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Tax Planning

Your 2023 Year-End Financial To-Do List

By | Financial Planning, Tax Planning

The end of the year is upon us. Here are some tasks to check off before 2024 arrives!

As the year wraps up, it can be a great time to take financial inventory. Your circumstances are constantly changing and evolving, and the proper financial plan is not meant to be a set-it-and-forget-it thing. With the end of the year presenting the perfect chance to revisit your goals, here are a few areas you may want to check in on before we flip the calendar to 2024.

  1. Review Your Financial Plan

As the year comes to a close, it can be a great idea to reassess your financial circumstances and make necessary adjustments to your financial plan. Maybe your goals have changed. Maybe you’re on a fast-track toward goals you expected to take longer to reach, so you can move some dates up. And remember, it’s always important to make sure that your beneficiaries are up-to-date annually on all of your accounts, investments and insurance policies.

  1. Adjust Your Monthly Budget

Now that we’re in the final quarter of the year, you may be in a good position to revisit your budget and adjust as needed. Maybe you received a nice annual bonus or raise, or maybe you’ve recently had a baby and haven’t had a chance to fine-tune your budget through the sleepless nights. No matter your circumstances or the new milestones and stages of life you reached this year, it can be a good idea to look at how your income keeps up with your expenditures and tweak accordingly.

  1. Review Your Investments

It’s important to know that diversifying with different asset classes can help protect your overall portfolio, especially important during times of increased market volatility. Be sure that your investment portfolio positions you with a level of risk you’re able to tolerate, especially as you get closer to retirement.

  1. Recalibrate Your Retirement Account Contributions [1,2,3,4]

As you traverse your career and attempt to carve out a lifestyle that will be sustainable once you get the chance to quit working and chase your retirement dreams, it’s important to know how much you’re allowed to contribute to your various accounts. In 2023, the contribution limit is $6,500 for traditional and Roth IRA accounts, and it is $22,500 for 401(k)s. In 2024, those limits are expected to increase to $7,000 and $23,000, respectively. If you’re 50 or older, you can also make catch-up contributions of up to $1,000 to your IRA and $7,500 to your 401(k). Those limits are expected to remain the same for 2024.

  1. Take Your RMDs [5,6]

Below we’ve created a chart to show the age at which you must begin taking required minimum distributions from your tax-advantage accounts that mandate them. Failure to adequately withdraw funds will result in a 50% excise tax, and the deadline to withdraw the minimum amount from tax-deferred accounts is Dec. 31. If you’ve reached the age at which you must take the distributions, withdrawing the proper minimum amounts from the correct accounts can help you avoid that hefty penalty. We’re also available to help you calculate your RMDs to ensure that you withdraw the right amount!

 

Date of Birth RMD Age
June 30, 1949, or Before 70 ½
July 1, 1959, to Dec. 31, 1950 72
Jan. 1, 1951, to Dec. 31, 1959 73
Jan. 1, 1960, or After 75

 

  1. Spend Money Left in Your FSA [7]

Unlike health savings accounts (HSAs), flexible savings accounts (FSAs) do not typically allow you to roll your excess funds into the next year. You may have a grace period provided by your employer, but even the grace period often comes with a limit as to how much can roll over. Some ideas to avoid losing funds left in your FSA include booking general wellness appointments like visits to the eye doctor, annual physicals and dental cleanings.

  1. Talk to Your Financial Professional or Advisor

The job of a financial professional, planner or advisor is to assist you with your unique circumstances and goals. We aim to provide guidance that aligns with your vision, and together we’ll navigate the path to a financial future you are comfortable with. Whether you’re looking to check off all of these boxes as the year ends or start 2024 with fresh goals, we can help!

 

If you would like to discuss your situation with a financial professional or advisor, give us a call! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395

 

Sources:

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  2. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
  4. https://www.thinkadvisor.com/2023/09/27/smaller-401k-ira-contribution-limit-increases-expected-in-2024/
  5. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
  6. https://www.orba.com/what-is-your-required-minimum-distribution-age/
  7. https://www.goodrx.com/insurance/fsa-hsa/hsa-fsa-roll-over

Investment Advisory Services offered through Trek Financial LLC., an (SEC) Registered Investment Advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 23-732

 

7 Strategies to Reduce Taxes

By | Tax Planning

No matter which phase of life you’re in, you might be looking for ways to trim your tax bill. Here are some strategies to consider!

Nothing is certain but death and taxes. Perhaps a phrase most known for being spoken by Benjamin Franklin, the old adage seems to have held up over the course of centuries as a constant, dogmatic idea that sticks with investors and consumers. Nevertheless, each year around tax time, most of us wonder how we can pay less in income taxes, and the answer to that question is always, “It depends.” Each person’s situation is completely unique to them, and the strategies that may be able to be employed to mitigate or reduce tax obligation vary based on goals and circumstances.

That’s why it can be so important to find an advisor and a tax professional who can work together as a team to help you determine strategies that can lower your bill. To that end, we’d like to share seven strategies for pre-retirees and retirees that you should be aware of but may not apply to your particular situation. Remember, while we don’t handle tax returns, we often function as part of a team alongside a client’s CPA when it comes to future tax-planning scenarios, so don’t hesitate to reach out if you have any questions.

If You’re Working

Beef Up Your Traditional 401(k) [1]

In general, for those who are able to participate in an employer-sponsored group retirement plan like a traditional 401(k), contributing more to that account can lower your taxes in a given earning year. Contributions to a traditional 401(k) account are made on a pre-tax basis, meaning that they do not count as taxable income. This could lessen your tax obligation, potentially even dropping you into a lower tax bracket for the year. You should see that reflected on your annual W-2 from your employer.

