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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So if you convert to Roth at a current tax cost of 22% and you or your heirs are ultimately taxed at 22% when funds are withdrawn, you broke even.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.

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

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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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News and Views from LFS

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Pay Uncle Sam Now or Later

The Charitable Interpretation

Clothes, Money, Wealth–Simplicity

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