BitCoin Mining, Other Virtual Activity Taxable Under US Law / VIRTUAL ECONOMIES AND CURRENCIES: Additional IRS Guidance Could Reduce Tax Compliance Risks / Beware BitCoin Users: The Tax Man Cometh!

BitCoin Mining, Other Virtual Activity Taxable Under US Law

Posted by timothy on Tuesday June 18, 2013 @10:59AM 
from the them-as-has-gits dept.

chicksdaddy writes"Beware you barons of BitCoin – you World of Warcraft one-percenters: the long arm of the Internal Revenue Service may soon be reaching into your treasure hoard to extract Uncle Sam's fair share of your virtual wealth. A new Government Accountability Office (GAO) report on virtual economies finds that many types of transactions in virtual economies – including Bitcoin mining and virtual transactions that result in real-world profit – are likely taxable under current U.S. law, (BELOW) but that the IRS does a poor job of tracking such business activity and informing buyers and sellers of their duty to pay taxes on virtual earnings. The report, 'Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks' (BELOW)  found that the growing use of virtual currencies like BitCoin and virtual game currencies warrants the U.S.'s tax collection agency to mitigate the risks. Those include efforts to educate taxpayers and the publication of basic tax reporting requirements for transactions using virtual currencies, The Security Ledger reports."

VIRTUAL ECONOMIES AND CURRENCIES: Additional IRS Guidance Could Reduce Tax Compliance Risks   

What GAO Found

Transactions within virtual economies or using virtual currencies could produce taxable income in various ways, depending on the facts and circumstances of each transaction. For example, transactions within a "closed-flow" virtual currency system do not produce taxable income because a virtual currency can be used only to purchase virtual goods or services. An example of a closed-flow transaction is the purchase of items to use within an online game. In an "openflow" system, a taxpayer who receives virtual currency as payment for real goods or services may have earned taxable income since the virtual currency can be exchanged for real goods or services or readily exchanged for governmentissued currency, such as U.S. dollars.

Virtual economies and currencies pose various tax compliance risks, but the extent of actual tax noncompliance is unknown. Some identified risks include taxpayers not being aware that income earned through virtual economies or currencies is taxable or not knowing how to calculate such income. Because of the limited reliable data available on their size, it is difficult to determine how significant virtual economy and currency markets may be or how much tax revenue is at risk through their usage. Some experts with whom we spoke indicated a potential for growth in the use of virtual currencies.

Beginning in 2007, IRS assessed the tax compliance risks from virtual economies, and in 2009 posted information on its website on the tax consequences of virtual economy transactions. However, IRS has not provided taxpayers with information specific to virtual currencies because of other priorities, resource constraints, and the need to consider the use of these recently-developed currencies, according to IRS officials. By not issuing guidance, IRS may be missing an opportunity to address virtual currency tax compliance risks. Given the uncertain extent of noncompliance with virtual currency transactions, formal guidance, such as regulations, may not be warranted. According to IRS officials, formal guidance requires extensive review, which adds to development time and cost. However, IRS may be able to develop more timely and less costly informal guidance, which, according to IRS officials, requires less extensive review and can be based on other existing guidance. An example is the information IRS provides to taxpayers on its website on the tax consequences of virtual economy transactions. Posting such information would be consistent with IRS's strategy for preventing and minimizing taxpayers' noncompliance by helping them understand and meet their tax responsibilities.

Why GAO Did This Study

Recent years have seen the development of virtual economies, such as those within online role-playing games, through which individual participants can own and exchange virtual goods and services. Within some virtual economies, virtual currencies have been created as a medium of exchange for goods and services. Virtual property and currency can be exchanged for real goods, services, and currency, and virtual currencies have been developed outside of virtual economies as alternatives to government-issued currencies, such as dollars. These innovations raise questions about related tax requirements and potential challenges for IRS compliance efforts.

This report (1) describes the tax reporting requirements for virtual economies and currencies, (2) identifies the potential tax compliance risks of virtual economies and currencies, and (3) assesses how IRS has addressed the tax compliance risks of virtual economies and currencies.

To accomplish these objectives, GAO reviewed tax laws, IRS guidance and program documents, federal program internal control guidance, and interviewed IRS officials and knowledgeable experts on the topics.

What GAO Recommends

GAO recommends that IRS find relatively low-cost ways to provide information to taxpayers, such as on its website, on the basic tax reporting requirements for virtual currencies. In commenting on a draft of this report, IRS agreed with our recommendation.

For more information, contact James R. White at (202) 512-9110 or whitej@gao.gov.

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 Beware BitCoin Users: The Tax Man Cometh!  Paul with the SecurityLedger writes: Beware you barrons of BitCoin – you World of Warcraft one-percenters: the long arm of the Internal Revenue Service may soon be reaching into your treasure hoard to extract Uncle Sam’s fair share of your virtual treasure.

Services for buying and exchanging virtual currencies and goods abound online. GAO found that many are likely taxable under current U.S. tax law.

That’s the conclusion of a new Government Accountability Office (GAO) report on virtual economies, which found that many types of transactions in virtual economies – including bitcoin mining and virtual currency transactions that result in real-world profit – are likely taxable under current U.S. law, but that the IRS does a poor job of tracking such business activity and informing buyers and sellers of their duty to pay taxes on virtual earnings.

