Tax Planning Archives - Bulwark Capital Management

Oct 30

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10 Considerations for Year-End Tax Planning

By Zach Abraham | Tax Planning

As we head into the holiday season, another season looms in the distance: tax season. Don’t wait until March to see how 2024 shook out for you tax-wise.

Before the year draws to a close, it’s an ideal time to evaluate financial strategies and take advantage of year-end tax planning opportunities. Now is the time to proactively review, consult with professionals, and implement strategies that can potentially benefit you now and in the years ahead.

RMDs (Required Minimum Distributions) Due In Retirement

Required minimum distributions (RMDs) must be withdrawn from traditional retirement accounts like 401(k)s and IRAs by December 31 each year beginning at age 73. There is no grace period to April 15 tax day; RMDs must be taken by December 31.

Calculate RMDs (Required Minimum Distributions) Before Retirement

Even if you are not 73 or older, remember, all the money you have socked away in traditional 401(k)s, IRAs, and similar qualified retirement accounts will require annual withdrawals, and ordinary income taxes will be due on the amounts withdrawn. According to the Social Security Administration, around 40% of Americans must pay federal income taxes on their Social Security benefits—up to 85%—because they have substantial income, like the income created by required minimum distributions.

Strategic Timing for Roth Conversions

Converting traditional IRAs or other tax-deferred accounts to Roth IRAs can be a strategic move, particularly if you anticipate being in a higher tax bracket in the future. Roth accounts contain already-taxed money, so they offer tax-free growth and withdrawals, meaning you can access your money in retirement without owing any federal taxes provided the account has been in place five years and all other IRS rules are followed. They are also tax-free to your heirs.

While there are no limits on the amounts you can convert, it’s essential to remember that the converted amount will be added to your gross income for the year, potentially affecting your overall tax situation. And since Roth conversions cannot be undone, it’s important to seek professional tax advice.

RMDs (Required Minimum Distributions) Due On Inherited Accounts

This July, the IRS finally issued clarifications about the SECURE Act 1.0 changes on the rules for non-spousal inherited traditional accounts, stating that enforcement will begin in 2025 on accounts inherited after 2019. If you inherited a traditional IRA or 401(k) or similar account, check with your CPA or tax professional now because RMDs will be due or you may owe penalties.

Maximize Retirement Account Contributions

If you are still working, contributing the maximum allowable amounts to tax-deferred retirement accounts like traditional 401(k)s and IRAs can offer a significant opportunity to grow your retirement savings while reducing your taxable income for the tax year. The contribution limit for 401(k) plans for 2024 is $23,000 for individuals under 50, with an additional catch-up contribution of $7,500 for those 50 and older, bringing the total to $30,500. For IRAs, the limit is $7,000, or $8,000 with the catch-up provision for those 50 and older.

Implement Tax Loss Harvesting

If you’re seeking to reduce your taxable capital gains in 2024, tax loss harvesting may be a strategy worth considering. This involves selling underperforming investments, such as stocks and mutual funds, to help realize losses that can offset any taxable gains you may have accrued throughout the year.

Charitable Contributions

A charitable donation is a gift of cash or property given to a nonprofit organization to support its mission, and the donor must receive nothing in return for it to be tax-deductible. Taxpayers can deduct charitable contributions on their tax returns if they itemize using Schedule A of Form 1040, and contributions may be deductible to up to 60% of adjustable gross income for 2024.

Defer Income

Another way to help reduce your tax burden is by deferring, or shifting, income to the next year. If you’re employed, you won’t be able to defer your wages; however, you could delay a year-end bonus to the following year, so long as it’s a standard practice at your company.

Be Mindful of the Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) is designed to ensure that high-income individuals pay a minimum level of tax, regardless of how many deductions or credits they claim under the regular tax rules. The AMT is calculated by adding back certain deductions, such as state and local taxes, that are allowed under the regular system but not under AMT rules. In 2024, the AMT tax exemption for individuals is $85,700, and for married couples it’s $133,300.

Utilize Flexible Spending Accounts (FSAs) and Other Tax-Advantaged Accounts

For 2024, flexible spending accounts (FSAs) offered an increased contribution limit of $3,200, up from $3,050 in 2023, allowing employees to use pre-tax dollars for eligible medical expenses. Contributions to FSAs reduce taxable income, as funds are deducted before federal, Social Security, and Medicare taxes are applied. However, it’s essential to use all FSA funds before year-end to avoid forfeiture under the “use it or lose it” rule. Some employers offer a grace period, extending the deadline to use 2024 funds until March 15, 2025. Exploring other tax-advantaged accounts for 2025, such as dependent care FSAs, might further reduce future taxable income while maximizing the benefit of pre-tax dollars for qualifying expenses.