It is important to remember that these contributions are tax-deferred, meaning that you will pay taxes upon withdrawal. There are also limits to how much you can contribute. For 2023, you are allowed to contribute up to $22,500 to your 401(k) plan, plus an additional catch-up contribution amount of $7,500 if you are age 50 or older. If your company provides a matching amount for contributions, in many cases you should consider contributing at least that amount to receive the full match.

Contribute to a Traditional IRA [1]

A traditional individual retirement account, otherwise known as a traditional IRA, is an account independent of your employer that allows you to contribute funds to save and invest for retirement. In terms of tax savings, depending on your income level—or whether or not you or your spouse contributes to a 401(k) or similar plan at work—you may be able to deduct traditional IRA contributions from your taxes.

For those who are married and filing jointly in 2023, you can deduct your traditional IRA contribution if your joint income is $116,000 or less. For 2023, you are allowed to contribute up to $6,500* to your own traditional IRA, plus an additional catch-up contribution amount of $1,000 if you are age 50 or older.

Contribute to a Roth IRA [2]

Though Roth IRA accounts have the same contribution limits as traditional IRAs, they typically function differently and are subject to a few different rules. For example, contributions to a Roth IRA are not tax-deductible because account holders fund their accounts with post-tax dollars. The benefit of paying taxes on the amount contributed is that gains are made and withdrawals are taken tax-free, slicing tax obligation later on.

In 2023, you can contribute the full $6,500*/$1,000 catch-up limit to a Roth IRA if your single-filing income is $138,000 or less or your married-filing-jointly income is $218,000 or less. Single filers and those who are married filing jointly can contribute partial amounts with income of up to $153,000 and $228,000, respectively. You can’t contribute to a Roth IRA if your single-filing income is more than $153,000 or your married-filing-jointly income is more than $228,000.

*In any given year, you can contribute to a traditional IRA, a Roth IRA or a combination of both only up to the $6,500/$1,000 catch-up limit.

If You Have Taxable Investments

Tax-Loss Harvesting [3]

Tax-loss harvesting is a strategy typically used by investors who have experienced losses in their investments. It involves selling those positions while they’re at a lower point, realizing a loss and then using those losses to offset taxable gains. In a given year, investors can claim losses of up to $3,000 to lower their taxable income; however, losses can be carried forward into future years. Oftentimes, investments are sold during market downturns, then proceeds are reinvested with a new allocation.

This has the potential to significantly decrease an investor’s tax obligation while improving overall portfolio returns. It is, however, important to note that, as always, tax-loss harvesting should be undertaken with the help of a financial advisor or professional with experience in investing and tax planning. It is a more complex method of cutting your tax bill and exposes an investor to many variables, including the uncertainty of the market. We’d always advise consulting and working closely with your financial professional who understands your goals and plan.

For Those Close to Retirement

Consider Roth Conversions

A Roth conversion can be a helpful long-term strategy to convert tax-deferred retirement funds into tax-free funds. This allows you to withdraw that money without tax obligation in retirement. The one caveat to this strategy is that you will owe taxes on the converted funds in the tax year that you complete any conversion. That’s why this can be a helpful strategy for low earning years, or for those close to or already in retirement. Retirees may earn less taxable income than they did when they were collecting salary, meaning that taxes owed on converted funds could be taxed in a lower income bracket.

Additionally, those close to retirement can use a series of conversions to avoid being pushed into higher income tax brackets and paying a larger percentage of their funds in taxes later, when annual RMDs (required minimum distributions) begin. Roth conversions allow you to experience all of the perks of Roth accounts, like tax-free growth and withdrawals, no required minimum distributions, flexibility and certainty in future tax legislation, and tax-free passing of assets. It is, however, important to remember that Roth conversions cannot be undone, so it’s always a good idea to speak to your advisor and tax professional before performing one or a series of conversions.

Annuities and Permanent Life Insurance [4]

Annuities and life insurance policies can be a great way to cut your tax obligation if you’re close to retirement or already retired. However, depending on how you fund your annuity, your payments may be taxed differently. For example, if you purchase your annuity with non-qualified money, or money you’ve already paid taxes on, the interest grows and is credited on a tax-deferred basis, so only gains will be taxed at the time of payment. On the other hand, if you purchase an annuity with qualified money, such as money from a traditional 401(k) or IRA, your annuity payments are entirely taxable as ordinary income. Even if you owe income tax on your annuity payments, they will not be counted as part of your combined income by the Social Security Administration, so you won’t pay taxes out of your Social Security benefit for annuities. (NOTE: Yes, you can be taxed on your Social Security benefit—up to 85%!)

Life insurance policies also offer tax benefits to help policyholders and beneficiaries. For instance, the classic death benefit is typically paid out tax-free to heirs, often granting them a nice lump sum to help recover from the loss of their loved one. Furthermore, modern life insurance policies offer benefits to the policyholders themselves. Because permanent policies with a cash value portion, such as whole and indexed universal life policies, are funded with post-tax dollars, they usually allow policyholders to borrow from the cash value of the policy tax-free in retirement, and these amounts are not counted as income by the Social Security Administration either.

For Any Phase of Life

Charitable Giving [5]

Charitable giving can be a great way to help an organization or a cause you care about while also reducing your tax obligation. The rules for charitable giving are relatively simple, as the gifts or donations must simply be made to or for the use of a qualified organization, which generally includes charities, religious organizations and private foundations with tax-exempt 501(c)(3) status. Those making charitable donations also have many options when it comes to the type of gift, such as cash, property, stock holdings or other any other assets that have a determinable market value.

