Please feel free to forward to anyone who may find this helpful. In particular, people over age 70 1/2 and or family members of these same people who assist them in financial matters.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law last week offers relief to those who are required to withdraw a minimum amount from IRA and other retirement accounts. Effective with this bill, all 2020 Required Minimum Distributions (RMDs) are suspended, including inherited (beneficiary) IRAs. Consideration should be given to whether to take advantage of this suspension. For example, if the effects of the pandemic drop you into a lower tax bracket, it might make sense to take the RMD (and perhaps a bit more than the minimum) out of the account in 2020.

That much is clear. Here is where it gets tricky:

If you have already taken your 2020 RMD, as it looks right now, you will have to include this withdrawal in your 2020 gross income and pay taxes on it. That said, in the year following the 2008 financial crisis, this same initial ruling prohibiting redeposits was later reversed. Also, not all tax experts agree on this redeposit rule. For right now, the best practice is to consult your tax advisor for their opinion.

If you have taken RMD for 2020, you still have some options that might work for you:

You have up to 60 days to return a distribution to an IRA or deposit it in another qualified retirement account without owing taxes on it.

You also might decide to convert the amount into a Roth IRA. Since you are paying the taxes anyway, but if you don’t need the money for current year expenses, you can use a Roth to generate tax-free growth.

The CARES Act offers other temporary changes to retirement account deposits and withdrawals. We intend to provide clarity on some of these changes in future updates.

Please call us with any questions about your retirement accounts, taxable investments, or other financial matters. Right now, we are walking through history. There is no need to walk alone.

This information is not intended to ne 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 Roth IRA. The converted amount is generally subject to income taxation.

Tracking# 1-975182

What younger investors need to know.

The SECURE Act passed into law in late 2019 and changed several aspects of retirement investing. These modifications included modifying the ability to stretch an Individual Retirement Account (IRA) and changing the age when IRA holders must start taking requirement minimum distributions to 72-years-old.1,2

While those provisions grabbed the headlines, several other smaller parts of the SECURE Act have caught the attention of individuals who are raising families and paying off student loan debt. Here’s a look at a few.

Changes for college students. For those who have graduate funding, the SECURE Act allows students to use a portion of their income to start investing in retirement savings. The SECURE Act also contains a clause to include “aid in the pursuit of graduate or postdoctoral study.” A grant or fellowship would be considered income that the student could invest in a retirement vehicle.3

One other provision of The SECURE Act:  you can use your 529 Savings Plan to pay for up to $10,000 of student debt. Money in a 529 Plan can also be used to pay for costs associated with an apprenticeship.4

Funds for a growing family. Are you having a baby or adopting? Under the SECURE Act, you can withdraw up to $5,000 per individual, tax-free from your IRA to help cover costs associated with a birth or adoption. However, there are stipulations. The money must be withdrawn within the first year of this life change; otherwise, you may be open to the tax penalty.5

Annuities and your retirement plan. This might be the most complicated part of the SECURE Act. It’s now easier for your employer-sponsored retirement plans to have annuities added to their investment portfolio. This was accomplished by reducing the fiduciary responsibilities that a company may incur in the event the annuity provider goes bankrupt. The benefit is that annuities may provide retirees with guaranteed lifetime income. The downside, however, is that annuities are often the incorrect vehicle for investors just starting out or far from retirement age.6

The best course is to make sure that you review any investment decisions or potential early retirement withdrawals with your advisor.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – Under the SECURE Act, your required minimum distribution (RMD) must be distributed by the end of the 10th calendar year following the year of the Individual Retirement Account (IRA) owner’s death. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements.

2 – Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act as long as you meet the earned-income requirement.

3 – forbes.com/sites/simonmoore/2019/12/23/if-youre-a-graduate-student-the-secure-act-makes-easier-to-save-for-retirementheres-how/#207d85d322ef [12/23/2019]. A 529 plan is a college savings play that allows individuals to save for college on a tax-advantages basis. State tax treatment of 529 plans is only one factor to consider prior to committing to a savings plan. Also consider the fees and expenses associated with the particular plan. Whether a state tax deduction is available will depend on your state of residence. State tax laws and treatment may vary. State tax laws may be different than federal tax laws. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.