The report, “Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks” (GAO-13-516) was released this week. It was prepared in response to a request from the U.S. Senate Committee on Finance, which asked GAO to look into virtual currencies and the IRS’s approach to addressing their tax implications. The GAO said that the IRS’s tax treatment of virtual currency transactions is lax, and that the growing use of virtual currencies like BitCoin and virtual game currencies warrants the U.S.’s tax collection agency to mitigate the risks. Those include efforts to educate taxpayers and the publication of basic tax reporting requirements for transactions using virtual currencies. 

Virtual currencies have gained favor in recent years, as the sophistication and complexity of virtual economies have grown. In-game currencies for virtual environments like Second Life (Linden Dollars), The Sims (Simoleons) and World of Warcraft (WoW Gold) have sprung up as a way for players to buy and sell virtual goods. While the currency is often earned in exchange for in-game activity and labor, many virtual currencies can also be purchased with real-world currency through in-game or third party exchanges. The exchanges have attracted the attention of law enforcement, who recently cracked down on Liberty Reserve, a Costa Rica-based virtual currency firm popular among cyber criminal groups.

GAO said that strict virtual (or “closed flow”) transactions in which virtual currency is used only within a game or virtual environment to purchase virtual goods and services were not taxable. However, so called “hybrid” and “open flow” virtual currency systems, in which real world currency is used to buy virtual currency, which is then used to buy or sell virtual- or real world goods and services are subject to U.S. taxes.

Many types of virtual currency systems generate taxable revenue, GAO said.

Some virtual economies in massively multiplayer online role-playing games (MMORPG) like World of Warcraft are “hybrid” systems in which in-game economic activity can spill into the real world via third-party transactions in which virtual goods are exchanged for real money, GAO said.

Virtual currencies like BitCoin and the Linden Dollars of used-to-be-cool virtual environment Second Life  are examples of open flow systems in which virtual currencies can be used to purchase both real and virtual goods and services, then exchanged for real world currencies like the U.S. dollar.

GAO provides a number of examples of virtual transactions that are subject to taxation that, in all likelihood are not taxed. They include “John,” a resident of Second Life, who rents a virtual property to other residents who pay him in Linden dollars. “At the end of the year, John exchanges his Linden dollars for U.S. dollars and realizes a profit. John may have earned taxable income from his activities in Second Life,” GAO said. 

There is also the example of “Bill” the Bitcoin miner who successfully mines 25 bitcoins. “Bill may have earned taxable income from his mining activities,” GAO said.

BitCoin mining and exchanges are taxable under most scenarios, GAO said.

The problem with virtual currencies is similar to the challenges the IRS has in capturing other kinds of economic activity, such as cash transactions and barter, where records and third party reporting is lax or non-existent, GAO said. Still, the growing popularity of virtual currencies and exchanges pose unique risks, including lost tax revenue and tax evasion by way of virtual currencies like Bitcoin.

While the extent of the virtual currency problem isn’t known, and in light of the IRS’s sequester-based staffing issues, GAO recommended that IRS take mostly low-cost steps to address it, rather than mounting a large and expansive campaign to crack down. IRS should publish clear guidance of what kinds of online transactions are taxable and clarify third party reporting requirements to counter misinformation that is circulating. However, as the extent of virtual currencies and economies grow, IRS may find it needs to take bolder steps to bring virtual economic activity into line with other kinds of transactions, GAO said.

Law to Exclude US Ex-Citizens Judged To Have Avoided Tax

Mike Godfrey, Tax-News.com writes: Two US Senators have filed an amendment to the Immigration Reform Bill, that will automatically bar former citizens eligible to pay the exit tax from re-entering the USA unless they can show the Department of Homeland Security that they did not renounce US citizenship for tax purposes.

The amendment has been put forward by Senators Jack Reed (D-RI) and Chuck Schumer (D-NY), and is described by Reed as a measure against "expatriate tax dodgers." Reed introduced a similar law in 1996, after a billionaire businessman renounced US citizenship, became a citizen of Belize, and then returned to his hometown in Florida as a Belizean consular official. Last year, Schumer proposed the "Ex-PATRIOT" Bill, following the decision of Facebook co-founder and partial owner Eduardo Saverin to renounce US citizenship.

As with the Ex-PATRIOT Bill, the new amendment, known as the Reed-Schumer amendment, will apply an automatic exclusion to ex-citizens with either a net worth of USD2m, or an average income tax liability of at least USD148,000 over the last five years. However, while the Ex-PATRIOT Bill included a provision by which the exclusion would be waived if the ex-citizen could demonstrate to the Inland Revenue Service that he or she had not in fact renounced citizenship primarily to avoid tax, the new amendment requires the ex-citizen to provide "clear and convincing evidence" to the Department of Homeland Security.

Reed stated: "American citizenship is a privilege. But it seems that a privileged few are trying to game the system by accumulating wealth and benefiting from the greatness of the United States and then renouncing their citizenship to avoid paying their fair share of taxes. They are welcome to leave our country, but they should not be welcomed to return without playing by the rules and paying what they owe."

When a Client Struggles With Memory Loss

AUSTIN KILHAM for the Wall St Journal writes:  The 74-year-old man struggled with degenerative memory loss and was forgetting to complete financial tasks.

He needed help, and turned to financial planner Audrey Wehr Jones, of Casselberry Fla.-based Financial Life Designs. Ms. Jones doesn't manage client assets, but has worked for 15 years advising high-net-worth individuals on tax and estate planning and retirement cash flow. She has 15 clients.

"The client brought me onboard to try to make things as easy as possible for him and his wife, who has not taken care of their daily finances for the last 50 years," says Ms. Jones

The client found it especially difficult to remember to make his quarterly federal estimated tax payments, she says. His assets included an IRA, a trust fund and a pension. These tax responsibilities, combined with his required minimum distributions and charitable giving plans, involved a lot of moving parts for the client to remember. So Ms. Jones devised a strategy that consolidated the tax payments, streamlined his giving--and reduced his tax liability.