As you may expect, there are limits on deductions for charitable giving. Deductions on long-term capital gains are limited to 30% of a person’s adjusted gross income, while deductions for other contributions are limited to 60% of a person’s adjusted gross income. In retirement, if you don’t need the money and don’t want your income taxes to go up, you can contribute your RMD amount (called a QCD or qualified charitable donation) directly to a charity—up to $100,000 of qualified, pre-tax retirement money can be donated. (After 2023, this QCD limit will be indexed to inflation under the new SECURE Act 2.0.)

You may be able to find effective strategies to cut your tax bill no matter which stage of life you’re currently in. If you have questions about any of these tax strategies which may apply to you, please give us a call to discuss. We are happy to work as a team with your tax professional to help you. You can reach Bulwark Capital Management at 253.509.0395.

 

 

Sources:

  1. https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
  2. https://www.fidelity.com/retirement-ira/ira-rules-faq
  3. https://www.irs.gov/taxtopics/tc409
  4. https://www.annuity.org/annuities/taxation/
  5. https://www.fidelitycharitable.org/faqs/all/charitable-deduction-limitations.html

 

This article is provided for general information only and is not to be construed as financial or tax advice. It is recommended that you work with your financial advisor, tax professional and/or attorneys when tax planning.

Trek 23-555

6 Facts About Taxes

By | Financial Planning, Tax Planning

Individual income tax returns for 2021 will be due April 18th, 2022 [1]. In preparation as we head into the tax season, here are some facts to consider.

 

  1. Where your tax dollars go.

In 2021, the federal government spent $6.82 trillion, which equals 30% of the nation’s gross domestic product. Three significant areas of spending make up the majority of the budget. Medicare accounted for $696.5 billion, or 10%. Defense spending made up $754.8 billion, or 11% of the budget, was paid for defense and security-related international activities. Seventeen percent of the budget, or $1.1 trillion, was paid for Social Security, which provided monthly retirement benefits averaging $1,497 to 46 million retired workers [2].

 

  1. How long you should keep tax documents.

The IRS provides the following recommended timelines for retaining financial documents [3]:

  1. You should keep your tax records for three years if #4 and #5 below do not apply to you.
  2. You should keep records for three years from the original filing date of your return or two years from the date you paid your taxes. Select whichever is the later date. This is if you claimed a credit or refund after you filed your return.
  3. You should keep your records for seven years if you claimed a loss from worthless securities or a bad debt deduction.
  4. You should keep your records for six years if you failed to report income that you should have, and the income was more than 25% of the gross income listed on your return.
  5. Keep records indefinitely if you do not file a return.
  6. You should keep employment tax records for at least four years after the due date on the taxes or after you paid the taxes. Select whichever is later.

 

  1. Tax brackets for 2021 individual income tax returns.[4]

NOTE: These tax rates are scheduled to expire in 2025 unless Congress acts to make them permanent [9].

 

  1. Tax brackets for 2022.

When it comes to taxes, it’s always a good idea to plan ahead. In November 2021, The Internal Revenue Service announced that it is boosting federal tax brackets for 2022 due to faster inflation. Below is a breakdown of the new thresholds for the seven tax brackets in 2022 [5]:

10%: Single individuals earning up to $10,275 and married couples filing jointly earning up to $20,550.

12%: Single filers earning more than $10,275 and married couples filing jointly earning over $20,550.

22%: Single filers earning more than $41,775 and married couples filing jointly earning over $83,550.

24%: Single filers earning more than $89,075 and married couples filing jointly earning over $178,150.

32%: Single filers earning more than $170,050 and married couples filing jointly earning over $340,100.

35%: Single filers earning more than $215,950 and married couples filing jointly earning over $431,900.

37%: Single filers earning more than $539,900 and married couples filing jointly earning over $647,850.

 

  1. Standard deductions.

Here is an overview of the standard deductions since 2019, including the standard deduction for the 2021 tax season [6]:

For 2022, the IRS is increasing standard deductions due to faster inflation:

The standard deduction for married couples filing jointly will rise 3.2 percent to $25,900 next year for the 2022 tax year, an increase of $800 from the prior year. The standard deduction for single taxpayers and married individuals filing separately rises to $12,950 for tax year 2022, up $400 from tax year 2021. For heads of households, the standard deduction will be $19,400, up $600 [7].

 

  1. You can still contribute for the 2021 tax year.

If you have not already contributed fully to your individual retirement account for 2021, April 15 is your last chance to fund a traditional IRA or a Roth IRA [8]. Please call us if you have any questions about setting up or contributing to a traditional or Roth IRA.

 

This information is for general purposes only and is not to be relied upon or considered as financial or tax advice. It is recommended that you work with your tax professional to complete your tax returns based on your unique situation.