4 – forbes.com/sites/simonmoore/2019/12/21/who-benefit-from-the-recent-changes-to-us-savings-programs/#4b86e86f6432 [12/21/2019]

5 – congress.gov/bill/116th-congress/house-bill/1994/text#toc-HCF4CC8DCF6E14B28968474EB935AB36D [05/23/2019]

6 – marketwatch.com/story/will-the-secure-act-make-your-retirement-more-secure-2020-01-16 [01/16/2020]. The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxes as ordinary income. If a withdrawals is made prior to age 59 ½, a 10% federal income tax penalty may apply (unless an exception applies).

You are invited to what should be an interesting panel discussion on five strategies that help mitigate or defer taxes on highly appreciated real estate investments. While the 1031 exchange is known by many, it will represent only one of the five strategies that will be discussed by the panel. I do not know of a time when all five strategies were available for discussion in one sitting.

Click here for the invitation or to register.

The panel is very smart – advanced thinkers, open to your questions during and after the workshop. There are two workshop dates scheduled over the next six week – two chances to hear this presentation. The first is February 19th in Pleasanton and then March 19th in Alameda.

#BayEastAssociation
#Real Estate
#Taxes
#TaxStrategies
#TaxSavings
#1031
#1031Exchange
#OpportunityZone

Leave more for your beneficiaries and charities?

By Cornerstone Wealth Management

Probate costs will reduce estate size. Attorneys fees, court costs, other professional fees and expenses can result in shrinking an estate by up to five percent (5%). For example, with an estate valued at $1 million, settlement costs can be as much as $50,0001. That assumes a routine probate. In addition, the probate process can take over a year to settle.

Where does this money go? If the probate is routine, then these costs are for administration of the settlement process. Few estates require more than that. More complex probates may incur higher cost and potentially require more time to settle. Beneficiaries of small, five-figure estates may be allowed to claim property through affidavit. This option does not apply to larger estates.

The question for those who wish to manage these expenses becomes, how can you exclude more assets from the expense of probate? They key for many is to create a plan that exclude from probate as many assets as possible. What follows are four ideas that have worked for others.

  1. Joint accounts. Married couples may hold property as joint tenants. Jointly titled property includes a right of survivorship and is exempt from probate. At the death of the first spouse, assets then pass to the surviving spouse. State law varies on this matter. Some states allow a variation called tenancy by the entirety, in which married spouses each own an undivided interest in property with the right of survivorship (they need consent from the other spouse to transfer their ownership interest in the property). Other states allow community property with right of survivorship; assets titled in this manner also skip the probate process.2,3 Joint accounts may still face legal challenges. For example, a potential beneficiary to assets in a jointly held bank account may claim that it is not a “true” joint account, but a “convenience account” where a second accountholder was added just for financial expediency. Or, a joint account arrangement with right of survivorship may be found inconsistent with an estate plan.4 While not a solution for all, joint accounts can be a tool that can be effective for many.
  2. POD & TOD accounts. Payable-on-death and transfer-on-death forms are used to permit easy transfer of bank and investment accounts, and in some states, motor vehicles. During the life of the original owner, the named beneficiary has no rights to claim the asset. Upon the owner’s death, the named beneficiary can claim the assets or securities by showing his or her I.D. and valid proof of the original owner’s death5.
  3. Gifting. For 2018, the IRS allows tax free gifts of up to $15,000 per person to as many different people as you like. Gifting will reduce the size of your taxable estate. Gifting over $15,000 per recipient per year may be subject to federal gift tax (which tops out at 40%) and count against your lifetime gift tax exclusion. In 2018, the lifetime individual gift tax exemption is $11.18 million, and $22.36 million for married couples.6,7
  4. Revocable living trusts. In a sense, these estate planning vehicles allow people to do much of their own probate while living. The Grantor – the person who establishes the trust – funds it while alive with up to 100% of his or her assets, designating the beneficiaries of those assets at his or her death. The trust owns assets once owned by the Grantor, yet the Grantor can invest, spend, and manage these assets as if it is their own while alive. Upon the Grantor’s death, the trust becomes irrevocable, and its assets should be able to be distributed by a successor trustee without having to be probated. The distribution is private (as opposed to the completely public process of probate), and it can save heirs court costs and time.8