First, Ms. Jones tackled the client's estimated federal tax payments. He usually owed about $8,500 annually on the income from his trust and pension. Rather than pay estimated taxes four times a year, she suggested that the year's payments be calculated in the fall, and then paid off in December using a loan from the man's $600,000 IRA account.

IRA holders can take a loan once every 12 months, and because the client was older than 59 1/2 years, there was no withdrawal penalty. He also would owe no taxes on the distribution provided he repays it within 60 days, so Ms. Jones suggested her client transfer assets from his trust fund to replenish the IRA.

The strategy meant the client no longer had to remember to make quarterly tax payments. Instead, Ms. Jones would arrange the IRA distribution and tax payment, and then simply ask him once a year to sign an approval to transfer the funds from his trust.

Next, the adviser turned her attention to her client's charitable giving, which was extremely important to him. Because the client no longer needed the income from his required minimum distributions to cover quarterly tax payments, she suggested he use the funds for philanthropy instead. The American Taxpayer Relief Act of 2012 allows older IRA owners to make donations up to $100,000 a year with IRA withdrawals, so Ms. Jones knew he could make qualified distributions directly to charity.

"This is a great way to get a tax deduction without itemizing," she says.

She used his $22,000 required minimum distribution to directly fund his selected charities, which included research institutions and environmental causes. The technique not only streamlined his giving, it also eliminated the taxes on his required minimum distributions. And because he didn't itemize, he could still claim the standard federal tax deduction of $14,600.

Ms. Jones worked closely with the client's accountant on the transaction. She cautions that it is important for the CPA to change the 1099 the client receives for this kind of distribution to note the charitable donation.

In the end, the client was relieved he no longer had to remember to pay his taxes each quarter, or itemize his charitable giving. Ms. Jones says the strategy is a solution for clients struggling with memory loss.

"It's a good way to ease the worry about estimated taxes and charitable giving," she says.

The taxation of Social Security benefits

Karin Price Mueller/The Star-Ledger writes: QUESTION. I have been doing a lot of reading regarding the best way to start drawing Social Security benefits for me and my wife. I understand there are taxes required if you have earned income while collecting Social Security if you reach a certain dollar threshold. I believe earned income comes from working or providing paid services. My wife and I only plan on two sources of funds: Social Security and IRA withdrawals. We are 65 and 64. Our intent is to live off our IRA funds until we each reach full retirement age, and then collect Social Security benefits with my wife exercising her “spousal benefits.” The question: Would our Social Security be taxed if the IRA withdrawals exceed the dollar value threshold?

— JB

ANSWER:  Good for you, JB, for considering these important tax issues before you retire, when it’s probably too late to alter your plans.

Many soon-to-be retirees wonder how Social Security benefits are taxed.

Like most IRS rules, the ones governing this topic are more complicated than we’d like, said Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown.

“Anywhere from zero percent to 85 percent of your Social Security benefits will be taxed,” Kazanchy said.

He said the base amount to use when calculating the taxability of your benefits is as follows:

• $25,000 if you are single, head of household, or qualifying widow(er)

• $32,000 if you are married filing jointly

He offered a few scenarios to explain.

How IRA income impacts the taxation of Social Security benefits

Scenario 1: If all of your income (pensions, wages, IRA distributions, interest, dividends, other taxable income and tax-exempt interest) plus one-half of your Social Security benefits is less than your base amount of $32,000 for a married couple (or $25,000 for a single tax filer), then none of your Social Security benefits are taxable.

Scenario 2: If all of your income plus one-half of your Social Security benefits are more than $44,000 for a married couple (or $34,000 for a single tax filer), then 85 percent of your Social Security benefits are taxable.

Scenario 3: If all of your income plus one-half of your Social Security benefits are more than $32,000 for a married couple (or $25,000 for a single tax filer), but less than $44,000 for a married couple (or $34,000 for a single tax filer) then 50 to 85 percent of your Social Security benefits are taxable based on a more intricate calculation.

Kazanchy said determining how you can fund your lifestyle with the most tax-efficient combination of IRA distributions and Social Security benefits will be important.

He also recommends you consider a different scenario known as “file and suspend.”

“If the husband files and suspends his benefit, then the benefit will grow 8 percent per year with delayed retirement credits until age 70,” Kazanchy said. “The wife can still collect her spousal benefit at her full retirement age.”

Assuming you have enough IRA assets to help fund your living needs, the 8 percent return on the delayed retirement credits is very attractive.

“Where else can you earn 8 percent per year with no volatility?” he said “In addition, if the husband predeceases the wife, her benefit will step up to the full amount of his Social Security benefit.”

“If he has earned delayed retirement credits, he will be able to leave more income to his wife to fund her living needs,” he said.

The Smart 401(k) Rollover Option That Almost Everyone Forgets

Dan Caplinger for DailyFinance writes: Taking your retirement-plan money when you switch jobs and going on a spending spree would be a costly mistake, resulting in higher taxes, penalties, and lost investment opportunities. But even if you know enough not to treat your retirement account as a windfall, it's hard to get good advice on what to do with it instead.

Back in March, the Government Accountability Office took a close look at how workers handle 401(k) retirement plans when switching jobs. What the GAO's study found was that while the current process has a bias toward pushing workers toward rolling that retirement savings into IRAs, people often overlook another option: moving their retirement assets to your new employer's 401(k) plan.

