tax consequences

Catch-Up > Ketchup
graphic shows a piggy bank looking on curiously at a bottle of ketchup

These two terms may essentially be homonyms, but one is so much greater than the other. Kiddos sometimes choose huge portions of the condiment ketchup. But beyond a sugar-fueled addiction for dipping our fries in that one is a great opportunity to “catch up” on our IRA contributions.

In the world of IRAs—Individual Retirement Accounts—we consider the beginning of January through tax filing day “catch-up season.” Whether Roth or traditional, if we are eligible to make contributions, then we can catch up on last year’s contributions even though the last calendar year is over.

Those just learning about the power of Roth IRAs can use this season to make two years’ worth of contributions at once. Even with the federally-mandated limits, you can contribute thousands of dollars in standard contributions. And for people who turned 50 by year-end, there is an extra “catch-up” contribution option.

Consider even just the standard contribution limits. Imagine if you had $15,000 in a regular account (in which you pay tax on earnings) and were eligible to contribute to a Roth IRA for both this year and next year. If you won’t be spending that money in the next few years, the question comes down to whether you would like to never pay tax on earnings on that money–ever again, for the rest of your life.

If that value were to double over the years and double again, as sometimes happens with long-term investments, there might be $60,000 available later with zero tax. After five years your contributions can be withdrawn without tax. At the later of five years or age 59½, the earnings may be withdrawn without tax too. And if you didn’t withdraw it, your beneficiaries would receive it, free of income tax.

No guarantees, of course: the markets go up and down.

There is a maximum earnings limit on Roth contribution eligibility, and there is a whole world of other lifetime tax reduction strategies related to Roth conversions. We’d be happy to visit with you about your eligibility. Simply email us or call if you have an interest in learning more.

For now, happy catch-up season, one and all!

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

This information is not intended to be a substitute for specific individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend you discuss your specific situation with a qualified tax or legal advisor.

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Catch-up > Ketchup – 228Main.com Presents: The Best of Leibman Financial Services

Spicing Things Up: Catsup, Ketchup, or Catch-Up?
graphic shows a piggy bank looking on curiously at a bottle of ketchup

One of these is not about tomato-based condiments.

In the world of IRAs—Individual Retirement Accounts—we consider the beginning of January through tax filing day “catch-up season.” Whether Roth or traditional, if we are eligible to make contributions, then we can catch up on our 2024 contributions even though 2024 is over.

Those just learning about the power of Roth IRAs can use this season to make two years’ worth of contributions at once. The limit on contributions is $7,000 for 2024 plus $7,000 for 2025. Another note to know: for people who turn 50 by year-end, there is an extra $1,000 per year that can go in—a “catch-up” contribution.

Consider even just the standard contribution limits. Imagine if you had $14,000 in a regular account (in which you pay tax on earnings) and were eligible to contribute to a Roth IRA for 2024 and 2025. If you won’t be spending that money in the next few years, the question comes down to whether you would like to never pay tax on earnings on that money, ever again, for the rest of your life.

If that value were to double over the years and double again, as sometimes happens with long-term investments, there might be $56,000 available later with zero tax. And if you didn’t spend it, your beneficiaries would receive it, free of income tax.

No guarantees, of course: the markets go up and down.

The way Roth IRAs work, after five years your contributions can be withdrawn without tax. At the later of five years or age 59½, the earnings may be withdrawn without tax. There is a maximum earnings limit on Roth contribution eligibility; we’d be happy to visit with you about your eligibility. Simply email us or call if you have an interest in learning more.

There is a whole world of other lifetime tax reduction strategies related to Roth conversions; we’ll talk about those another time.

For now, happy catch-up season, one and all!

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

This information is not intended to be a substitute for specific individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend you discuss your specific situation with a qualified tax or legal advisor.

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Play the audio version of this post below:

Spicing Things Up: Catsup, Ketchup, or Catch-Up? – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Catsup, Ketchup, or Catch-Up?
graphic shows a piggy bank looking on curiously at a bottle of ketchup

One of these is not about tomato-based condiments.

In the world of IRAs—Individual Retirement Accounts—we consider the beginning of January through tax filing day “catch-up season.” Whether Roth or traditional, if we are eligible to make contributions, then we can catch up on our 2023 contributions even though 2023 is over.

Those just learning about the power of Roth IRAs can use this season to make two years’ worth of contributions at once. The limit on contributions is $6,500 for 2023 plus $7,000 for 2024.

Another note to know: for people who turn 50 by year-end, there is an extra $1,000 per year that can go in—a “catch-up” contribution.

Imagine if you had $13,500 in a regular account (in which you pay tax on earnings) and were eligible to contribute to a Roth IRA for 2023 and 2024. If you won’t be spending that money in the next few years, the question comes down to whether you would like to never pay tax on earnings on that money, ever again, for the rest of your life.