Are there assets not subject to the probate fees and process? Yes, there are all kinds of non-probate assets. The common denominator of a non-probate asset is that they transfer by beneficiary designation, which allows these assets to pass either to a designated beneficiary or a joint tenant, regardless of what a will states. Examples: assets jointly owned with right of survivorship, trusts and assets held within trusts, TOD accounts, proceeds from life insurance policies, and IRA and 401(k) accounts.9

Make sure to list/update retirement account beneficiaries. When you open a retirement account (such as an IRA), you are asked to designate beneficiaries of that account. This beneficiary form stipulates where these assets will go when you die. A beneficiary form commonly takes precedence over a will.7

Your beneficiary designations need to be reviewed, and updated when appropriate. This will help prevent you from inadvertently leaving an asset to a former spouse or estranged family member.

If you are married and have a workplace retirement account, under federal law, your spouse is the default beneficiary unless he or she in writing declines. Your spouse is automatically entitled to receive 50% of the account assets should you die, even if you designate another person as the account’s primary beneficiary. In contrast, a married IRA owner may name anyone as a primary or secondary beneficiary, without spousal consent.10

If you or someone you know would like to get coaching on approaches to estate planning, we welcome your call.

#Probate #AvoidProbate #ProbateCosts #BeneficiaryDesignation #TOD #POD #EstatePlanning #FinancialPlanning #Gifting #Charity #Taxes #TaxStrategies

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

This material was prepared by MarketingPro, Inc. and does not necessarily represent the views of the presenting party nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.1 – nolo.com/legal-encyclopedia/why-avoid-probate-29861.html [9/12/18]
2 – info.legalzoom.com/difference-between-community-property-rights-survivorship-vs-joint-tenancy-21133.html [9/12/18]
3 – law.cornell.edu/wex/tenancy_by_the_entirety [9/12/18]
4 – clarkhill.com/alerts/a-guide-for-challenging-a-joint-account-arrangement-in-michigan [3/16/17]
5 – nolo.com/legal-encyclopedia/avoid-probate-transfer-on-death-accounts-29544.html [9/12/18]
6 – thebalance.com/how-is-the-gift-tax-calculated-3505674 [7/25/18]
7 – marketwatch.com/story/how-to-avoid-making-the-same-mistake-aretha-franklin-did-2018-09-04 [9/4/18]
8 – thebalance.com/how-does-a-revocable-living-trust-avoid-probate-3505224 [7/24/18]
9 – fidelity.com/life-events/inheritance/inheritance-basics/probate [9/12/18]
10 – connorsandsullivan.com/Articles/Beneficiary-Designations-Getting-the-Right-Assets-to-the-Right-People.shtml [9/12/18]

For some, the recent tax reforms indicate, yes. For others, not so fast.

By Cornerstone Wealth Management

Can federal income tax rates get lower than they are today? Given the national debt and the outlook for Social Security and Medicare, it is hard to imagine that rates go much lower. In fact, it is more likely that federal income taxes get higher, as the tax cuts created by the 2017 reforms are scheduled to sunset when 2025 ends.

Additionally, the Feds are now using a different yardstick, the “chained Consumer Price Index,” to measure cost-of-living adjustments in the federal tax code. As a result, you could inadvertently find yourself in a higher marginal tax bracket over time, even if tax rates do not change. Due to this, it is possible that today’s tax breaks could eventually be worth less.1

As a result of tax reform, we are occasionally asked if this is a good time to convert a traditional IRA to a Roth. A conversion to a Roth IRA is a taxable event. If the account balance in your IRA is large, the taxable income linked to the conversion could be sizable, and you could end up in a higher tax bracket in the conversion year. For some, that literally may be a small price to pay.2

The jump in your taxable income for such a conversion may be a headache – but like many headaches, is likely to be short-lived. Consider the long term advantages that could come from converting a traditional IRA balance into a Roth IRA. A “big picture” comprehensive financial plan can help you estimate the short and long term merits of this transaction, even before you decide to pull the trigger.