Let's take a closer look at the options you have and which one makes the most sense in your situation.

Three Choices

When you switch jobs, you'll typically have three options of what to do with the money in your employer-sponsored retirement savings account.

• You can roll it over into an individual IRA at the financial institution of your choice.
• If your new employer offers a 401(k) plan, then you can transfer the assets into your new employer's plan.
• And lastly, if you have enough money to satisfy your existing plan's minimum account balance for former employees -- usually $5,000 -- you can keep your money in your old employer's 401(k).

The GAO found several pieces of evidence pointing to the tendency to push former employees toward IRAs. IRA providers tend to be more aggressive in seeking rollover business, as nine of the 10 providers the GAO reviewed advertised the fact that they offer assistance to workers wanting to roll over old retirement assets. New-account bonus payments of as much as $2,500 helped provide even greater incentives to choose an IRA.

By contrast, the number of people using plan-to-plan rollovers is much smaller, with the GAO pointing to one plan sponsor that reported about 10 to 15 percent of participants moving their retirement savings to new-employer 401(k)s.

With the need to coordinate paperwork for both sets of plan administrators, workers found it far more difficult to get through the obstacles to getting their old retirement money into their 401(k) account at their new employer.

When a 401(k)-to-401(k) Transfer Makes Sense

Cost is a key component of choosing a retirement-savings option, and some 401(k) plans charge higher fees than you'd get by selecting a low-cost IRA investment. But in some cases, sticking with a low-cost 401(k) makes more sense than picking an IRA.

Cloud accounting could be key to cashflow and growth, says tax expert

Rosa Powell for StartUpSmart writes: Small businesses and sole traders could halve the time they spend managing their financials and focus on growth and innovation if they embraced cloud accounting software systems, a tax specialist from advisory firm BDO says.

Christian Schoener, a senior manager specialising in information and communication technology solutions for small to medium enterprises, told StartupSmart entrepreneurs could be more confident and adept at managing their cashflow.

“One of the reasons why businesses fail is they don’t have the kind of data needed to make the decisions they need to on a day-to-day basis,” he says.

“Cloud accounting systems put owners in the driver’s seat with the information they need to know to make the right decisions.”

Schoener says the integrated updating capabilities of cloud accounting cashflow means business owners have a better understanding of how much money is coming in, going out and available.

Older accounting software systems are usually managed monthly or limited to quarterly BAS statements outsourced to an accountant.

“Currently, many small business owners log their receipts at month’s end, which means data used to make business decisions is late by the time it is captured,” Schoener says, adding this is especially an issue for the many small business grappling with.

He says this is problematic for start-ups and sole traders, who often need to make investments as they grow, rather than in predictable intervals.

“The biggest benefit is accessing the data at anytime and anywhere whenever the business owner needs it. It helps you assess your profitability of your business. By managing it online, you’ll have a better understanding of your cashflow. You won’t be relying on information that is a month or two old.”

Schoener says the main concerns small business owners have about cloud accounting come down to cost and data security.

According to BDO research, most small businesses don’t require more than basic functionality and says the average cost can be around $30 a month.

Schoener says data security issues are harder to reconcile for many business owners.

“I think it’s fair enough to be concerned about data security. Most companies do store data on multiple servers, including ones out of Australia. But once you work out what you need, sitting down with a qualified and realistic advisor will help you find the right option for you.”

IRA Rollover Services And Responsibility Of Plan Sponsors

Frederick Reish and Bruce L. Ashton for Drinker Biddle write: The Government Accountability Office (GAO) has issued a report that raises serious issues about how participant rollovers are being handled. The report also suggests that plan sponsors and committees, in their roles as ERISA fiduciaries, may have duties regarding rollovers they have never considered. The report, issued in early April, entitled "401(k) PLANS: Labor and IRS Could Improve the Rollover Process for Participants," points out the lack of quality information and possible mis-information being given to participants by some providers. (As discussed later, this shouldn't be taken as a condemnation of all, or even most, providers.)

This bulletin summarizes parts of the GAO Report and discusses whether plan sponsors and committees may be obligated to monitor the IRA rollover services offered by their providers. The answer is that the law is not clear, and the cautious approach would be to proactively monitor the services.

Legal Analysis

While the report discusses a number of issues and recommends that the Internal Revenue Service and the Department of Labor provide clearer guidance and better educational materials, there is also a message to plan sponsors about the practices of some providers. As a part of the study, the GAO reviewed the practices and materials of selected plan providers and their IRA rollover services (e.g., call centers) and determined that, in some cases, participants were receiving biased information.

That raises the obvious issue of whether plan sponsors are responsible, in their capacity as fiduciaries, for the information being given to participants by the plan providers (e.g., recordkeepers) who are selected by the plan sponsors. Is it possible that plan sponsors could be viewed as "endorsing" or selecting the provider for that purpose and, therefore, be obligated to prudently select and monitor the IRA rollover services of their provider? Unfortunately, neither the courts nor the DOL have provided a clear answer to that question. As a result, the conservative answer is that plan sponsors should review the practices of their service providers and their communications with participants for these purposes.

An ERISA concept of plan sponsor "endorsement" of service providers has already been raised in DOL guidance. For example, in Interpretive Bulletin 96-1, the DOL attempted to provide a distinction between whether a provider was endorsed or not by explaining that an endorsement is "an inherently factual inquiry which depends on all the relevant facts and circumstances." The DOL went on to say that, if a plan sponsor uniformly provides office space or computer terminals for use by participants who have independently selected service providers, that would not be an endorsement. However, the negative implication is that, if plan sponsors limit the use of their facilities (for example, access to employees) to a particular provider, it could be viewed as an endorsement of that provider. And, as a practical matter, in most cases the only provider of rollover services who has been given access to the employees is the retirement plan recordkeeper.