 

Sources:

  1. https://www.irs.gov/newsroom/2022-tax-filing-season-begins-jan-24-irs-outlines-refund-timing-and-what-to-expect-in-advance-of-april-18-tax-deadline
  2. https://datalab.usaspending.gov/americas-finance-guide/spending/categories/
  3. https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records#:~:text=Keep%20records%20for%203%20years%20from%20the%20date%20you%20filed,securities%20or%20bad%20debt%20deduction
  4. https://www.kiplinger.com/taxes/tax-brackets/602222/income-tax-brackets
  5. https://www.newsweek.com/irs-adjusting-2022-standard-deductions-due-inflation-what-that-means-you-1648767
  6. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021
  7. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022
  8. https://www.irs.gov/retirement-plans/ira-year-end-reminders
  9. https://smartasset.com/taxes/trump-tax-brackets
  10. https://www.irs.gov/
  11. https://www.ssa.gov/

 

Your Year-End Financial Checklist

By | Financial Planning, Retirement, Tax Planning

The end of the year can help remind us of last-minute things we need to address as well as the goals we want to pursue and get serious about. To that end, here are some aspects of your financial life to contemplate as this year leads into 2022. 

Your investments. Set up a meeting to review your investments with your financial professional. You’ll want to come away from the meeting with an understanding of your portfolio positions and a revisit of your asset allocation based on your age, desires and personal circumstances. Remember, asset allocation and diversification are approaches to help manage investment risk, they do not guarantee against stock market drops or equities losses. Make sure your portfolio reflects your desire for protection and safety as well as growth.

Your retirement strategy. You may want to consider contributing the maximum to your retirement accounts—this may be a great time to decide on making catch-up contributions if you are 50 or older. It’s also a good idea to review any retirement accounts you may have through your work to see if your selections are still suitable for you. If you are getting close to retirement, you’ll want to start considering your Social Security filing strategy in advance, since that will dovetail with your overall retirement income plan.

Your tax situation. It’s a good idea to check in with your tax or legal professional before the year ends, especially if you have questions about an expense or deduction from this year. Also, it may be a good idea to review any sales of property as well as both realized and unrealized losses and gains. Look back at last year’s loss carryforwards. If you’ve sold securities, gather up cost-basis information. As always, bringing all this information to your financial professional as well as your tax professional is a smart move.

Your charitable gifting goals. Plan charitable contributions or contributions to education accounts and make any desired cash gifts to family members. The annual federal gift tax exclusion allows you to give away up to $15,000 in 2021, meaning you can gift as much as $15,000 to as many individuals as you like this year. Such gifts do not count against the lifetime estate tax exemption amount, as long as they stay beneath the annual federal gift tax exclusion threshold. Besides outright gifts, you can explore creating and funding trusts on behalf of your family. The end of the year is also a good time to review any trusts you have in place. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, it’s important to work with a professional who is familiar with the rules and regulations.

Your life insurance coverage. The end of the year is an excellent time to double-check that your policies and beneficiaries are up to date. Don’t forget to review premium costs and beneficiaries and think about whether your insurance needs have changed. Several factors could impact the cost and availability of life insurance, such as age, health, and the type of insurance purchased, as well as the amount purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, you may pay surrender charges, which could have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Finally, don’t forget that any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Life events. Here are some questions to ask yourself when evaluating any large life changes in the last year: Did you happen to get married or divorced this year? Did you move or change jobs? Did you buy a home or business? Was there a new addition to your family this year? Did you receive an inheritance or a gift? All these circumstances can have a financial impact on your life as well as the way you invest and plan for retirement and wind down your career or business.

Keep in mind, this article is for informational purposes only and is not a replacement for real-life advice. Make certain to contact a tax or legal professional before modifying your tax strategy. The ideas presented are not intended to provide specific advice.

If you would like to discuss your year-end checklist items, please give us a call. You can reach Bulwark Capital Management at 253.509.0395.

 

RMDs Are Back for 2021

By | Retirement, Tax Planning

RMDs, or Required Minimum Distributions, are withdrawals that are required by the IRS each year out of your traditional retirement accounts like 401(k)s and IRAs starting at age 72. The money that you have to take out annually by December 31st at midnight is taxed based on your income tax rate for that tax year.

Some retirees forget about RMDs when planning for retirement, and don’t realize how big the tax bite may be for them. This year, because of the pandemic, the CARES Act suspended the RMD for the 2020 tax year in an effort to help retirees avoid withdrawing money from accounts when the market was down.

(An RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets drop significantly, the RMD represents a much higher percentage of a diminished portfolio and that reduces the ability to recover from big losses.)

In 2021, the RMD will be back. As an example, a 75-year-old man with a traditional IRA worth $100,000 will have to withdraw $4,367 this year.

Roth 401(k) Plans

Roth 401(k) plans, which are funded with after-tax dollars, are subject to the same RMD rules that traditional 401(k) and IRA plans are. The amounts are calculated using the same IRS life expectancy tables and account holders must begin taking them after they turn 72. (One exception is if you continue working after age 72 for the company that sponsors the plan and you don’t own more than 50% of the company.)

The difference is that Roth 401(k) withdrawals are usually not taxed.

You can avoid taking the minimum distributions entirely by rolling a Roth 401(k) into a personal Roth IRA, which is not subject to RMD rules.

2020 RMDs Without Penalty, But With Taxes

As part of the CARES Act, the IRS allowed COVID-related withdrawals from traditional retirement plans up to $100,000 without penalty in 2020 for those who were impacted by the pandemic. Income taxes were due on those withdrawals, which could be paid over a three-year period. Those who can afford to can pay the withdrawals back this year (or over a three-year period) can get the taxes back by filing amended tax returns.

Those Who Just Turned 72—It’s Complicated

The SECURE Act of 2019 raised the age when RMDs must begin to age 72. If you turned 70-1/2 in 2019, the old rules applied—your first RMD should have been due April 1st, 2020. However, because the CARES Act suspended RMDs, the new due date was April 1, 2021 for those individuals.