Generally, you can take tax-free withdrawals from a Roth IRA once the Roth IRA has been in existence for five years and you are age 59½ or older. For those who retire well before age 65, tax-free and penalty-free Roth IRA income could be very nice.3

You can also contribute to a Roth IRA regardless of your age, provided you earn income and your income level is not so high as to bar these inflows. In contrast, a traditional IRA does not permit contributions after age 70½ and requires annual withdrawals once you reach that age.2

Lastly, a Roth IRA is can be a good estate planning strategy. If IRS rules are followed, Roth IRA beneficiaries may end up with a tax free inheritance.3

A Roth IRA conversion does not have to be “all or nothing.” Some traditional IRA account holders elect to convert just part of their traditional IRA to a Roth, while others choose to convert the entire balance over multiple years, the better to manage the taxable income stemming from the conversions.2

Important change: you can no longer undo a Roth conversion. The Tax Cuts & Jobs Act did away with Roth “recharacterizations” – that is, turning a Roth IRA back to a traditional one. This do-over is no longer allowed.2

Talk to a tax or financial professional as you explore your decision. While this may seem like a good time to consider a Roth conversion, we have seem working with our clients that this move is not suitable for everyone. Especially during years of high earned income. The resulting tax hit may seem to outweigh the potential long-run advantages.

If you or someone you know would like to get coaching on the most appropriate approach to reviewing Roth strategies, we welcome your call.

#IRA #RothIRA #Roth #RothConversion #FinancialPlanning #Investments #RetirementIncome #RetirementPlanning #Taxes #TaxStrategies #TaxSavings #Cornerstonewmi

This material was prepared by MarketingPro, Inc. and does not necessarily represent the views of the presenting party nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – money.cnn.com/2017/12/20/pf/taxes/tax-cuts-temporary/index.html [12/20/17]
2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [8/17/18]
3 – fidelity.com/building-savings/learn-about-iras/convert-to-roth [8/27/18]

What do you do with sudden money?

Provided by Cornerstone Wealth Management

Imagine getting rich, quick. Liberating? Yes of course. Frustrating and challenging? Most likely.

Sudden money can help you resolve retirement saving or college funding goals, and set the stage for your financial independence. On the downside, you’ll pay higher taxes, attract more attention, and maybe even deal with “wealth envy.” Sudden Money may also include grief or stress if associated to death, divorce, or a employer buy-out.

Sudden Money does not always lead to happy endings. Take the example of Alex and Rhoda Toth, a real-life Florida couple down to their last $25 who hit a lottery jackpot of roughly $13 million in 1990. Their story ended badly: by 2006, they were bankrupt and faced tax fraud charges. Or Illinois resident Janite Lee, who won $18 million in the state lottery. Eight short years later, Janite filed for bankruptcy; had $700 to her name and owed $2.5 million to creditors. Sudden Money doesn’t automatically breed “old money” behavior or success. Without long-range vision, one generation’s wealth may not transfer to the next. Wealth coaching firm The Williams Group spent years studying the estate transfers of more than 2,000 affluent households. It found that 70% of the time, the wealth built by one generation failed to successfully migrate to the next.1,2

What are some wise steps to take when you receive a windfall? What might you do to keep that money in your life and in your family for their future?

Keep quiet, if you can. If you aren’t in the spotlight, don’t step into it. Aside from you and your family, the only other parties that need to know about your financial windfall is the Internal Revenue Service, the financial professionals who you consult or hire, and your attorney. Beyond those people, there isn’t generally an upside to notify anyone else.

What if you can’t keep a low profile? Winning a lottery prize, selling your company, signing a multiyear deal – when your wealth is more in the public domain, expect friends and strangers and their “opportunities” to come knocking at your door. Time to put on your business face: Be fair, firm, and friendly – and avoid handling the requests directly. One well-intended generous handout on your part may risk opening the floodgates to others. Let your financial team review requests for loans, business proposals, and pipe dreams.

Yes, your team. If big money comes your way, you need skilled professionals in your corner – a tax professional, an attorney, and a wealth manager. Ideally, your tax professional is a Certified Public Accountant (CPA) and or Enrolled Agent (EA) and tax advisor, your lawyer is an estate planning attorney, and your wealth manager is “big picture” and pays attention to tax efficiency.

Think in increments. When sudden money enhances your financial standing, you need to think about the immediate future, the near future, and the decades ahead. Many people celebrate their good fortune when they receive sudden wealth and live in the moment, only to wonder years later where that moment went. Many times, it is better to identify what needs immediate attention, and delay anything else until life becomes more stable.

In the short term, an infusion of money may result in tax challenges; it may also require you to reconsider existing beneficiary designations on IRAs, retirement plans, and investment accounts and insurance policies. A will, a trust, an existing estate plan – they may need to be revisited. Resist the immediate temptation to try and grow the newly acquired wealth quickly by investing aggressively.

