Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to
time. Recently, I went though some
continued education for some credentials I maintain and it occurred to me that
we all could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
Navigating the Secure Act:
(Now
signed and is law)
What Retirement Savers Need to Know to
Optimize Their 401(k)s and IRAs
Dec.
20, 2019 6:55 pm ET
The most sweeping changes to the U.S. retirement system in more than a
decade have passed Congress and are widely expected to be signed into law
before year’s end, leaving little time for pre-retirees and current retirees to
digest a spate of new rules that are aimed at increasing Americans’ access to
work-based retirement plans and helping their savings last longer.
Some of the biggest
features of the Setting Every Community Up for Retirement Enhancement
Act—better known as the Secure Act—include removing the age limit restricting
contributions to individual retirement accounts; raising the age at which
people need to start taking required minimum withdrawals; provisions that could
encourage annuities in work-based retirement plans; and closing a loophole that
allowed affluent investors to stretch the tax advantages of IRAs across an
heir’s lifetime.
MORE ON THE SECURE ACT
·
Questions about how the Secure
Act will affect you? Reach us at retirement@barrons.com
Barron’s checked in
with financial advisors to see where savers and retirees need to reassess their
retirement and estate plans, and to pinpoint possible tax minefields.
Stretch IRA Strategies
Under the bill,
beneficiaries of an IRA would need to draw down the account—and pay income tax
on the money—over a decade, rather than a lifetime.
• Check beneficiaries and
reassess trusts. With the stretch IRA strategy no longer an option under
the bill, IRAHelp.com founder Ed Slott suggests possibly naming a spouse as the
beneficiary so that the assets can be stretched across the spouse’s lifetime
and then passed on to a grandchild, who would have 10 years before having to
draw the IRA down completely.
• Reconsider conduit
trusts. Affluent families often use a conduit trust as a beneficiary for a
stretch IRA to manage the required minimum withdrawals over an heir’s lifetime.
But if they had left it to a grandchild, the bill would mean that the IRA would
have to be drawn down within a decade, potentially creating a major tax
headache, says Jeffrey Levine, head of BluePrint Wealth Alliance.
• Add beneficiaries.
Instead of designating a trust as the beneficiary of an IRA that would then
distribute it to heirs, one way to minimize the tax hit for a family with five
heirs, for example, is to name each a beneficiary so that the tax bill can be
paid over a decade by each, or 50 tax returns, says Christian Cordoba, a
financial planner and founder of California Retirement Advisors.
• Consider a Roth IRA conversion. One
alternative for those who have saved roughly $1 million to $5 million in IRAs
would be to do piecemeal Roth conversions over a number years to build a
tax-free account you can leave to your beneficiaries, Stott says. That would
allow you to take advantage of today’s low tax rates.
Near- and Recent-Retirees
• Keep contributing to the
IRA. With the bill
removing the 70½ age cap for IRA contributions, those who are working
longer can continue saving for retirement. That gives them more time to
consider doing a Roth conversion, which could give them a larger kitty of
tax-free assets to draw from.
• The bill would also delay required minimum
withdrawals until age 72, instead of 70½, simplifying a rule that often
tripped up retirees. For those who turned—or will turn—70½ this year, the first
RMD will have to be taken by April 1, 2020. But anyone who turns 70½ in a
month—or later—won’t have to take their RMD until they’re 72.
Annuities in 401(k)s
Among the more controversial
features of the bill is a safe harbor for 401(k) plan sponsors that could make
it easier to include annuities in their retirement plans by taking employers
off the fiduciary hook for assessing an insurer’s financial health.
• Consider carefully.
Academics have long advocated the merits of incorporating low-cost, simple
income annuities to offer a guaranteed lifetime income stream and decrease the
risk of outliving your assets, but consumer advocates and financial planners
worry that it will also open the door to more complicated and pricey annuities
that could lead savers astray.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Tax moves to consider by year-end
Seize the chance to save
on taxes by acting before the end of the year.
- Fidelity Viewpoints
- – 11/20/2019
Key takeaways
- Consider "bunching" charitable donations or
medical expenses if it helps you to deduct more income.
- To help reduce taxable income, consider increasing your
contributions to tax-deferred retirement accounts and a health savings
account.
- If you are age 70½ or older, don't forget required
minimum distributions (RMDs) and consider a qualified charitable
distribution.
- To help reduce taxes on capital gains, consider a
"tax-loss harvesting" strategy, which offsets realized capital
gains on your investments with realized capital losses.