To put the GAO report in context, it is important to note that many providers offer valuable rollover services to participants, helping them with rollovers to IRAs and investing for retirement. It is possible— perhaps even likely—that, because of these services, many participants have preserved their retirement benefits in tax-deferred vehicles that are well-invested.

As a result, the negative findings of the GAO should not be viewed as an overall condemnation of rollover services by providers...nor should they be viewed as necessarily reflecting industry-wide practices. Instead, a proper perspective might be that the GAO Report disclosed potential conflicts of interest that plan sponsors and committees should be aware of and should consider in light of the fiduciary duty to act in the best interests of the participants.

GAO Report

With that in mind, let's look at some of the GAO's concerns. (We have included quotes from the report, because they most clearly show the nature and depth of the concerns. To see the full GAO Report, please visit:http://fredreish.com/gao-report-on-ira-rollovers/.)

"Many experts told us that much of the information and assistance participants receive is through the marketing efforts of service providers touting the benefits of IRA rollovers and is not always objective. Plan participants are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do with their 401(k) plan savings when they separate or have separated from employment with a plan sponsor. In many cases, such information and marketing come from plan service providers. As we have reported in the past, the opportunity for service providers to sell participants their own retail investment products and services, such as IRAs, may create an incentive for service providers to steer participants toward the purchase of such products and services even when they may not serve the participants' best interests."

The GAO's concern was not limited to biased information or aggressive sales practices. The report expressed similar concerns over "steering of participants into investment products that are managed by the recordkeeper or an affiliate." In this case, the issue is not mis-information... but instead it is limited information. In other words, the GAO appears to be concerned that, by providing information only about proprietary products, participants are not being educated on their alternatives and may not be aware of the conflicts of interest inherent in recommending proprietary investments or in only providing information about proprietary products. In that regard, the GAO stated:

"[P]articipants may interpret information about their plans providers' retail investment products contained in their plans' educational materials as suggestions or recommendations to choose those products. Research has shown that many individuals contributing to defined contribution plans or IRAs spend very little time scrutinizing disclosure statements.

As shown in figure 3, a provider's offer of their own retail IRA in a plan's distribution materials is one way to guide participants into their products.

Figure 3: One Example of a 401(k) Plan Service Provider Using Distribution Information as a Venue to Promote Their Own Retail IRA Product

Although many service providers said they do not promote their own investment products in interactions with plan participants of the plans they serve, we reviewed examples of educational materials that couple distribution information with information on the providers' retail IRA products. We also found several separation packets that emphasized the simplicity of rolling over to the service providers' IRAs, as opposed to the relative complexity of other providers' IRAs, and added flexibility regarding distributions and beneficiaries. Additionally, many of the providers that provided written responses to our questions indicated that the educational materials they give to participants include their firms' IRA products as examples. While some plan sponsors may attempt to limit such marketing activities, other sponsors are either unaware that they can negotiate a provider's ability to promote its products to plan participants or they do not have the resources to prepare their own materials in lieu of the materials offered by their providers."

The GAO is also concerned that participants may mis-interpret the rollover services of the provider as being unbiased investment advice and perhaps fiduciary recommendations. Since participants are told that the investment line-up in their plan is prudently selected and monitored by fiduciaries, it is possible that participants would view the rollover services as being part of, or perhaps consistent with, those plan-level services. In that case, participants might believe that they were receiving individualized and conflict-free recommendations of high-quality, reasonably priced investments. The GAO discussed these issues in some detail:

"The marketing of IRA products by providers is not limited to written materials but may also be pervasive in other interactions with participants. Participants can be steered toward IRA rollovers when receiving information from service providers, including via call centers. We were told by industry experts that

• participants think that they have received investment advice from their service providers that is solely in the participants' best interest, even though they may not actually be receiving such advice;
• service providers use their websites and call centers, including making outbound calls to plan participants, as a means of marketing their firms' retail IRA products and steering participants into them; and
• when taking a distribution participants may be steered first into a provider's IRA product, and if they opt out or decline that rollover option, they are then directed to a portal sponsored by the same provider where participants can access other companies' IRA platforms, for which the service provider receives some compensation if a participant chooses a company's IRA through that portal.

In addition to marketing their products, service providers may offer their call center representatives financial or other incentives for asset retention, when separating plan participants leave their assets in the plan or roll over to one of the providers' IRA products, which could lead to representatives promoting the providers' products over other options."

As mentioned earlier, the GAO expressed concerns about mis-information. The mis-information could be about any of several issues, for example, about fees and expenses, about the benefits (or lack thereof) of leaving the money in the current plan or rolling it over to the plan of a new employer, and so on. In that regard, the GAO made phone calls to the call centers of several providers and some of those conversations are the foundation of the GAO's concerns. The following examples were given in the GAO report:

Figure 4: Examples of 401(k) Plan Service Providers (Who May or May Not Be Fiduciaries) Giving a Potential Plan Participant Guidance Favoring IRAs

In the Report, the GAO noted that some providers are utilizing fairly aggressive practices while others are being very conservative. The GAO pointed, at least in part, to the lack of clear governmental guidance on the services and information that plans and their providers can give to participants.