Looking down the road a few miles, think about what financial independence (or greater financial freedom) means to you. How do you want to spend your time? Do you want to continue working, or change your career? If you own a business, should you stick with it, or sell or transfer ownership? What kinds of near-term possibilities could this mean for you? What are the strategies that could help you defer or reduce taxes long term? How can you manage investment and other financial risks in your life?

Looking further ahead, tax efficiency can potentially make an enormous difference for that windfall. You may end up with considerably more money (or considerably less) decades from now due to asset location and other tax factors.

Important idea: Think about doing nothing for a while. Nothing financially momentous, that is. There’s nothing wrong with that. Sudden, impulsive moves with sudden wealth can backfire.

Welcome the positive financial changes, but don’t change yourself. Remaining true to your morals, ethics, and beliefs will help you stay grounded. Turning to professionals who know how to capably guide that wealth is just as vital.

If you or someone you know would like to get coaching on the most appropriate to sudden money, we welcome your call.

This material was prepared by MarketingPro, Inc. and does not necessarily represent the views of the presenting party nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – bankrate.com/finance/personal-finance/lottery-winners-who-went-broke-1.aspx#slide=1 [5/23/18]
2 – money.cnn.com/2018/09/10/investing/multi-generation-wealth/index.html [9/10/18]

This article was prepared by a third for information only. It is not intended to provide specific advice or recommendations for any individual.

To find out if this tax applies to you, look closely at two factors.

Provided by Cornerstone Wealth Management

Your Social Security income could be taxed. That may seem unfair or unfathomable. Regardless of how you feel about it, it is a possibility.

Since 1984, Social Security recipients have had to contend with this possibility. Social Security benefits became taxable above a certain yearly income level in that year. Then in 1993, a second, higher yearly income threshold (at which a higher tax rate applies) was added. Unfortunately for today’s recipient, these income thresholds have never been adjusted upward for inflation.1 As a result, more Social Security recipients have been exposed to the tax over time. Today, about 56% of senior households now have some percentage of their Social Security incomes taxed.1

Only part of your Social Security income may be taxable, not all of it. This is good news for some. Two factors come into play here: your filing status and your combined income.

Social Security defines your combined income as the sum of your “adjusted gross income” (AGI), any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of “modified AGI,” or MAGI.)2

Single filers with a combined income from $25,000 to $34,000 and joint filers with combined incomes from $32,000 to $44,000 may have up to 50% of their Social Security benefits taxed.2

Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2

If you are a head of household, or a qualifying widow/widower with a dependent child, the combined income thresholds for single filers apply to you.2

What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive. (The only exception is if you are married filing separately and do not live with your spouse at any time during the year. In that case, part of your Social Security benefits may be taxed if your combined income exceeds $25,000.)2

You may be able to estimate these taxes in advance. You can use an online calculator (a Google search will lead you to a few such tools) or the worksheet in I.R.S. Publication 915.2

You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 22% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2,3

Did you know that 13 states tax Social Security payments? In alphabetical order, they are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. It might be a surprise to some that California is not on this list. Sometimes, only higher-income seniors face such taxation. For example, in Kansas, Missouri, and Rhode Island, the respective AGI thresholds for the taxation of a single filer’s Social Security income are $75,000, $80,000, and $85,000.1

If it appears your benefits will be taxed, what can you do? You could explore a few options to try and minimize the tax hit, but keep in mind that if your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, though, some moves might help.

If you have a number of income-generating investments, you could opt to try and revise your portfolio so that less income and tax-exempt interest are produced annually. Part of our work with clients is to review this possibility.

As written about in another article, a charitable IRA gift may be a good idea. You can make one if you are 70½ or older in the year of the donation. Individually, you can endow a qualified charity with as much as $100,000 in a single year this way. This idea could have a dual purpose: The amount of the gift counts toward your Required Minimum Distribution (RMD) and will not be counted in your taxable income.4

You could withdraw more retirement income from Roth accounts to lower AGI. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax exempt as long as you are age 59½ or older and have held the account for at least five tax years.5

Will the income limits linked to taxation of Social Security benefits ever be raised? Retirees can only hope so, but with more baby boomers becoming eligible for Social Security, the I.R.S. and the Treasury stand to receive greater tax revenue with the current limits in place.