If that value were to double over the years and double again, as sometimes happens with long-term investments, there might be $54,000 available later with zero tax. And if you didn’t spend it, your beneficiaries would receive it, free of income tax.

No guarantees, of course: the markets go up and down.

The way Roth IRAs work, after five years your contributions can be withdrawn without tax. At the later of five years or age 59½, the earnings may be withdrawn without tax. There is a maximum earnings limit on Roth contribution eligibility; we’d be happy to visit with you about your eligibility. Simply email us or call if you have an interest in learning more.

There is a whole world of other lifetime tax reduction strategies related to Roth conversions; we’ll talk about those another time.

For now, happy catch-up season, one and all!

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

This information is not intended to be a substitute for specific individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend you discuss your specific situation with a qualified tax or legal advisor.

Want content like this in your inbox each week? Leave your email here.

Play the audio version of this post below:

Catsup, Ketchup, or Catch-Up? – 228Main.com Presents: The Best of Leibman Financial Services

This text can be found at https://www.228Main.com/.

Getting Down to Brass “Tax”
photo shows a light letter box with the word "TAXES" sitting on top of various cash bills

While paying taxes is generally a good sign that you are making money, it seems most people want to avoid paying more tax than they need to. It’s a common enough question we field, and one worth considering.

How do we handle the tax impacts of our choices?

For smaller investors with tax-deferred vehicles like IRAs or 401(k) plans, tax considerations are simpler. Only deposits and withdrawals have any tax implications (and for Roth IRAs, rarely even then.)

Things get more complicated for investors with substantial balances outside of retirement accounts: most trading activity has tax impacts. You pay taxes on interest and dividend payments; you also become subject to capital gains tax when selling investments.

The principle of capital gains is straightforward enough. For instance, if you buy stock for $100 and later sell it for $100, you made no money and owe no tax. If you were to sell it for $110, you would have to pay some percentage of the $10 profit in tax (but not the rest of the $100: that was money you had in the first place.) And if you sold it at $90, you would have a loss of $10 that you could use to offset taxable gains elsewhere.

The important thing here is that the IRS generally only cares about the value of investments when they are bought or sold. If your $100 stock position balloons up to $1,000 one year and then collapses back down to $100 the next, the IRS has no interest in the round trip. They only see the difference from your original purchase, regardless of how high or low the price got in the meantime.

It is easy to despair when an investment is underperforming, but according to the IRS, those losses do not exist until you decide to sell. And if a high-flying investment should pull back from its highs, the IRS would give you a very funny look if you tried to claim it as a loss.

So if the IRS does not care about your gains or losses “on paper,” why should you? A drop is not a loss, and value at inception is a great anchor to come back to when you need a jolt of perspective.

And if after all this you find yourself with more resources than you would need in your lifetime, there are estate planning opportunities to consider. If you are sitting on long-term investment gains that you do not think you will be spending, there is little reason for you to sell those holdings and pay taxes on your gains yourself.

If those assets are passed down to your heirs, however, they would generally only need to worry about gains made after they inherited them, so whatever gains you accumulated during your lifetime can pass to them tax-free.

Lots to think about! It’s an important topic for many investors. Clients, when you need to talk about your tax considerations, please reach out.

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.

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Play the audio version of this post below:

What the IRS Knows: Getting Down to Brass "Tax" – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

What the IRS Knows: Getting Down to Brass “Tax”
photo shows a light letter box with the word "TAXES" sitting on top of various cash bills

While paying taxes is generally a good sign that you are making money, it seems most people want to avoid paying more tax than they need to. It’s a common enough question we field, and one worth considering.

How do we handle the tax impacts of our choices?

For smaller investors with tax-deferred vehicles like IRAs or 401(k) plans, tax considerations are simpler. Only deposits and withdrawals have any tax implications (and for Roth IRAs, rarely even then.)

Things get more complicated for investors with substantial balances outside of retirement accounts: most trading activity has tax impacts. You pay taxes on interest and dividend payments; you also become subject to capital gains tax when selling investments.

The principle of capital gains is straightforward enough. For instance, if you buy stock for $100 and later sell it for $100, you made no money and owe no tax. If you were to sell it for $110, you would have to pay some percentage of the $10 profit in tax (but not the rest of the $100: that was money you had in the first place.) And if you sold it at $90, you would have a loss of $10 that you could use to offset taxable gains elsewhere.

The important thing here is that the IRS generally only cares about the value of investments when they are bought or sold. If your $100 stock position balloons up to $1,000 one year and then collapses back down to $100 the next, the IRS has no interest in the round trip. They only see the difference from your original purchase, regardless of how high or low the price got in the meantime.

It is easy to despair when an investment is underperforming, but according to the IRS, those losses do not exist until you decide to sell. And if a high-flying investment should pull back from its highs, the IRS would give you a very funny look if you tried to claim it as a loss.

So if the IRS does not care about your gains or losses “on paper,” why should you? A drop is not a loss, and value at inception is a great anchor to come back to when you need a jolt of perspective.