Don’t let time pass you by, start planning for this upcoming tax season today! If you’re not sure how these tips could be plugged into your overall financial plan, let’s meet together with your tax professional. We’re here to help you end the year strong financially. Give us a call today!

This article is provided for general information only and is believed to be accurate. This article is not to be used as tax advice. In all cases, we advise that you consult with your tax professional, financial advisor and/or legal team before making any changes specific to your personal financial and tax plan.

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Oct 23

0

Now Is the Time To Do Your Year-End Planning

By Zach Abraham | Tax Planning

Don’t wait until it’s too late. Some important deadlines loom on December 31, 2024, and many other things should be reviewed, so be sure to meet with your financial advisor as soon as possible.

As the year wraps up, it is important to meet with your financial advisor to make sure you meet all IRS year-end requirements and take steps to plan ahead for 2025. The end of the year is a busy time for everyone and critical due dates are fast approaching. It’s crucial to stay on top of your financial deadlines to avoid last-minute issues!

RMDs (Required Minimum Distributions) Due In Retirement¹

Required minimum distributions (RMDs) must be withdrawn from traditional retirement accounts like 401(k)s and IRAs by December 31 each year beginning at age 73. There is no grace period to April 15 tax day; RMDs must be taken by December 31.

Failure to adequately withdraw funds could result in a 25% excise tax in addition to taxes owed, and there are many rules to follow about amounts due as well as which accounts require withdrawals or can be aggregated for one withdrawal. This is why it’s recommended that you work with your tax and financial professionals to do the calculations and implement the withdrawals on your behalf.

Calculate RMDs (Required Minimum Distributions) Before Retirement

Even if you are not 73 or older, at least five to 10 years before you plan to retire you should start working with your financial advisor to calculate your future RMDs in case there are strategies you can implement now that can help you lower your overall tax burden in the future.

Remember, all the money you have socked away in traditional 401(k)s, IRAs, and similar qualified retirement accounts will require annual withdrawals, and ordinary income taxes will be due on the amounts withdrawn.

According to the Social Security Administration,² around 40% of Americans must pay federal income taxes on their Social Security benefits—up to 85%—because they have substantial income, like the income created by required minimum distributions.

RMDs (Required Minimum Distributions) Due On Inherited Accounts³

This July, the IRS finally issued clarifications about the SECURE Act 1.0 changes on the rules for non-spousal inherited traditional IRAs (individual retirement accounts), stating that enforcement will begin in 2025 on accounts inherited after 2019.

The clarifications are as follows:

a.) If the original retirement account owner had started taking RMDs before passing away, non-spousal beneficiaries must continue taking annual RMDs based on the owner’s schedule and deplete and close the account completely by the end of year 10.

(According to the IRS, if you chose not to take a RMD while waiting for this clarification to come out, you won’t be subject to the typical 25% penalty on the amount you should have withdrawn based on the original account owner’s schedule. But when the rules go into effect next year, the 10-year clock will still begin the year you inherited the account.)

b.) If the original IRA account owner hadn’t taken any RMDs before passing away, annual RMDs are optional, but the account must be emptied by the end of the 10^th year of inheritance.

Inherited 401(k) Accounts⁴

Inherited traditional 401(k) accounts must also be closed and taxes paid within 10 years of inheritance. But keep in mind that each company’s retirement plan has its own set of rules which will also have to be followed; for instance, some companies will allow you to keep the account in their plan during the 10 years and others won’t.

Inherited Roth Accounts

Roth accounts are created and contributed to with already-taxed money; therefore, taxes are not due as long as all rules are followed, but inherited Roth IRA and Roth 401(k) accounts must also be emptied and closed within 10 years of inheritance. Non-spousal inherited Roth 401(k) accounts do require RMDs.⁴

Roth Conversions⁵

As part of your retirement plan, your tax and financial advisor may recommend that you do a series of Roth conversions—converting taxable accounts to tax-free Roth accounts—in order to mitigate taxes for the long-term.