For retirees who turned 72 in 2020 or will turn 72 this year, you can take your RMD at any point in 2021, or even delay it up until April 1, 2022. But if you choose to delay it, you will owe two RMDs in 2022, which could put you into a higher tax bracket.

You should check with your tax professional before making decisions about RMDs, because there are strict rules about which accounts must be withdrawn from and stiff penalties for mistakes—to the tune of taxes owed plus an additional 50%!

 

To discuss your retirement plan, including RMDs, please call us. We are happy to discuss ideas with you and/or your tax professional. You can reach Bulwark Capital Management at 253.509.0395. 

 

This article is provided for educational purposes only and its content should not be relied upon for tax advice. As always, check with your tax professional or attorney for specific tax advice related to your situation.

Source:

https://www.cnbc.com/2021/03/01/required-minimum-distributions-on-retirement-plans-are-back.html

2021 Limits for IRAs, 401(k)s and More

By | Financial Planning, Tax Planning

Numbers to know for the new year.

On October 26, the Treasury Department released the 2021 adjusted figures for retirement account savings. Although these adjustments won’t bring any major changes, there are some minor elements to note.

 

401(k)s. The salary deferral amount for 401(k)s remains the same at $19,500, while the catch-up amount of $6,500 also remains unchanged.

However, the overall limit for these plans will increase from $57,000 to $58,000 in 2021. This limit applies if your employer allows after-tax contributions to your 401(k). It’s an overall cap, including your $19,500 (pretax or Roth in any combination) salary deferrals plus any employer contributions (but not catch-up contributions).

 

Individual Retirement Accounts (IRA). The limit on annual contributions remains at $6,000 for 2021, and the catch-up contribution limit is also unchanged at $1,000. This total includes traditional IRA (pre-tax) and Roth IRA accounts or a combination.

 

Deductible IRA Contributions. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income.

For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000. For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.

 

Roth IRAs. Roth IRA account holders will experience some slightly beneficial changes. In 2021, the Adjusted Gross Income (AGI) phase-out range will be $198,000 to $208,000 for couples filing jointly. This will be an increase from the 2020 range of $196,000 to $206,000. For those who file as single or as head of household, the income phase-out range has also increased. The new range for 2021 will be $125,000 to $140,000, up from the current range of $124,000 to $139,000.

 

QLACs. The dollar limit on the amount of your IRA or 401(k) you can invest in a qualified longevity annuity contract is still $135,000 for 2021.

 

Although these modest increases won’t impact many, it’s natural to have questions anytime the financial landscape changes. If you’re curious about any of the above, please call Bulwark Capital Management in the Seattle area at 253.509.0395.

 

 

 

Sources:

https://www.irs.gov/newsroom/income-ranges-for-determining-ira-eligibility-change-for-2021

https://www.forbes.com/sites/ashleaebeling/2020/10/26/irs-announces-2021-retirement-plan-contribution-limits-for-401ks-and-more/

 

Roth Conversions

What is a Roth Conversion?

By | Retirement, Tax Planning

To understand what a Roth conversion is, you must first understand some of the basics about the different types of retirement accounts, called “qualified accounts.”

  • Pensions

Also called defined-benefit plans, pensions are paid for by employers. They have largely gone away for Americans in the private sector starting with the passage of three laws during the Reagan administration, the Tax Equity and Fiscal Responsibility Act passed in 1982, The Retirement Equity Act of 1984, and The Tax Reform Act and Single Employer Pension Plan enacted in 1986.

The lack of pensions is one reason why it’s important for people to create their own retirement income plans.

  • 401(k) Accounts

Defined-contribution plans, including 401(k)s and similar plans, rely on an employee to elect to contribute a percentage of their salary in order to save for retirement. Contribution amounts are usually taken out of an employee’s check on a “pre-tax” basis, and sometimes a company will add a “matching” amount based on the percentage the employee contributes, often based on an employee’s length of service.

A 401(k) plan generally has a limited list of fund choices. The maximum an individual can contribute to a 401(k) in 2020 is $19,500 per year, or $1,625 per month, not including the employer’s matching amount.

For traditional 401(k)s, no taxes are due on 401(k) accounts until the money is withdrawn. Ordinary income taxes are due upon withdrawal at the account owner’s current tax bracket rate, and withdrawals are mandatory starting at age 72. NOTE: Roth 401(k)s are available at some companies, and contributions for those are made on an after-tax basis.

  • Traditional IRA Accounts

An IRA—Individual Retirement Account—is a type of account which acts as a shell or holder. Within the IRA, you can invest in many different types of assets. You can choose between CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available. You can open an IRA account at a bank, brokerage, mutual fund company, insurance company, or some may be opened directly online.

For 2020, you can contribute up to $6,000 to an IRA, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. Traditional IRA contributions are typically made with pre-tax dollars, which gets accounted for on your tax return in the year you choose to make the contribution. Depending on your income level, sometimes traditional IRA contributions can also be tax-deductible. Traditional IRA withdrawals are treated as ordinary income and taxed accordingly, and withdrawals are mandatory starting at age 72.

  • Roth IRA Accounts

Like a traditional IRA, a Roth IRA is a type of account which acts as a shell or holder for any number of different types of assets. The difference is that Roth IRA contributions are made with after-tax dollars.

Withdrawals are not mandatory for Roth IRAs, but you can withdraw funds tax-free as long as you follow all rules, which include having the account in place for at least five years. Those age 59-1/2 or older can withdraw any amount—including gains—at any time for any reason, and can also leave Roth IRA accounts to their heirs tax-free—beneficiaries just have to withdraw all the money within 10 years of the account holder’s death.