And if after all this you find yourself with more resources than you would need in your lifetime, there are estate planning opportunities to consider. If you are sitting on long-term investment gains that you do not think you will be spending, there is little reason for you to sell those holdings and pay taxes on your gains yourself.

If those assets are passed down to your heirs, however, they would generally only need to worry about gains made after they inherited them, so whatever gains you accumulated during your lifetime can pass to them tax-free.

Lots to think about! It’s an important topic for many investors. Clients, when you need to talk about your tax considerations, please reach out.

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.

Want content like this in your inbox each week? Leave your email here.

Play the audio version of this post below:

What the IRS Knows: Getting Down to Brass "Tax" – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

College Savings Ideas When There’s More Than One Kiddo
photo shows graduation caps in the air against a blue sky

Some things that seem complicated can be made simple. Other things, like college funding accounts for descendants, may get more complicated over time when more than one child is involved.

Consider how disparities may develop across account balances:

  • Imagine that, upon their birth, the first child receives a one-time deposit of $1,000; the second-born receives $100 monthly from birth to age 18; the third on the way is set to receive the same deal as either of the first two. However, this third child will necessarily have less purchasing power from the same amount in contributions. Why? In the years that have passed, inflation will have done its work.
  • One-time deposits may go in at a more advantageous time to invest for one child than another.
  • Equity among children will remain a shifting target as asset values and college costs change over time.

… And all this is before we even consider the differences in children’s needs.

One approach to simplify this reality is to think of college funding as a consolidated endeavor for the group, not as individual accounts. With a 529 plan owned by grandparents or a Roth IRA earmarked for education, this can be done. (We should note: owners of 529 college savings plans may change the beneficiaries among siblings or cousins with no adverse tax consequences.)

Consider this example. If there are seven grandchildren, you can allocate 1/7 of the total college fund balance to the oldest, then 1/6 of what remains to the second-oldest, and so on as each grandchild reaches college age.

In the case 529 college savings accounts are used, transfers may be needed to set up the oldest with the proper balance. If a Roth IRA is used, a withdrawal in the proper amount can be made by the grandparent to meet education expenses, then the “paid” child is removed from the beneficiary (or contingent beneficiary) provision.

Proceeds of a gift via Roth may of course be used for purposes other than education, a house down-payment for example.

Some clients who have 529 accounts for grandchildren make adjustments from time to time among grandchildren’s accounts to reflect each child’s individual needs and to maintain a better sense of equity. Others deposit equal amounts for each grandchild and do not worry about differences that emerge later.

One general rule in college funding: the more removed the funding is from the child, the less impact it may have on college aid formulas. A 529 account owned by the child is 100% available for college expenses, but a Roth IRA balance of a grandparent or parent has little or no impact.

Clients, we talk about options and alternatives; you make decisions. If you would like to talk about strategies for your children or grandchildren, email us or call.

Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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College Funding Ideas When There’s More Than One Kiddo – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Higher Returns, or Minimize Taxes?

© Can Stock Photo / joebelanger

In the course of our research, we recently came across a survey of investors published by a large investment organization1. It contained an example of a technique that might be used to manipulate investors into a less-than-optimal path.

Would you rather minimize taxes, or achieve the highest investment returns? Many people might think that this is a straightforward question: the survey reported that 61% of baby boomers preferred to minimize taxes. In our opinion, it is indeed straightforward—just not in the way they think it is.

We pondered that question, and wondered why there was even a choice between minimizing taxes and going for higher returns. Generally, an investor comes out better off if she or he aims for the highest after-tax returns.

Peddlers of financial products know that if they can get a prospect to focus on taxes, then it doesn’t matter whether the investment is really any good or not. It merely needs to meet that very important objective of minimizing taxes. A tight focus on taxes takes the spotlight away from the actual investment and its performance.

We think a better approach is to include the potential impact of taxes in our investment decision-making. You may hate taxes, but it would make no sense to go for 1% tax free instead of 6% taxable (all other things being equal)—the higher rate would leave you better off even after you paid the tax.

Some of you are more concerned about income taxes than others. It doesn’t matter what your object is, we need to agree that seeking the highest after-tax returns is a more sensible goal than either minimizing taxes or achieving higher returns. In our reality-based approach, we can integrate both objectives to work towards a more sensible plan.

Each of you is free to make whatever decisions you would like to, with your money. (We never forget whose money it is.) If you bring it us, we are never going to focus on just minimizing taxes, or just focus on achieving high returns. That is a false choice, and a seller who presents that to you may be trying to manipulate you.

We seek to achieve the best after-tax returns—that is the path that potentially leaves you with the biggest bucket. No guarantees, of course. Clients, if you have questions about this or any other pertinent issue, please email us or call.

1 2016 U.S. Trust Insights on Wealth and Worth survey, U.S. Trust Bank of America Private Wealth Management

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.

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.

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