If you decide to do these, ordinary income taxes will be due on the amounts converted, and Roth conversions they must be completed by December 31. These cannot be undone, so they must be undertaken very carefully following all IRS rules.

Charitable Contributions⁶

Tax-deductible charitable contributions must be completed by December 31, and the fair market value (FMV) of non-cash items must be determined.⁷

FSA (Flexible Spending Accounts), Spend It Or Lose It⁸

Flexible savings accounts (FSAs) through your employer allow you to have pre-tax funds deducted from your paycheck to spend on allowable expenses like healthcare and child care. Most FSAs don’t allow you to roll your excess funds into the next year. 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.

(If you are able to procure a high-deductible health insurance plan, you may be able to contribute pre-tax funds to an HSA (health savings account) which will not have to be emptied, but may be used for allowable healthcare expenses in retirement. Be sure to ask your financial advisor about this possibility.)

Other Things to Review

It’s very important to review your named beneficiaries on retirement accounts, insurance policies, and your estate plan. Births, deaths, divorces, and marriages can change your family through the years, and it’s important to keep everything up to date.

You should also review your expected tax liability for 2025, your FSA/HSA contribution amounts for 2025, your paycheck withholding amount if you are still working, your monthly budget, and your investment portfolio.

As you get older, it’s important to start lowering your market risk in order to protect the assets you have accumulated. 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 and as you get closer to retirement.

We’re here to help you with year-end planning as well as meeting IRS deadlines in conjunction with your tax professional. Call us as soon as possible if we haven’t spoken already! You can reach Bulwark Capital Management at 253.509.0395.

Sources:

This document is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions. It is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. 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 24-358.

Jul 26

0

Personal Finance: The Importance of Starting Early

By Zach Abraham | Financial Planning, Retirement, Social Security, Tax Planning

Whether you’re just starting out in your career, you are a Gen-X-er sandwiched between your kids’ college expenses and aging parents’ needs, or you are a Baby Boomer eyeing retirement, starting early can help when it comes to your finances. Here are some reasons why.

When You’re Young—In Your 20s

We’ve all heard the famous quote by Albert Einstein, the one where he said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” And it’s true. In many cases, if you start out early—perhaps in your teens or 20s—saving just a small amount each month, you can amass more money through time than if you start saving at a later age, even if you save a larger amount each month. Of course, it depends on what you invest in. Be sure to check with a trusted financial advisor about how this works.

Investopedia uses this example:

Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.

Who will have more money saved up in the end? Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.

When You’re Older—In Your 40s, 50s or Early 60s

As you head into retirement, starting early to map and plan out your retirement—well before you retire—can help you for many reasons, because there are a lot of moving pieces to consider. Plus, everyone’s situation is completely different and what might work for someone else might not be right for you at all. For instance, one person’s desired retirement lifestyle could be drastically different than another person’s, requiring different budget amounts. (Consider whether you want to stay home and become a painter, or travel the world with your entire extended family. That’s what we mean by drastically different budgets.)

Once you have your required retirement budget amount settled, timing then becomes very important. A financial advisor with a special focus on retirement can really make the difference by laying out a retirement roadmap just for you. Here are some of the things you should know and think about:

1) Medicare Filing – Age 65

You are required to file for Medicare health insurance by age 65 or pay a penalty for life. To avoid this penalty, be sure to sign up for Medicare within the period three months before and three months after the month you turn age 65. If you are still working or otherwise qualify for a special enrollment period, you can sign up for Part A which is free for most people, and then sign up for Part B after you retire. Visit https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties to learn more about penalties and how you can avoid them.

You are required to have Medicare coverage if you are not working or covered by a spouse with a qualified health insurance plan, and Medicare (other than Part A) is not free. In fact, it costs more if your income is higher. Your Medicare premium is often deducted right out of your Social Security check, and premiums generally go up every year.

When you sign up for original Medicare Part B or a replacement Medicare Advantage plan, the least amount you will pay for 2024 is $174.70 per month per person. For those with higher incomes, the Medicare premiums you pay are based on your income from two years prior—those with higher incomes pay more. For couples filing jointly, the highest amount you might pay for Part B coverage if your MAGI (modified adjusted gross income) is greater than or equal to $750,000 is $594.00 per month per person for 2024.

So, depending on your income for the tax year two years prior to filing for Medicare, your premium could be from $174.70 to $594.00 in 2024, or somewhere in between.

