tax advantages

Silver Lining Playbook

Recent market action featured normal stock market volatility in a remarkably compressed time period. (We all know which direction the volatility took us, don’t we?)

Some clients see a silver lining in stock market downturns. They are able to do Roth IRA conversions on a more favorable basis. These transactions are taxed on the value transferred from traditional IRA or rollover accounts into Roth IRA accounts.

Think about $60,000 invested that temporarily declines to $50,000 before bouncing back to $60,000. If the conversion happens at the low point, tax is paid on $50,000 but the Roth ends up with $60,000 of assets. This is a way to build after-tax wealth over the long term. If the rules are followed, gains in the Roth are never taxed, even when withdrawn.

By intentionally selecting the specific holdings with the most potential to snap back, an additional edge may be gained. (Of course, we have no guarantees on the selections we make.)

Many of you are looking at the lowest tax brackets in years, due to recent tax reform, changes that are scheduled to disappear in the years ahead. And income tax rates may rise anyway, as the government seeks to deal with record borrowing and national debt.

So the silver lining in the stock market decline is a pair of potential advantages in Roth IRA conversions: we may be converting assets at a temporary market value discount, taxed at temporarily low tax rates.

We have a crystal ball. It does not work. We could be wrong about future tax rates, and nobody knows their own specific future tax situation. And there is no guarantee that depressed investments rise again. We just do the best we can with what we know.

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. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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.

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.

Which Bucket?

One key aspect of investment management often gets overlooked. When you have a variety of investment accounts with differing tax treatment, it can make a great deal of difference where you place which investments. At 228 Main, our portfolio management system enables us to choose our spots.

Roth IRA accounts have a wonderful attribute: used properly, you will never pay income tax on the gains made inside them. So when particularly dynamic investment opportunities arise, we prefer to place them in a Roth IRA bucket, when possible. There are no required distributions in later life, and heirs inherit Roths free of income tax.

Traditional retirement accounts like IRA’s and 401(k)’s are another category. Gains and portfolio income may not be taxed for years or decades into the future. This is called tax deferral, and is a powerful way to build your balances. (You or your heirs will pay the piper eventually.) Withdrawals are taxed as ordinary income, so preferential treatment on capital gains and dividends is not available.

Taxable accounts—your single or joint or revocable trust accounts—generate tax consequences year by year. You receive a Form 1099 listing everything each year. There are a couple of things to note, however. Capital gains and qualifying ordinary dividends are taxed at lower rates than ordinary income. And, there is no income tax on lifetime gains for assets held until death. So heirs get an income tax break.

Tax features of these different kinds of buckets are only part of the picture. Your need for current income comes into play, and other aspects of your situation. Unique portfolios for unique people—hey! What a great motto that would be.

Clients, if you would like to talk about this or anything else, 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.

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.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

Working? Here’s Some Basics.

What has been the biggest factor in helping people end up financially sound in retirement?

In our opinion, it is the availability of retirement plans in the workplace. This article is a primer on the high points. If you are on the job, this may be key information for you.

Employer-sponsored retirement plans have a number of features that may help people build wealth. They go by different names (401k, SEP, SIMPLE, 457, TSA, 403b etc.) but generally share these features:

1. Once you sign up, you invest automatically every payday. It takes no effort or thought month to month—you put your asset-building on autopilot when you enroll.

2. The arithmetic of pre-tax retirement plans can be compelling. For some, for every $5 they contribute, their paychecks may only go down by $4. Taxable income goes down, so your income taxes go down. A potential tax break for the working person—imagine!

3. Some employers match your contributions to some extent. A fifty-cents on the dollar match means if you put in $5, your employer will add $2.50. That’s like a 50% return on Day One! (Employer contributions may be subject to vesting, so you might not keep the whole match unless you stay on the job for up to five years, for example.)

We are always happy to talk to you about your situation, and how you might use an employer plan to get you where you want to go. But here are a couple of rules of thumb. These are general pointers that may or may not fit you, but some have found them useful:

First, saving 10% of everything you ever make is a good way to start on a sound retirement. If you aren’t there and cannot contribute that much, ratchet up your savings rate by 1% a year if you can—every year. Some clients make a habit of putting raises (or half of them) into the plan, or increasing their contribution rate by 1% per year.

Second, if you are a long way from retirement, you can afford to take a long view with the investments you choose for the plan. Why take a short term view on money you probably won’t spend for many years, or even decades? But the choice is yours—most plans give you options.

Clients, call or email if you would like to talk about your situation or any other pertinent topic.

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 tax issues with a qualified tax advisor.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

228Main

News and Views from 228 Main

tax advantages

Silver Lining Playbook

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Which Bucket?

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Working? Here’s Some Basics.

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