"Service providers told us that the regulatory environment, specifically the lack of clarity between investment education and investment advice, creates challenges for them in providing information to participants. Experts said that, to limit liability, some service providers are very cautious when interacting with plan participants and discussing distribution options for fear that the information they provide may be construed as investment advice, which would trigger ERISA fiduciary liability. One sponsor noted that the materials provided to participants are dense and contain a lot of "legalese" in order to observe the regulations that govern a sponsor's interactions with participants. In addition, plans and service providers tend to provide participants with pre-packaged materials that are generic in nature in part to avoid crossing the line from providing investment education to investment advice."

Concluding Thoughts

Our experience is that, for the most part, recordkeepers and bundled providers are helping participants transfer their money into tax-sheltered IRAs and continue to investment their money in diversified portfolios, such as target date funds, balanced funds and managed accounts.

Nevertheless, there are valuable lessons to be learned from the GAO Report. First, plan sponsors should consider, for risk management purposes, reviewing and understanding the practices of the service providers that are allowed to access their employees. Without the plan sponsor's consent (or perhaps implied consent), the service providers would not be able to communicate with participants through corporate facilities, e.g., phones, computers, etc. While there is no clear guidance about whether plan sponsors are acting as fiduciaries for these purposes, there is at least a risk that they are. As a result, the cautious approach is to take charge of the situation and make sure it is operating properly.

Also, some plan sponsors will view this as a "best practices" issue. Those plan sponsors will want to ensure that their participants are receiving high-quality, unbiased information about their alternatives. The first level of information includes the broad alternatives of: IRA rollovers; leaving the money in the current plan; transferring the money to the plan of the successor employer; or taking the money and paying taxes. If a decision is made to rollover to an IRA—which many participants will choose because of the sense of control and perhaps in order to have all of their money in one location, the next "best practice" is to ensure that participants are receiving unbiased information about reasonably priced, high-quality investments, as well as disclosures of conflicts of interest.

With the aging of the baby boomers, and the impending retirement for many of them, this issue is going to gain increasing attention. Now is the time to review the practices of your providers.

Added dimension as popular 529 plan adds funds, cuts fees / Utah offering will now include portfolios from Dimensional Fund Advisors; high rating from Morningstar

Liz Skinner for InvestmentNews writes: Utah's college savings program is expanding its investment lineup, adding funds from Vanguard and Dimensional Fund Advisors. Administrative fees on the plan are also being cut by about 10%.

The plan, already one of the nation's largest 529s with about $6 billion in assets, is sold directly to clients but many fee-only advisers favor the program's low cost and unique investment features. Advisers note, for example, that participants in the plan can give them direct access to make changes in their accounts.

As of June 21, account holders using the customized investment options will be able to design an age- based allocation from 22 underlying funds: Six Dimensional funds, 15 Vanguard mutual funds and an FDIC-insured savings account option. Today, the investor has nine investment choices.

Utah's college savings program is expanding its investment lineup, adding funds from Vanguard and Dimensional Fund Advisors. Administrative fees on the plan are also being cut by about 10%.

The plan, already one of the nation's largest 529s with about $6 billion in assets, is sold directly to clients but many fee-only advisers favor the program's low cost and unique investment features. Advisers note, for example, that participants in the plan can give them direct access to make changes in their accounts.

As of June 21, account holders using the customized investment options will be able to design an age- based allocation from 22 underlying funds: Six Dimensional funds, 15 Vanguard mutual funds and an FDIC-insured savings account option. Today, the investor has nine investment choices.

5 Ways to Beat the Payroll Tax Increase

 Nancy Mann Jackson for FoxBusiness/Bankrate writes:  Does it seem like you're bringing home less money than you used to? Chances are, you are. With the payroll tax increases that went into effect in January, the paycheck of every working American is a little less than it was last year.

According to the Tax Policy Center, a worker earning a $40,000 median wage will take home $800 less this year than in 2012, a 2.3% reduction. A single high earner making $120,000 will see his or her payroll tax bill jump more than $2,400, a 2.5% cut in take-home pay. That amount could move even higher because there's an extra 0.9% payroll tax for the highest earners, due to the Affordable Care Act.

How are Americans making up for the money they're not getting each month? A new study from Accounting Principals of Jacksonville, Fla., shows that as a result of payroll tax increases, 20% of American workers are going out to bars and restaurants less often, and 19% are eating out for lunch less often.

But, there are plenty of other ways to deal with the shortfall, some of which may be more productive. Here are five ways to make up for your payroll tax increase.

Stop using your credit or debit card

On average, people who use cash rather than plastic spend about 20% less, says Gail Cunningham, spokeswoman for the Washington, D.C.-based National Foundation for Credit Counseling. That's why ditching your credit card or debit card can be a good way to automatically spend less.

Rather than swiping a credit card or debit card when you want to purchase something, carry cash with you at all times, says Mark Mersman, chief marketing officer for USA Financial in Ada, Mich., and co-host of the "USA Financial Headquarters Show." When you pay for everything with cash, it can be more painful to part with your money, or at least make you think twice before making a purchase.

Skip the warranties

Purchase almost anything -- electronics, toys, sports equipment -- and you'll often be asked if you'd like to pay a small additional fee for a product warranty. Most likely, you'd be better off keeping those extra dollars in your pocket than to spend them on warranties you'll likely never need, says Andrew Housser, co-CEO of Freedom Financial Network in San Francisco.

Consumers spend billions on extended warranties every year, Housser says. "But, the odds of needing a protection plan are slim. Warranties make the most sense for high-priced items like a washer and dryer or a plasma television," he says.