If you plan ahead, your advisor might help you plan to take a smaller income in the years prior to turning age 65 in order to keep your Medicare premium smaller. For instance, some people might want to retire at age 62 or 63 and live on taxable income withdrawn from their traditional 401(k) or IRA account/s before they even file for Medicare or Social Security. Each person’s situation is completely unique, but advance retirement planning may help you come out ahead in the long run.

2) Social Security Filing – Age 62, 66-67, 70 or sometime in between

Another moving piece in the retirement puzzle is Social Security. The youngest age you can file for Social Security is age 62, but a mistake some people can make is thinking that their benefit will automatically go up later when they reach their full retirement age—between age 66 to 67 depending on their month and year of birth. This is not the case. If you file early, that’s your permanently reduced benefit amount, other than small annual COLAs (cost of living adjustments) you might or might not receive based on that year’s inflation numbers.

Filing early at age 62 can reduce your benefit by as much as 30% according to Fidelity. Conversely, waiting from your full retirement age up to age 70 can garner you an extra 8% per year. (At age 70, there are no more benefit increases.)

Planning ahead for when and how you will file for Social Security can make a big difference in the total amount of benefits you receive over your lifetime. And married couples, widows or widowers, and divorced single people who were married for at least 10 years in the past have even more options and ways to file that should be considered to optimize their retirement income.

3) Taxes In Retirement

Thinking that your taxes will automatically be lower during retirement may not prove true in your case, and it’s important to find out early if there is a way to mitigate taxes through early planning. Don’t forget that all that money you have saved up in your traditional 401(k) will be subject to income taxes—and even your Social Security benefit can be taxed up to 85% based on your annual combined or provisional income calculation.

And the IRS requires withdrawals. Remember that by law RMDs (required minimum distributions) must be taken every year beginning at age 73* and strict rules apply. You must withdraw money from the right accounts in the right amounts by the deadlines or pay a penalty in addition to the income tax you will owe on the mandated distributions.

Planning ahead to do a series of Roth conversions—shifting money in taxable accounts to tax-free* Roth accounts—might be indicated to help lower taxes for the long-term in your case, but these must be planned carefully and are not reversible.

*There is a unique rule since 2022. If you reach age 72 after December 31, 2022, you must begin receiving required minimum distributions by April 1 of the year following the year you reach the age 73.

This means that RMDs (required minimum distributions) must be taken by midnight April 1st of the year following the year you reach the age 73, and then by midnight December 31st of every year after the year you reach age 73.

This creates an opportunity for someone who turns 73 to delay their first RMD until the following year (by April 1) and then take their 2nd RMD that same year by December 31st. So, two RMDs in one year if desired. Then one RMD forever afterwards.

Let’s talk about your financial and retirement goals and create a plan to help you achieve them. Don’t put it off—give us a call! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395.

*In order for Roth accounts to be tax-free, all conditions must be met, including owning the account for at least five years.

This article is for general information only and should not be considered as financial, tax or legal advice. It is strongly recommended that you seek out the advice of a financial professional, tax professional and/or legal professional before making any financial or retirement decisions.

Sources:

https://www.investopedia.com/articles/personal-finance/040315/why-save-retirement-your-20s.asp

https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties

https://www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles

https://www.ssa.gov/benefits/retirement/planner/agereduction.html

https://www.fidelity.com/viewpoints/retirement/social-security-at-62

https://content.schwab.com/web/retail/public/book/excerpt-single-4.html

https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html

https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

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Oct 26

0

Your 2023 Year-End Financial To-Do List

By Zach Abraham | 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.

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.

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.

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.

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.

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

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.

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:

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

Apr 24

2

7 Strategies to Reduce Taxes

By Zach Abraham | 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:

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

Mar 01

0

6 Facts About Taxes

By Zach Abraham | Financial Planning, Tax Planning

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

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].

How long you should keep tax documents.

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

You should keep your tax records for three years if #4 and #5 below do not apply to you.
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.
You should keep your records for seven years if you claimed a loss from worthless securities or a bad debt deduction.
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.
Keep records indefinitely if you do not file a return.
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.

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].

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.

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].

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:

Dec 28

1

Your Year-End Financial Checklist

By Zach Abraham | 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.

Apr 26

0

RMDs Are Back for 2021

By Zach Abraham | 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 31^st 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 1^st, 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

Nov 19

0

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

By Zach Abraham | 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/

Sep 24

0

What is a Roth Conversion?

By Zach Abraham | 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/