For people under age 59-1/2, as long as they have had their Roth IRA account in place for five years or longer, they can withdraw any amount they have invested at any time—but not the gains or earnings. If they withdraw the gains or earnings, they may have to pay ordinary income taxes plus a 10% penalty on those, with some exceptions, such as first-time homebuyer expenses up to $10,000, qualified education and hardship withdrawals, which may avoid the penalty but still require tax be paid on any amount attributed to earnings.

Roth IRAs offer the potential for tax-free retirement income as well as tax-free wealth transfer to heirs. Essentially, with a Roth IRA, your interest, dividends and capital gains which accumulate inside it are tax-free as long as you follow all Roth IRA withdrawal rules.

For 2020, you can contribute up to $6,000 depending on your income, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. However, Roth IRAs have income restrictions that may disqualify higher-income people from participating. The income restrictions on Roth IRA accounts are not always a barrier to conversions—a perfectly legal tax strategy called a “backdoor Roth IRA conversion” can be accomplished as long as all IRS rules are followed.

Roth Conversions

Because of the many Roth IRA tax advantages, some people may benefit from converting some of the money in their taxable 401(k) and/or traditional IRA accounts into tax-free Roth IRAs. Conversions are a taxable event in the year they are done, and they cannot be undone, so it is important to work with a qualified advisor to run anticipated tax savings calculations to see if they make sense. Additionally, there are complex tax rules which must be adhered to in regard to the ratio of taxable to non-taxable amounts held in IRAs.

If you have a low-income year due to a job loss or cutback, or you are five to 10 years away from retirement, you may benefit from a Roth conversion, or a series of them at today’s lower tax bracket rates, set to revert back up to 2017 levels for the 2026 tax year.

There are basically three ways to do Roth conversions according to Investopedia:

1) A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days.

2) A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution.

3) A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution.

Whatever method you use, you will need to report the conversion to the IRS using Form 8606 when you file your income taxes for the year and follow all rules. Roth conversions are complex and you should seek expert tax guidance.

Let’s talk. Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

 

This article is for informational purposes only and should not be used for financial or tax advice. Future tax law changes are always possible. Be sure to consult a tax professional before making any decisions regarding your traditional IRA or Roth IRA.

Sources:

https://protectpensions.org/2016/08/04/happened-private-sector-pensions/)

https://blog.turbotax.intuit.com/tax-deductions-and-credits-2/can-you-deduct-401k-savings-from-your-taxes-7169/.

https://www.nerdwallet.com/blog/investing/how-much-should-i-contribute-to-a-401k/.

https://www.debt.org/tax/brackets/

https://www.investopedia.com/terms/b/backdoor-roth-ira.asp#

https://www.investopedia.com/roth-ira-conversion-rules-4770480

https://www.kitces.com/blog/roth-ira-conversions-isolate-basis-rollover-pro-rate-rule-employer-plan-qcd/

How Rich Do You Have to Be in Order to Retire?

By | Health Care, Long Term Care, Retirement, Tax Planning

Even though perceptions have changed during the pandemic with more Americans now saying they need less money to feel rich1, when it comes to retirement, most people are still unclear about how much they will need to have saved before they can quit their jobs.

The answer to that question is different for every person.

Here are some of the things you need to think about in order to get a realistic retirement number in mind.

 

What do you want to do during retirement? Where will you live?

Different people have different retirement goals and visions. You may not realize that you need to answer lifestyle questions before you can answer the “how much do I need” question.

Think about it this way. A single woman downsizing into a tiny home in a rural community to enjoy hiking in nature is going to need to have saved up a lot less money than a couple who wants to buy a big yacht, hire a crew and travel around the world docking at various international ports. A man who wants to spend all his time woodworking in his garage in the Midwest will need a smaller nest egg than a power couple collecting art and living in a penthouse in New York.

Most people are somewhere in the middle of these extremes. Yet answering these questions for yourself is very important both financially and emotionally for everyone entering retirement. You don’t want to end up feeling lost or bored not working—you want to feel that you are moving forward into a phase of life that is rewarding to you. And you certainly don’t want to run out of money because you miscalculated.

Take some time to get specific about your needs and desires. Will you want to spend holidays with family or friends? Start an expensive new hobby like golf? Take a big vacation every year? (The pandemic will end eventually!) Visit your grandchildren who live across the country multiple times? Go out to eat every day?

Based on your goals and objectives for your retirement lifestyle, your financial advisor will help you prepare a realistic monthly budget, adding in calculations for inflation through the years.

Once you’ve developed your monthly budget, it can be compared against your Social Security benefit to give you a good idea of how much additional monthly retirement income you will need to generate from your savings. From there, your advisor can come up with strategies to help you create income from savings, and then give you a realistic figure that you will need to have saved up before you retire.

But in addition to your retirement lifestyle, there are a couple of other things that need to be considered.

 

How is your health?

Nearly every retiree looks forward to the day they can sign up for Medicare. But Medicare is not free; the standard Part B premium for 2020 is $144.60 per month2 for each person. Your premiums for Medicare are usually deducted right from your Social Security check.

If you elect to purchase additional coverage through Medicare Advantage, Medigap and/or prescription drug plans, your premiums will cost more. And there will still be deductibles to meet and co-pays you will owe.

Some estimates for health care expenses throughout retirement are as high as $295,000 for a couple both turning 65 in 2020!3

Even worse, keep in mind that this figure does not include long-term care expenses—Medicare doesn’t cover those after 100 days.4

 

Have you planned for taxes?

