tax planning

An Offer You Can’t Refuse

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When you save money in an IRA, you get a benefit in the form of a tax deduction that reduces your liability come tax time. Unfortunately, all good things must come to an end, and these taxes are merely deferred: when you take distributions from your IRA, it gets taxed as income.

To make sure that the IRS gets its share, IRA owners are required to take out a percentage of their account value each year starting at age 72. This “required minimum distribution” (RMD) starts out around 4% and slowly grows with age according to life expectancy tables.

Beneficiary IRAs are also subject to RMDs, regardless of age. (The IRS has a vested interest in seeing that they are drained. They designed IRAs to help taxpayers fund retirement, not to sock away generational wealth with impunity.)

There has been some confusion about RMD rules in recent years because of multiple rule changes, including the requirement being waived altogether for 2020. There are no signs that Congress intends to waive RMDs for a second year, so anyone who is 72 or older by the end of 2021 will need to take out an RMD by December 31.*

No matter when your birthday is, you get complete discretion on when to take out your RMD. Some prefer to put it off as long as possible to keep the money at work in the market; some would just as soon have it in their pockets at the start of the year. It is up to you.

One notable exception for IRA holders: Roth IRAs do not have any mandatory RMDs. A Roth is funded with after-tax money, so the IRS has no interest in how you take money out or leave it in. If you are still saving up and counting down days until retirement, this is one advantage of a Roth that you should take into consideration.

Clients, if you want to talk about your RMD, please call or email us.

*Those turning 72 this year get a one-time extension and can put off their very first RMD until Tax Day next year, though we generally do not recommend this: these folks will still need to take 2022’s RMD out by the end of next year, so doubling up on distributions will create a lumpy tax bill.


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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.

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.

Sinking Feeling or Sinking Fund?

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Have you ever been faced with a large expense for which you were unprepared?  

I have. It gave me a sinking feeling. 

Sinking itself isn’t always a bad thing. The term “sinking fund” originally referred to a dedicated reserve a corporation would set up to repay a debt, contributing funds on a regular basis to build up the needed amount.  

Many individuals have adapted the idea to manage their personal finances: having a sinking fund may help us avoid that sinking feeling

This idea came in handy as I recently set out to see how well the sources for my retirement income were matching up with my expenses. My home has a new roof, won’t need another for many years. My vehicles are fairly new; they won’t need to be replaced for years, either. 

But the fact is, someday I will need to pay for a new roof. I will need to replace a car. Furniture and appliances wear out. More predictable but “lumpy” expenses happen, too, like property taxes and planned travel. 

If my budget fails to account for these items, my budget is not really covering all of my living expenses, is it? The answer is a sinking fund, as in these examples. 

  • Home maintenance. If I sink $200 for repairs and such into a sinking fund every month, I would have $12,000 every five years. That should cover a new roof ten or fifteen years from now… or deductibles on storm damage… or a chance to repaint when needed. Likewise, $100 monthly should cover whatever appliances or furniture need replacing: that’s $12,000 over ten years. 
  • Transportation. Piling $350 monthly toward vehicle replacement ought to pile up to enough to buy a car when needed, years down the road. 
  • Annual needs. By adding in one-twelfth of my property taxes and one-twelfth of the annual travel budget each month, my sinking fund should be able to handle most anticipated lumpy expenses, in general. 

I don’t know when the dryer will need replacing—or what else might break!—but I should have the funds to meet the need. And in any of these scenarios, if the balance gets way ahead of likely expenses, I could always pare back the monthly deposit, direct that money elsewhere as I see fit. 

There are different ways to do sinking funds. I set up a monthly automatic transfer into my LPL Financial brokerage account, where the funds will go into an insured cash account until needed. If you would like to set up a sinking fund for your lumpy expenses, email us or call. 


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The Swiss Army Knife of Finance

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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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Rule Change: IRA Required Distributions

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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.

New Lifestyles, New Plans

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It seems that life used to be plainly segmented. First we got educated, then we worked, then we retired.

Financial plans followed suit: first we accumulated during our working years, then we spent in retirement – hopefully, not running out of money before we died.

Increasingly in the 21st century, life is sliced and diced. Periods of education may happen at any age. People remake themselves to meet the needs of the marketplace, or their own preferences. Stretches of leisure may be mixed in with periodic bouts of consulting or other work in the golden years.

Some people choose to retire to volunteering or a new business venture or employment in a more enjoyable field, or seasonally, or part-time. There are a lot of ways to live life these days.

In addition to changing lifestyle patterns, people are living longer than ever before.

In this new environment, financial plans and planning need to be more flexible, and serve different purposes. The key theme: flexibility.

1. Investment products that tie your money up for years are less appropriate than before, as changing circumstances could mean an unforeseen need for liquidity.

2. The accumulation of funds in traditional retirement accounts still makes sense. Adequate funds make work optional in later years, or enable volunteer work or even a business start-up.

3. It may pay to pay more attention to tax brackets, as shifting circumstances could change tax status from year to year. Techniques to take advantage of low-bracket years may reduce lifetime total income taxes.

The key, of course, is not what the trends are or what many people are doing, but what YOU want to do. 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 investing involves risk including loss of principal. No strategy assures success or protects against loss.

Hammer or Pliers?

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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.