"With technological advancements, it is highly likely that the computerized devices that you purchase today will be obsolete by the time you need the warranty. Instead, set aside what you might have spent in a savings account to cover emergencies like appliance repairs down the road," Housser says.

Negotiate household bills

Almost everything is up for negotiation, so why not try to get your personal bills lowered? For instance, telephone and cable companies frequently offer lowball fees to get you to sign up and raise the prices later. Call them and ask to get their current promotional prices, or at least get a less expensive package than the one for which you're currently paying.

Contributors to Ramit Sethi's blog, "I Will Teach You to Be Rich," have reported negotiating savings of as much as $100 per month on cable bills and $20 per month on cellphone bills.

In addition, call your insurance agent to lower insurance premiums or consider switching to a new one to find less expensive coverage. "If you haven't shopped your auto, home or life insurance policies in a couple of years, you may find a significant savings lurking," Mersman says.

'Brown bag' your lunch

According a recent survey by Accounting Principals, 82% of respondents spend more than $21 on coffee on average each week, while 89% spend more than $36 on lunch. But saving money on food and beverages is easy. Start by packing your lunch and bringing a drink from home.

Jeanette Pavini, a consumer savings expert with Coupons.com, compared the prices for homemade sandwiches to the average deli price for three popular sandwiches, and found that you can save $23.75 per week, or $1,235 over the course of a year, by doing just a little shopping and taking five minutes each day to prep your lunch.

In addition to packing your own lunch, rethink your drinks. Rather than stopping for coffee on your way to work, bring some from home. And rather than buying bottled water, drink from the tap.

Reduce taxable income, adjust withholding

There are a few ways to reduce your taxable income that don't require taking a pay cut, says Thomas Duffy, principal planner of Jersey Shore Financial Advisors LLC, in Red Bank, N.J. Start by increasing contributions to any tax-deferred retirement plans you have, such as a 401(k), 403(b) or 457 plan. If your employer offers a health savings account, increase your contributions of pretax dollars.

In addition, adjust withholding on your W-4 form so you pay just as much in income taxes as you owe. While you won't get a large tax refund, you'll have more money in each paycheck.

"Getting a large sum back from the government may seem like a windfall," Housser says. "But, it is really an indication that too much is being withheld from your paycheck. In essence, you have allowed the government to hold on to your money interest-free."

Your goal should be to break even with the Internal Revenue Service. To determine how much you should withhold, use Bankrate's payroll deductions calculator.

 

10 worst money moves for near retirees

Dana Anspach for MarketWatch writes: Mistakes are part of life. Some are easier to recover from than others. When it comes to money — and time — the closer you are to retirement the less time you have to recover from bad money moves. Don’t take any chances.

Here are the 10 money moves you need to avoid as you get near retirement:

1. Invest the same old way

The same investment approach that got you this far will work just fine in retirement, right?

Maybe, maybe not. When you do your retirement planning right you will know specifically what amount of money needs to come out of which accounts in which calendar years. Suppose you'll begin taking IRA withdrawals first because it will be most tax-efficient to do so, but your younger spouse won't touch their IRA for at least 10 to 15 years? Should both accounts be invested in a similar way? I don't think so. As you near retirement you'll need to spend some time creating an investment approach that aligns each account to its specific goal, cash flow requirements and time frame.

2. Claim Social Security without a strategy

If someone deposited an extra $50,000 or $100,000 into your retirement savings, it would make no difference at all to you, right?

The right Social Security claiming plan leads to a result that is just like having more retirement savings. People mistakenly think that claiming later means they have to retire later or have less spending money early in retirement. This is not true. Retirement date and claiming date are not synonymous. For many upcoming retirees there will be little-known tax benefits to a delayed Social Security start date combined with early IRA withdrawals or Roth conversions. Married couples, those with a previous marriage that was at least 10 years in length and those with expected retirement incomes less than $90,000 should not even think about claiming without first creating a plan.

3. Avoid tax planning

You feel like the government uses your money wisely so there is no reason for you to invest a few hours each year in tax planning, right? After all, who cares if you pay more than you might otherwise have to?

One of the most important things you can do as you near retirement is create a multi-year tax projection that shows your expected tax liability each year in retirement by showing you where your expected income will come from, including future estimated required minimum distributions (you must begin taking these from IRA/401k accounts at age 70 1/2), Social Security, and pensions. Once you see what your marginal rate is expected to be each year you can proactively make decisions that can reduce your retirement tax liability. These decisions might involve taking IRA distributions earlier than you thought, funding a Roth IRA instead of your 401(k) plan, or converting IRA assets to a Roth. In my book Control Your Retirement Destiny I devote an entire chapter to the type of tax planning that can increase your after-tax income in retirement. 

4. Assume health care is covered

You don't need to budget much for health care because once you reach 65 Medicare's got you covered, right?

Sorry, it doesn't work that way. Medicare will cover about 50% of your health care expenses in retirement. You'll still have expenses for Medicare Part B and D premiums, dental, eye care, hearing, co-pays, etc. How much will that add up to? At a minimum plan on $400 - $800 per month in health care expenses. For current retirees, statistics show anywhere from 15% - 33% of their income goes toward health care. It's a broad range because costs vary by location and health status.

5. Learn nothing

You'll only need to rely on your retirement savings and planning decisions for the next 20 to 30 years. There's no reason to learn much about it, is there?

One of the first things I always tell a new client is "The truth is no one will ever care about your money as much as you do." Time invested in your own financial success is worth it. Even if you plan on delegating to a trusted advisor, you need to know enough to find that person in the first place. There are numerous ways to learn: read a book or two, subscribe to financial magazines, or simply spend time on the Internet every week browsing retirement blogs, articles and research papers.