It’s not how much money you have saved, it’s how much you get to keep net of taxes.

When designing your retirement plan and helping you calculate how much you need to save, your advisor will take into consideration an important piece of the puzzle—taxes. Tax planning is often different than the type of advice you get from your CPA or tax professional when you do your tax returns each year. Tax planning involves looking far into the future at what you may owe later, and finding ways to minimize your tax burden so you will have more money to spend on things you enjoy doing in retirement.

Different types of accounts are subject to different types of taxation. “After-tax” money that you invest in the stock market can be subject to short- or long-term capital gains taxes. Gains accrued on “after-tax” money that you have invested in a Roth IRA account are not taxed due to their favorable tax rules. Interest paid on “after-tax” money in savings, CDs or money market accounts is taxed as ordinary income, although this usually doesn’t amount to much especially with today’s low interest rates.

What your financial advisor will be most concerned about is your “before-tax” money held in accounts like traditional IRAs or 401(k)s which are subject to ordinary income taxes when you take the money out, which you have to do each year starting at age 72 per the IRS. (These mandatory withdrawals are called required minimum distributions.)

If “before-tax” money like 401(k)s are where the bulk of your savings is held, you will want to run projections to calculate how much of a bite income taxes will take out of your retirement, especially since tax brackets will go back up to 2017 levels5 beginning in January of 2026. There may be steps you can take now to help you lower your taxes in the future.

 

Please contact us if you have any questions about your retirement. Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

 

Sources:

1 https://www.financial-planning.com/articles/americans-now-say-they-need-less-money-to-feel-rich

2 https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance#

3 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

4 https://longtermcare.acl.gov/medicare-medicaid-more/medicare.html

5 https://taxfoundation.org/2017-tax-brackets/

Clearing Up Confusion About RMDs

By | Retirement, Tax Planning

Last month, we posted information about how the SECURE Act has increased the age for required minimum distributions (RMDs) from 70-1/2 to 72 starting this year, 2020.

If you turned age 70-1/2 in 2019, your RMDs were required for the 2019 tax year, and WILL BE required for 2020, 2021 and every year from now on.

For everyone turning 70-1/2 in 2020, your RMDs will not be required until the year you turn 72, even if you have received notification from your custodian to the contrary.

Because the law was passed and became effective within two weeks of passage, automated computer notifications and settings have not been changed yet. Call us if you have any questions!

 

LET’S MEET ABOUT YOUR ESTATE PLAN

Remember that inherited “stretch IRAs” have been shortened to 10 years in many circumstances due to the passage of the SECURE Act.

Let’s get together and discuss how this may affect your current estate plan, what burdens your heirs may face, and what we need to do now in conjunction with your estate attorney.

 

SECURE ACT CHANGES FOR EMPLOYEES AND EMPLOYERS

  1. PART-TIME EMPLOYMENT ELIGIBILITY

Unless there is a collectively-bargained plan in place (such as a union agreement), you may be eligible for your employer’s 401(k) or similar retirement benefit plan even if you work part time. If you have worked for your employer for one year consecutively for at least 1,000 hours, or for three consecutive years for at least 500 hours (roughly 25 work-weeks of 20 hours per week), you will be eligible.

  1. ANNUITY OPTIONS IN 401(k) PLANS

Even though employers were already allowed to offer annuities in their 401(k) plans, only about 9% of them did. The SECURE Act shifts the burden of legal liability away from employers who offer annuities in their plans; you will need to be diligent about examining them before choosing. (We can help you with this.) The DOL will require standardized monthly retirement income projections to help you compare; they are expected to issue guideline regulations about this in the coming months.

  1. ANNUITY PORTABILITY

Within a retirement plan, an annuity portability requirement has been added by the SECURE Act. If an annuity offering is removed from a 401(k) plan menu, you will be able to roll that annuity investment over into your own IRA with no penalty.

  1. FOR EMPLOYERS

The SECURE Act raised the tax credit for employers to $15,000 to set up, administer and educate employees about retirement plan changes over a three-year period. (NOTE: Employer contributions to 401(k) plans have been and still are tax deductible.) There is a new tax credit of $500 per year for automatic enrollment of employees into a company’s 401(k) plan—and the cap for auto enrollment has been raised from 10% to 15% of wages.

 

If you have any questions about this information, please don’t hesitate to call our office! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395.

 

Sources:
https://www.plansponsor.com/in-depth/getting-secure-acts-lifetime-income-provisions-right/
https://humaninterest.com/blog/part-time-employees-secure-act/
https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743
https://www.cnbc.com/2019/07/03/if-annuities-come-to-your-401k-savings-plan-heres-what-to-know.html
The SECURE Act is a complex new law still being analyzed and assessed by industry experts. IRS clarifications may follow. The information in this article is provided for general information and educational purposes only. It is not designed nor intended to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in or refrain from a particular course of action.
Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.

5 Things You Need to Know About the SECURE Act

By | News, Retirement, Tax Planning

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) became effective Jan. 1, 2020, and many people have questions about it. Here are the top five things consumers should know.

 

  1. 72 is the new 70½

The SECURE Act raises the age at which retirees must begin taking Required Minimum Distributions from the awkward age of 70-1/2 to an even age 72, allowing for a couple more years of growth before RMDs kick in. NOTE: Anyone who reached age 70-1/2 in 2019 or before is subject to the old rules.