If you would like to review options to help manage social security taxes, we welcome your call.

#FinancialPlanning #RetirementIncome  #RetirementPlanning #SocialSecurity #Taxes #TaxStrategies #TaxSavings

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – fool.com/retirement/2018/08/30/everything-you-need-to-know-about-social-security.aspx [8/30/18]
2 – forbes.com/sites/kellyphillipserb/2018/02/15/do-you-need-to-pay-tax-on-your-social-security-benefits-in-2018 [2/15/18]
3 – cnbc.com/2018/09/12/the-irs-is-warning-retirees-of-this-impending-surprise-tax.html [9/12/18]
4 – fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds [9/17/18]
5 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [10/25/17]

‘Stealth’ taxes and financial aid implications are among the factors savers should consider when switching accounts

The following article is Courtesy of Laura Saunders and The Wall Street Journal, and makes some very good points on why funding a Roth Conversion could have a negative impact to an overall financial plan. For many of our clients who are high income earners, the worse possible time for a Roth Conversion may be when they are in their peak earning years – the same period of time most people think about this for the first time.

To determine if a Roth IRA is the right strategy for you and your family, or perhaps to learn when might be the right time to explore this strategy, feel free to reach out to Cornerstone.

Switching your traditional individual retirement account to a Roth IRA is often a terrific tax strategy—except when it’s a terrible one.

Congress first allowed all owners of traditional IRAs to make full or partial conversions to Roth IRAs in 2010. Since then, savers have done more than one million conversions and switched more than $75 billion from traditional IRAs to Roth accounts. (Source: The Wall Street Journal September 2018)

The benefits of a Roth conversion are manifold. A conversion gets retirement funds into an account that offers both tax-free growth and tax-free withdrawals. In addition, the account owner doesn’t have to take payouts at a certain age.

While traditional IRAs can also grow tax-free, withdrawals are typically taxed at ordinary income rates. Account owners 70½ and older also must take payouts that deplete the account over time.

IRA specialist Ed Slott and Natalie Choate, an attorney in Boston, say that Roth IRAs also yield income that is “invisible” to the federal tax system. So Roth payouts don’t raise reported income in a way that reduces other tax breaks, raises Medicare premiums, or increases the 3.8% levy on net investment income.

Yet both Ms. Choate and Mr. Slott agree that despite their many benefits, Roth conversions aren’t always a good idea. IRA owners who convert must pay tax on the transfer, and the danger is that savers will give up valuable tax deferral without reaping even more valuable tax-free benefits. For tax year 2018 and beyond, the law no longer allows IRA owners to undo Roth conversions.

Savers often flinch at writing checks for Roth conversions, and sometimes there are good reasons not to put pen to paper. Here are some of them.

  • Your tax rate is going down. In general, it doesn’t make sense to do full or partial Roth conversions if your tax rate will be lower when you make withdrawals. This means it’s often best to convert in low-tax-rate years when income dips. For example, a Roth conversion could work well for a young saver who has an IRA or 401(k) and then returns to school, or a worker who has retired but hasn’t started to take IRA payouts that will raise income later.
  • Those who will soon move to a state with lower income taxes should also consider waiting.
  • You can’t pay the taxes from “outside.”  Slott advises IRA owners to forgo a Roth conversion if they don’t have funds outside the account to pay the tax bill. Paying the tax with account assets shrinks the amount that can grow tax-free.
  • You’re worried about losses. If assets lose value after a Roth conversion, the account owner will have paid higher taxes than necessary. Ms. Choate notes that losses in a traditional IRA are shared with Uncle Sam.
  • A conversion will raise “stealth” taxes. Converting to a Roth IRA raises income for that year. So, benefits that exist at lower income levels might lose value as your income increases. Examples include tax breaks for college or the 20% deduction for a pass-through business. Higher income in the year of a conversion could also help trigger the 3.8% tax on net investment income, although the conversion amount isn’t subject to this tax. The threshold for this levy is $200,000 for singles and $250,000 for married couples, filing jointly.
  • You’ll need the IRA assets sooner, not later. Roth conversions often provide their largest benefits when the account can grow untouched for years. If payouts will be taken soon, there’s less reason to convert.
  • You make IRA donations to charity. Owners of traditional IRAs who are 70½ and older can donate up to $100,000 of assets per year from their IRA to one or more charities and have the donations count toward their required payouts. This is often a highly tax-efficient move. But Roth IRA owners don’t benefit from it, so that could be a reason to do a partial rather than full conversion.
  • Financial aid will be affected. Retirement accounts are often excluded from financial-aid calculations, but income isn’t. If the income spike from a Roth conversion would lower a financial-aid award, consider putting it on hold.
  • You’ll have high medical expenses. Under current law, unreimbursed medical expenses are tax deductible above a threshold. For someone who is in a nursing home or has other large medical costs, this write-off can reduce or even wipe out taxable income. If all funds are in a Roth IRA, the deduction is lost.
  • You think Congress will tax Roth IRAs.Many people worry about this, although specialists don’t tend to. They argue that Congress likes the up-front revenue that Roth IRAs and Roth conversions provide and is more likely to restrict the current deduction for traditional IRAs and 401(k)s—as was considered last year.

