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The Swiss Army Knife of Finance
Some people consider the Roth IRA the “Swiss Army knife of finance.” A versatile tool, a Roth is useful in a lot of different circumstances. It might make sense to run through a review before year-end: your 2020 income tax situation may have an impact on your thinking.
Here are just a few uses of the Roth IRA to consider:
1. They can help you manage your lifetime total taxes.
You may be able to take advantage of relatively lower tax brackets now before income tax rates go up, as they are scheduled to after 2025 or in the case that future legislation raises tax rates. Converting existing retirement balances to Roth makes the amount converted taxable now—but wipes out taxes on future gains.
Moving temporarily depressed holdings from traditional IRAs to Roth involves paying tax only on the lower current value. Any recovery ends up being free of tax. (Airlines are an example of depressed stocks that may recover. No guarantees of course.)
2. They can add flexibility to your retirement planning.
Unlike traditional IRA balances, Roth IRAs do not have required minimum distributions (or RMDs). And they are a useful place to go for large retirement outlays without making a bulge in your tax bill. Planning to buy a second home, boat, or camper in retirement? Roth money might come in handy then.
3. They can make great gifts.
Roth IRAs can be wonderful for children or grandchildren with earned income who qualify to make Roth deposits because they have earnings but lack the funds with which to make deposits. Growth over the decades ahead may never be taxed.
4. They can help fund an education.
Parents seeking versatile education funding for their children may use their own Roth IRAs as a source of funds for that purpose. If not needed, the money may remain in the Roth and ultimately help fund their own retirement.
Right for you?
Again, the Roth is a versatile tool! What from the list is jumping out to you?
We understand that the end of the year can be a busy time. We would love to help you sort out these issues—just email us or call if they are pertinent to you.
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Temporary IRA Rule Change
You may know that the requirement for some people to make withdrawals from their retirement accounts was waived for this year, 2020. In the past, these Required Minimum Distributions generally applied to people over age 70.
Since the waiver was passed after some people had already taken withdrawals out, the benefit was not evenly spread. But now new guidance has been issued.
Anyone who took out IRA distributitions in the first half of the year 2020 may now repay those distributions by August 31 and avoid paying tax. It could make sense to review your options if you are in this situatiton.
Among the considerations we’ll be looking at:
• Whether there are sufficient cash balances to make the repayment without strain.
• If repayment would make room for Roth IRA conversions instead of outright withdrawals.
• Thinking about the possibility of higher tax rates later, and leaving 2020 withdrawals in place.
Everyone has difference circumstances and objectives, so a personal consultation might make sense for you. Or you might want to review overall retirement funding options at this time.
Clients, if you would like to talk about this or anything else, please email us or call.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Rule Change: IRA Required Distributions
Legislation intended to ameliorate the effects of the COVID-19 pandemic changed the rules on IRA required minimum distributions.
The SECURE Act passed in December 2019 changed the beginning date for required distributions to the year after you turn 72. This applies to people who turn 70 and a half after last December 31st. Otherwise the old rule applies.
However, the CARES act signed in March wipes out any required minimum distribution for 2020. IRA owners may still take distributions at their option, but the Required Minimum Distribution does not apply. Taken together, these laws give IRA owners new flexibility.
Your personal situation may be affected by these changes. Your cash flow strategy, Roth conversion strategy, or tax strategy may need additional thought. Or you may want to revisit your retirement account investment strategy. Retirement accounts may be a significant portion of invested assets.
Bottom line: clients, if you would like to talk about how these changes affect you, please call or email us.
Hammer or Pliers?
Recently a client asked us a common question. With a little room in the budget, should more money be added to retirement savings, or a regular investment account? Which one is better?
Of course, the answer depends on the situation. In the early and middle career stages, one might not put funds to be used before retirement into a retirement account. Saving for intermediate term goals like buying or trading homes, or buying a boat or camper, perhaps should be done outside of a retirement account.
But getting it down to fine points, some retirement plans have provisions for using money before retirement without penalty. We believe you can gain an edge by paying attention to the fine points. We like to outline all the alternatives so you can make a good decision.
On the other hand, money to be devoted to growing the orchard – a pool of capital that you may someday live on – should almost always be sheltered from taxes, if possible. This typically means into some form of retirement plan. The tax advantages may make a big difference over the years and decades ahead.
And retirement plans come in different flavors. Individual retirement accounts, employer plans of various kinds, Roth… there are many options.