 

  1. You can keep making contributions to traditional IRAs

The act repeals the age limitation for making contributions to traditional IRAs, as long as you have earned income. Previously, the maximum age for traditional IRA contributions was set at 70-1/2 (this was the only type of retirement account which had an age limitation). Now, those working into their 70s and beyond can continue contributing to their traditional IRAs, even if they’re simultaneously required to begin drawing them down.

 

  1. The stretch IRA is dead

While existing “stretch IRAs” are grandfathered in and still follow the old tax rules, stretch IRAs are unlikely to be used by financial and estate planners in the future because their tax advantages have been drastically reduced.

Prior to the new law, stretch IRAs were primarily used for estate planning because they allowed a family to extend distributions over future generations—while the IRA itself continued to grow tax free. The person inheriting an IRA was required to take RMDs based on their life expectancy, which meant that a very young beneficiary could stretch out their distributions potentially over their lifetime.

Now beneficiaries must draw down the entire account within 10 years of inheriting it, possibly throwing them into a higher tax bracket. (They can take the money out in any year or years they like, as long as the account is empty by 10 years of the date of death of the original account owner.)

The new 10-year rule also applies to inherited Roth IRAs.

You may want to review your plan if you have stretch IRAs set up for your family, because any IRA inherited as of January 1, 2020 is subject to the new rules. Trusts you may have put in place to take advantage of stretch IRA rules probably won’t ameliorate taxes anymore either.

Keep in mind that the act does provide for a whole class of exceptions who aren’t subject to this 10-year rule; for them, the old distribution rules still apply. These beneficiaries (referred to as “Eligible Designated Beneficiaries”) are:

  • Spouses
  • Disabled beneficiaries
  • Chronically ill beneficiaries
  • Individuals who are not more than 10 years younger than the decedent
  • Certain minor children (of the original retirement account owner), but only until they reach the age of majority. NOTE: At this time, minor children would appear to be ineligible for similar treatment if a retirement account is inherited from a non-parent, such as a grandparent.

 

This new law is clearly designed to raise taxes. According to the Congressional Research Service, the lid put on the Stretch IRA strategy by the new law has the potential to generate about $15.7 billion in tax revenue over the next 10 years!

 

  1. The Roth got more attractive

Because contributions to Roth IRAs are made on an after-tax basis, a Roth account owner is not subject to Required Minimum Distributions at any age. An owner can leave their Roth to grow until their death, leave it to their spouse, who can then allow it to grow until they die. The second spouse can leave it to their children, who can then allow it to continue to accumulate tax-free for another 10 years, although they will now have to empty the account by the 10-year mark.

In terms of estate planning, Roth IRAs typically do not cause a taxable event when distributions are taken by a beneficiary.

Low individual tax rates by historical standards and a pending reversion in 2026 to the higher income tax brackets/rates that preceded the Tax Cuts and Jobs Act (TCJA) of 2017 can make this an opportune time for Roth conversions for those over age 59-1/2. These can benefit you, your spouse and heirs by strategically moving taxable retirement funds into tax-free Roth retirement accounts. The most common strategy for Roth conversions is ‘bracket-topping,’ where you convert enough to go to the edge of your tax bracket.

Keep in mind that these conversions need to be planned and done carefully, as they can no longer be reversed.

Remember, any account can be set up as a Roth – including CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available.

 

  1. Other non-retirement related provision highlights:
  • You can use $5,000 of qualified money for childbirth or adoptions
  • 529 plan-approved “Qualified Higher Education Expenses” now include expenses for Apprenticeship Programs—including fees, books, supplies and required equipment—provided the program is registered with the Department of Labor
  • 529 plans can also be used for “Qualified Education Loan Repayments” to pay the principal and/or interest of qualified education loans limited to a lifetime amount of $10,000, retroactive to the beginning of 2019
  • The Kiddie Tax rules changed by the Tax Cuts and Jobs Act (TCJA) of 2017 have been reversed, (and can be reversed for the 2018 tax year as well)
  • The AGI (Adjusted Gross Income) “hurdle rate” to deduct qualified medical expenses remains lower at 7.5% of AGI for 2019 and 2020.
  • The following tax benefits for individuals are reinstated retroactively to 2018, and made effective onlythrough 2020 at this time:
    • The exclusion from gross income for the discharge of certain qualified principal residence indebtedness
    • Mortgage insurance premium deduction
    • Deduction for qualified tuition and related expenses

 

There are even more provisions of the SECURE Act designed to make it easier for small business owners to offer retirement plans to employees, as well as add annuities to their plans.

 

Call us if you would like to discuss how the new changes will affect your financial plan. You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395.

 

The SECURE Act is a complex new law still being analyzed and assessed by industry experts. IRS clarifications may follow. The information in this article is provided for general information and educational purposes only. It is not designed nor intended to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in or refrain from a particular course of action.
Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.
Sources:
https://www.wealthmanagement.com/retirement-planning/what-advisors-need-know-about-secure-act
https://www.marketwatch.com/story/economists-like-annuities-consumers-dont-heres-the-disconnect-2019-12-23
https://www.investopedia.com/articles/retirement/04/031704.asp
https://www.kiplinger.com/article/retirement/T064-C032-S014-pros-cons-and-possible-disasters-after-secure-act.html
https://www.forbes.com/sites/leonlabrecque/2019/12/23/the-new-secure-act-will-make-roth-strategies-much-more-appealing-here-are-five-ways-to-use-a-roth/#3c239df6381d
https://www.marketwatch.com/story/secure-act-includes-one-critical-tax-change-that-will-send-estate-planners-reeling-2019-12-30
https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/