If you're like many people, you may
still be adjusting to the new tax laws that went into effect in 2018. While
rates went down for many people, many itemized deductions were limited. That
means it's all the more important to get an early start to make the most of
tax-saving strategies before year-end.
Here are 5 timely tips to help get
your 2019 tax prep off to a good start.
1. Bunch deductions
The new tax laws simplified tax
filing for many people by increasing the standard deduction and capping many
itemized deductions.
But if you're considering itemizing,
to make the most of the potential tax deductions that still exist, consider
"bunching." That means concentrating deductions in a single year,
then skipping 1 or 2 years. This strategy can work well when your total
itemized deductions for a single year fall below the new standard deduction.
The catch is that this strategy requires having the financial capacity to pack
all of your deductions into one year.
Here's how it could work: Instead of
making annual charitable gifts, investors may want to give 2, 3, or even 5
years' worth of donations in a single year, then take a few years off. Focusing
all donations in a single year can increase the value of deductions beyond the
threshold for a single year, and then the larger standard deduction can be
taken in the "skip" years.
Consider the hypothetical example
below. This couple, in the 35% tax bracket, makes annual $10,000 charitable
donations. Including those donations, their mortgage interest, and property
taxes, their itemized deductions would total $25,000—$600 over the standard
deduction of $24,400 for married taxpayers filing jointly in 2019. Itemizing
gives them $210 in tax savings versus the standard deduction on their
charitable contribution each year.
But, if they bunch 3 years' worth of
charitable contributions into 1 year, they would exceed the standard deduction
by $20,600. By doing this they can save a total of $7,210 on taxes—$6,580 more
than they would save by taking the standard deduction for 3 years.
This is a hypothetical
example for illustrative purposes only. This chart assumes a married filing
jointly couple who contribute a cash gift. The tax savings referenced here are
specific to the charitable donation made above the $24,400 standard deduction.
Information herein is not legal or tax advice.
If you're considering a bunching
strategy, a donor-advised
fund may be appealing. That way you
can contribute several years of charitable contributions in 1 year, making the
most of the deduction in that year, but spread your giving over multiple years.
A donor-advised fund also lets you keep some control over the way your
charitable contributions are distributed.
You can also bunch medical expenses.
Medical expenses can be deducted if they exceed 10% of adjusted gross income
(AGI).
Bunching may work for people who
plan to make annual charitable donations but whose itemized deductions fall
close to the new standard deduction. Try our calculator to model the potential impact of bunching in
different financial situations.
2. Consider a Roth conversion
The tax law passed in 2018 lowered
tax rates and changed the income thresholds for different tax brackets. But
those changes are set to expire in 2025. If you saved money in a traditional
IRA, you may be able to lock in today's rates by converting part, or all, of
your savings to Roth accounts.
You may also be able to convert your
401(k) to a Roth account. Read Viewpoints on Fidelity.com: Do you earn
too much for a Roth IRA?
Because you pay taxes on your conversion amounts up front,
rather than when you withdraw money, you'll owe no taxes on future earnings as
long as your withdrawals are qualified. If you believe that your future tax
rates may go up, either because of legislative changes or because of higher
future income, a Roth conversion could save you money. Another potential
advantage: Roth IRAs don't have required minimum distributions (RMDs).
One strategy is to convert up to the limit of your tax
bracket. For example, in 2019, a couple with taxable income of $125,000 would
have a 22% marginal tax bracket (which tops out at $168,400). So they could
convert up to $43,400 before maxing out of the 22% bracket.
Of course, it's impossible to predict future tax law, but
income tax rates are now near historic lows, so it may be a relatively good
time to consider a Roth conversion. An added benefit of a Roth conversion is
tax diversification. The ability to take tax-free1 withdrawals in
the future may help manage taxes in retirement.
*Chart does not account for the Medicare
surtax on high earners. Source: IRS.
3. Reconsider the 529
For parents, grandparents, and anyone else worried about
paying for education, 529 accounts are a tax-advantaged way to help pay for
education expenses. The accounts allow savings to grow tax-deferred, and avoid
taxes on gains if used for tuition, room and board, and other qualified
expenses. The tax law passed in 2018 allows 529 accounts for the first time to
also be used for up to $10,000 of primary and secondary school tuition expenses
each year.
Before withdrawing money from a 529, discuss your situation
with a financial advisor. In some cases, allowing the money to grow and
compound in the tax-deferred account would produce greater tax savings than
tapping it early. And, in some cases, the timing and amount of withdrawals for
college, or other qualified uses, can have financial aid and tax ramifications.