Just as one cannot know whether the better tool is a hammer or a pair of pliers, one cannot know the best way to invest without understanding the job the money is supposed to do for you. That’s why we talk back and forth! You ask us things about our area of expertise, we ask you things about yours. A meeting of the minds is just the thing to make progress, with a collaborative process.
Clients, if you would like to talk about this (or anything else), please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Tomorrow’s Tax Rates and the Roth Opportunity
The economy is doing well by many measures. Every small rise in GDP (gross domestic product, our total output of goods and services) brings us to a new record. The unemployment rate sits at a 50 year low.
Yet the federal budget deficit is in excess of one trillion dollars, a record. A massive deficit when the economy is this good is unprecedented. When the next recession strikes, we may need to spend an additional trillion dollars a year on top of the current annual shortfall.
The moral of the story: some believe that tax rates will be higher in the future.
If you have 401(k) or traditional IRA balances, you might think about converting some fraction of those balances into a Roth IRA. The downside: you will have to pay income tax on the amount you convert. The upside: once those taxes are paid, those funds will be immune from higher tax brackets later.
The future growth will also be free of tax, if withdrawal rules are followed. And Roth balances are exempt from Required Minimum Distributions, the requirement that you take money out every year after age 70.
Each of you has a different situation, different circumstances. We cannot know the future. But it makes sense to talk about and think about what may happen in your situation. A Roth conversion might make sense.
If you are in a low bracket this year relative to what you believe you might be paying later, we should talk. You can use up the lower brackets with Roth conversions instead of letting them go unused.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Rothify Yourself or a Loved One
The Roth IRA concept was passed into law in 1997. It may be more pertinent than ever before. You see, once dollars are placed in a Roth, all the growth is free of tax when withdrawn, as long as the account is five years old and you are older than 59 ½.
Traditional retirement savings provide a tax advantage up front: contributions are not subject to income tax. Later on, withdrawals are taxed. The conventional wisdom was that tax brackets could be lower in the retirement years, so the tax later might not be too bad.
The way things look today, we may never see lower brackets than we have today. There are reasons to think that income taxes will be rising:
• The federal income tax changes passed in 2017 were temporary, with the old higher rates coming back after five years.
• Sooner or later the government may need more revenue to deal with record budget deficits and record national debt.
So the old conventional wisdom about lower tax brackets later may no longer apply. The Roth route may be the way to go.
What does this mean?
• Anybody with earned income may contribute to a Roth IRA, even past age 70, subject to a maximum income limit.
• Some employer plans (401k, 403b etc.) have Roth-type options that many employees could change to.
• Young adults with gifted UTMA accounts or other investments could use those funds to start Roth IRA’s.
• Parents or grandparents looking to give the next generation a boost could fund Roth IRA’s for any who have earned income.
• Anybody with IRA balances may convert any amount they choose to Roth, regardless of income. The converted amounts are subject to income tax, but ever after, the Roth benefits are in place.
The tax implications of a Roth conversion can be complicated. You should seek advice from a professional tax consultant. Your own situation and views should rule any decisions you make. Since we cannot know the future, there is no way to know which path is best. Like so many things in life, we will do the best with what we know.
Clients, if you would like to talk about this or anything else, please write or call.
Pay Uncle Sam Now or Later
Tax reform has delivered the lowest income tax rates in many years. These relatively low rates expire after five years. This brings up a great planning opportunity. The idea is to see if converting retirement assets to Roth IRA’s makes sense.
This is a classic “pay me now or pay me later” calculation. Normally, we want to pay later. But if we might get a discount on our taxes by paying now, we need to think about it.
Just as the best time to start Social Security retirement benefits depends partly on a fact we can’t know, the date of our death, the Roth conversion calculus has to include an assumption about future tax rates.
Some believe that with the spiraling budget deficits and national debt, tax rates must necessarily rise in the future. This makes sense to us, but we really cannot know. So having some assets in Roth format and some in traditional IRA format is a form of “tax diversification.” Split the difference.
Bottom line, your tax consultant might believe you will never foreseeably get below the 22% tax bracket (for example). So if you convert to Roth at a current tax cost of 22% and you or your heirs are ultimately taxed at 22% when funds are withdrawn, you broke even. The same after-tax money is available.
It is handy to note that breaking even produces some advantages. You will have greater ability in the future to choose where your withdrawals come from, and thus manage your future tax exposure year by year. You also could take out a lump sum from the Roth to help a child or buy a boat without aggravating your taxes that year. And you may avoid Required Minimum Distributions on the conversion.