6. Don't track anything

Don't track your net worth, spending habits, annual amount you contribute to savings or anything that has to do with your money. This way you won't know if you are making progress toward your goal. It's easier not to know, don't you think?

I grew up in the gym. It's common in the gym to see people with notebooks. Why? They know keeping a record of their progress will help them reach their goals. If you have never created a net worth statement or spending plan (budget) you are missing out on a big opportunity. These types of schedules are financial tools that can be used to steadily nudge you toward your goals. You need a plan that outlines your goals and a way to measure your progress toward them.

7. Upsize everything

The economy is improving and you want to appear as if you are doing well. You have to spend money to make money right? What will it matter if you put off additional savings for another year or two? You'll make up for it later.

The so-called "wealth effect" can be a dangerous thing. As your income and account balances go up, you start to relax a bit, which is good, but only to a point. When you find your spending increases are starting to outpace your income increases, you have a problem. And that increase in your account balances because the market did well last year? That does not mean there is now room for the latest model car — unless that was part of your original plan. When you get an increase in income always allocate a portion of it toward an increase in your savings rate. Once that is done then any excess can be used toward extras.

8. Decrease your emergency fund

You only need an emergency fund in case you lose your job. So once you're retired, you can spend that emergency fund on a cool vacation, right?

I've yet to work with a single retired client who didn't encounter an emergency, or some form of unforeseen expense, within their first five years of retirement. Most of the time it was something involving an adult child. A few times it was a health care event. And once or twice it was a major home repair. The best retirement plans are those that leave wiggle room for things you can't anticipate. That means the emergency fund is still a needed tool. You are best off having a year's worth of spending tucked away in a safe investment when you reach retirement age. Don't include it as part of your plan. It is there as reserves for the things that will happen that you can't foresee.

9. Take on risk to make up for lost time

You got a late start saving for retirement and the stock market has been doing well. You should invest aggressively to make up for lost time, right?

I frequently see financial advisors use software to illustrate how tweaking an asset allocation will deliver higher returns. This is blasphemous. A more aggressive allocation gives you the potential for higher returns — along with the potential for lower returns. If you're already running short of your goals, taking on more risk may help, but it's far from a sure thing. Before taking on additional investment risk, consider options that will deliver a more reliable outcome: like working longer, spending less and saving more. If you decide to take on investment risk it should be part of a well diversified plan that insures you wouldn't need to liquidate any of your riskier holdings in the event of a market correction.

10. Don't share your plans with the family

Your kids understand your retirement plans, your level of financial security, and exactly what they should do if something happens to you, right?

Parents spend a lot of time worrying about their kids. Do they realize, their kids worry about them too? Your kids want to know you have a plan. They want to know who to call and how to help if something goes awry. Don't leave it for them to figure it out once you're gone. Involve them now in discussions about beneficiary designations, trusts and health care decisions. One of my fellow RetireMentors, Jack Tatar, has a book called Having the Talk that provides guidance on how adult children can initiate these conversations. But if you're a parent, don't wait for the kids to talk to you. Start the conversation yourself.  

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SamO Ting

4 hours ago

 "One of the most important things you can do as you near retirement is create a multi-year tax projection that shows your expected tax liability each year in retirement by showing you where your expected income will come from, including future estimated required minimum distributions (you must begin taking these from IRA/401k accounts at age 70 1/2), Social Security, and pensions."

I already have my tax plan cashflowed until I am 96.

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Rusty Shackleford

9 hours ago

Wow, a retirement advice piece on Market Watch that actually contains useful retirement advice. Thanks Ms. Anspach, very well done!!

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William W. Gorman

9 hours ago

Healthcare costs are high in retirement even with Medicare Parts A, B, and D, and a supplemental insurance plan. These expenses MUST be met just as buying nutritious food is for a satisfactory retirement. Safety in retirement is also a factor and wasn't mentioned in the article. Your auto should be in good working order with good tires. Your living quarters should be free of things like extension cords or other items such as carpets that don't lay flat so you minimize the chances for falls. Maintaining physical strength and balance should be a daily part of your routine. This from someone who has been retired for 22 years.

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Donald Tucker

13 hours ago

The part about unexpected expenses in the first five years rings true to me:  major health expense and kid going to graduate school.  Hadn't expected either, but had the money to do both easily.  Helps to plan for the unexpected. 

As far as tax rates are concerned -- not sure how far out you can plan on that figure, since the rates and rules are subject to change at any time.  Don't expect rates to drop again in my lifetime, just tried to take advantage of them when they were unnaturally low.  (I'm sure I'll get some push back on that, but look at the 50 year averages vs. GDP and you'll see what I mean).

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Wayne Williams

14 hours ago

"those with expected retirement incomes less than $90,000"

That just about includes 90% of the population. Most retiring in the next 10 years will be lucky to squeeze out 40k. 

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greg schultz

15 hours ago

#1, put your lifetime of savings in a Cd to "earn" .015% interest to supplement your SS, instead of use your SS to supplement your savings?!  LOL!

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Harvey Texler

18 hours ago

You forgot to mention: buy gold. The last thing an income-dependent senior would want to do. Hopefully, they were wise when they were younger and would now be liquidating their holdings to supplement income. Sadly, many of them buy the story that inflation will eat their assets alive and are piling in at the urging of gold dealers -precisely at the wrong time in their lives.

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G James

13 hours ago

@Harvey Texler Great point! Let's make it the "11 Worst Money Moves".

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