4. Remember municipal
bonds
For most people, the new tax rules lowered their tax rates
and bills—but not for everyone. For some higher income taxpayers, particularly
in high tax states, tax bills are going up. For anyone who is concerned about
taxes, now may be a good time to reconsider the role of tax-exempt municipal
bonds in their portfolio.
Bond interest is typically taxed at ordinary income tax
rates—that's up to 37%, and in some cases there could also be a Medicare surtax
of 3.8%. Interest from tax-exempt municipal bonds is generally free from
federal income taxes, and in some cases state and local income taxes as well.2
That can make interest from tax-exempt municipal bonds an
appealing alternative to traditional bonds in taxable accounts, particularly
for higher earners.
5. Remember the
fundamentals: retirement, RMDs, and tax-loss harvesting
Many important tax rules were unaffected by the 2018 tax
law, including those governing retirement savings accounts, tax-loss harvesting, required minimum distributions (RMDs), and charitable distributions. Here are some reminders:
Max out retirement and health savings accounts:
Pre-tax contributions to a traditional 401(k), 403(b), or similar workplace
retirement plan can generally reduce current year taxes.
The 2019 contribution limit is $19,000. People over age 50
can contribute an extra $6,000, for a maximum contribution of $25,000. The
contribution limit increases to $19,500 for 2020; the catch-up limit rises to
$6,500.
Be sure to act quickly if you want to contribute more to
your workplace savings plan. The deadline is December 31 for this year's
contributions.
A Simplified Employee Pension (SEP) IRA offers potential tax
breaks similar to those of a 401(k). The maximum contribution for this year is
$56,000 or 25% of eligible income, whichever is less. You'll have until the tax
filing deadline, April 15, 2020, to make contributions to a SEP IRA for the
2019 tax year.
Contributions to a health savings account (HSA) reduce taxes
too. The IRS maximum annual contribution limit for HSAs in 2019 is $3,500 for those individuals electing single
coverage under an HSA-eligible health plan (also known as an HDHP—high
deductible health plan), and $7,000 for those electing family coverage.
Individuals aged 55 and older may contribute an additional $1,000 (this applies
to both single and family HDHP coverage). Family coverage includes any level of
coverage other than self-only coverage, if offered by the employer.
The deadline for 2019 contributions to an HSA is April 15,
2020.
Take required distributions and consider a qualified
charitable distribution: The deadline for taking a 2019 RMD is December 31, unless
you turned 70½ this year, in which case you get a grace period until April 1 of
next year to make your first withdrawal. Don't miss it—the penalty for missing
your RMD from tax-deferred retirement accounts like a traditional IRA or 401(k)
is up to 50% of the shortfall.
Want to donate to charity when age 70½ or older? Consider a
qualified charitable distribution (QCD). It's a direct transfer of funds from
your IRA custodian and payable to a qualified charity, which counts toward your
RMD for the year, up to $100,000. It's not included in gross income and does
not count against the limits on deductions for charitable contributions. These
can be significant advantages for certain high-income earners, but the rules
are complex—be sure to consult your tax advisor.
Capital gains and tax-loss harvesting:
A loss on the sale of a security can be used to offset any realized investment
gains, and then up to $3,000 in taxable ordinary income annually. You may sell
for a loss to offset gains, and then reinvest the proceeds to maintain your
investment strategy, but be sure to comply with IRS "wash sale" rules. Tax-loss harvesting needs to be completed by
December 31.
Read Viewpoints on
Fidelity.com: 5 tax-loss
harvesting considerations
Source: Fidelity
Investments. For illustrative purposes only. Does not consider state taxes.
Capital gains taxes are hypothetical and reflect a 20% capital gains tax and
assume that the investment decisions are in accordance with wash sale rules.
Revisit
your estate plan: If anything in your life has
changed, or if it's been a few years since you last checked, revisit your
estate plan and make sure your beneficiaries are up to date.
The bottom line
The end of the year is a good time
to check on your financial accounts. The last day of December is sometimes a
significant deadline so it can make sense to do some year-end housekeeping,
including evaluating tax strategies and making plans for the coming year.
Of course, tax planning is not a
one-and-done year-end exercise. To help reduce taxes, it makes sense to be
planning throughout the year. Need help? Fidelity advisors can help you build a
tax-smart investing plan that works for you.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable
advisor).
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Full post disclaimer in left column. PCN Home Page is located at: http://pcn.homestead.com/home01.html
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