If you convert to Roth at 22% and avoid future higher tax on withdrawals by you or your beneficiaries, you gained in terms of the after-tax result.
Clients, we believe we need to have this conversation with many of you before the end of 2018. It might significantly improve your financial security (or not.) If you have questions about this or any other topic, email us or call or set an appointment.
SEE ALSO: A Less Taxing Situation https://228main.com/2018/03/05/a-less-taxing-situation/
The opinions voiced in this material are for general information only and are not intended to provide specific tax advice or recommendations for any individual.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
The Charitable Interpretation
Americans are the most generous people on Earth, according to the Philanthropy Round Table1. We charitably provide funding for education, health, the arts, nature, religion, social services and other worthy endeavors. And we give larger fractions of our incomes than residents of any other land.
Some ways to give work better than others, financially speaking. Since our object is to do what we can to improve your financial position, here are some things we want you to know:
1. You may direct IRA distributions to go straight to charities. You do not pay tax on these distributions, unlike the ones that go in your pocket. The Internal Revenue Service calls these QCD’s, or Qualified Charitable Distributions. These may be used to satisfy all or part of any money you have to take out—the RMD or Required Minimum Distribution for those over 70. (The IRS loves acronyms!) Even if you don’t itemize on your taxes, this is a way to reduce income taxes you would otherwise have to pay.
2. If you own a stock that has gone up in value, you may donate the stock and avoid tax on the gain. Additionally, you do receive an income tax deduction for the full value of the stock on the date it is transferred to the charity. This works out better than if you sold the stock, incur tax on the gains, and then donated the cash to the charity. Consult your tax expert about your situation.
3. If you plan to leave bequests to family members and a charity too, think about the best way to do that. Since charities don’t pay tax, there is no tax pain associated with money coming out of an IRA. Your heirs DO have to pay tax on IRA distributions, however. So you might make any charitable bequests by way of IRA beneficiary designations, and leave less taxing assets to other heirs. Consult your estate attorney for detailed information.
Clients, we are not in the business of telling you how to spend your money. But if you are charitably inclined and want to take advantage of any of these ideas, call or email us. We will work with your other advisors, do the paperwork for QCD’s from your IRA accounts here, assist with transfers to charities and help you change beneficiary designations on your IRA accounts.
Email us or call if you would like to discuss these ideas in more detail.
1http://www.philanthropyroundtable.org/almanac/statistics/
2IRS FAQ on charities and IRA withdrawals: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax advisor.
Clothes, Money, Wealth–Simplicity
When I graduated from college just before my 21st birthday and went into business, I dressed to appear more experienced than I was. Suit, tie, wing-tip shoes—you know what I’m talking about. As the years went by, ‘trying to look experienced’ ceased to be an issue, somehow.
Over time, my wardrobe evolved into a new kind of uniform. Doc Martens casual shoes, gold socks, khaki slacks, polo shirt. In winter, add a sweater. When something wears out, replace it with like kind. I might be spending about $150 or $200 per year on my business wardrobe these past many years.
One of the byproducts of this simplified wardrobe is pure efficiency. I spend no time working out what to wear. My socks are all the same color. Choice of slacks is easy: the clean ones. And the polo shirt I select each day is the one whose ‘turn’ it is. My conscious thoughts run more to how to grow your bucket, and not so much trying to match colors on my fashion plate.
Mark Zuckerburg, billionaire social media pioneer, is famous for wearing the same modest clothes every day. Steve Jobs, cofounder of Apple, had the same habit. Anybody who has seen television talent show personality Simon Cowell has noticed his ever-present trademark black T shirt. Many decades ago, scientist Albert Einstein owned a number of suits—all grey.
Some of these luminaries are on record with the notion that the simplicity of standard routines creates time for them—and time is money.
Friends, I am not promoting the idea that you should be as boring as I am, sartorially speaking. There is a different way that standard routines can replace conscious choice and enrich you.
By making your periodic investments automatic instead of the product of a deliberate, recurring decision, you accomplish two things. First, the investment actually happens on schedule, every time—it is automatic. And second, you spend no time working on it or thinking about it every month—and time is money.
This is the way 401(k) and other retirement plans work. We know people who signed up for them, paid no attention for some period of years, and were surprised to find out later that they had accumulated tens or hundreds of thousands of dollars.
Roth IRA’s, college savings plans, and other forms of investment can be set up the same way. Automatic monthly investments may be drafted straight from your bank account, without the need for thought or action on your part.
Clients, if you would like to simplify more parts of your financial life, or talk about any other pertinent topic, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
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