Other proposals to limit the size of IRAs and 401(k)s to about $3.4 million, to make non-spouse heirs of traditional IRAs withdraw the funds within five years, and to require payouts from Roth IRAs at age 70½ also haven’t gotten traction so far.

Withdrawals from a Roth IRA 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. 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.

 

How the Tax Cuts & Jobs Act impacted three popular deductions.

Three recent tax law changes impact homeowners and home-based businesses. They may affect your federal income taxes this year.

The SALT deduction now has a $10,000 yearly limit. You can now only deduct up to $10,000 of some combination of (a) state and local property taxes or (b) state and local income taxes or sales taxes, annually. (Taxes paid or accumulated due to trade activity or business activity are exempt from the $10,000 limit.)1,2

If you have itemized for years and are continuing to itemize this year, this $10,000 cap may be irritating, especially if there is no state income tax or a very high state income tax where you live. In the state of New York, for example, taxpayers who took a SALT deduction in 2015 deducted an average of $22,169.1,2

Connecticut, New Jersey, and New York all recently passed laws in reaction to the new $10,000 limit, essentially offering taxpayers a workaround – cities and townships within those states may create municipal charities through which residents may receive property tax credits in exchange for charitable contributions.2

So far, the Internal Revenue Service is not fond of this. I.R.S. Notice 2018-54, released in May, warns that “despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” Both the I.R.S. and the Department of the Treasury are preparing rules to respond to these state legislative moves.2,3

The interest deduction on home equity loans is not quite gone. The Tax Cuts & Jobs Act seemed to suspend it entirely until 2026, but this winter, the I.R.S. issued guidance noting that the deduction still applies if a home equity loan is arranged to help a taxpayer “buy, build or substantially improve” the involved house. So, you may still deduct interest on a home equity loan if your receipts show that the borrowed amount is used for a new 30-year roof, a kitchen remodel, or similar upgrades. Keep in mind that the Tax Cuts & Jobs Act lowered the limit on the total home loan amount eligible for the interest deduction each year – it is now set at $750,000. That cap applies to the combined home loans a taxpayer takes out for both a primary and secondary residence.1,4,5

The home office deduction is gone, unless you are self-employed. Before 2018, if you dedicated an area of your home solely to business use and defined it as your principal place of business to the I.R.S., you could claim a home office deduction on Schedule A. This was considered a miscellaneous itemized deduction. Unfortunately, the Tax Cuts & Jobs Act did away with miscellaneous itemized deductions. If you work for yourself, though, you can still claim the home office deduction using Schedule C, the form used to report income or loss from a business activity or a profession.5

Are you strategizing to maximize your 2018 federal tax savings? Are you looking for ways to legally reduce your federal and state tax obligations? Talk to a financial professional to gain insight and plan for this year and the years ahead.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]
2 – cnbc.com/2018/05/23/irs-treasury-have-set-their-sights-on-blue-states-tax-workarounds.html [5/23/18]
3 – irs.gov/pub/irs-drop/n-18-54.pdf [5/23/18]
4 – nytimes.com/2018/03/09/your-money/home-equity-loans-deductible.html [3/9/18]
5 – fool.com/taxes/2018/05/20/say-goodbye-to-the-home-office-deduction-unless-yo.aspx [5/20/18]