No RMDs for 2020!

But, you may want to take IRA withdrawals anyway. The reason is simple: Taxes are On Sale!

Jim Lorenzen, CFP®, AIF®

Required minimum distributions (RMDs) have been eliminated for 2020 due to the COVID-19 pandemic; but, you just might want to consider taking a distribution anyway.   Why?

Taxes are on sale!  

The dirty little secret is that all that money in your IRA isn’t yours, unless you have so many deductions or credits that you can zero out all your income – not likely.   We have a tendency to look at our statement’s IRA balance and think all that money is ours.  It isn’t .  At some point, Uncle Sam will take a chunk of it.  It will happen when you begin withdrawing it.  So, the only question is at what rate?

Few people are aware that the current tax laws is set to expire – it ‘sunsets’ – on December 31,2025, about 5 years from now (that allows for tax increases without anyone in Congress having to vote for it, though many would happily do it earlier anyway).

So, you can take your IRA money now at ‘sale prices’ or take it later at higher prices.  Why would you want to do that (besides the obvious)?

The SECURE Act has eliminated the stretch IRA.  This means your heirs could have a big problem when you and your spouse pass away.  Odds are it will happen when your kids are in their peak earning years; want to guess what taxes might look like then?  When they inherit your IRA(s), they will be required fully liquidate those IRAs by the end of the 10th year – ouch!  Big tax bite.

What can you do?  Begin withdrawing your IRA money while taxes are on sale over the next five years and do a Roth conversion on the money each year.   You’ll pay taxes now at ‘sale prices’ and the money will grow inside the Roth IRAs tax-free.   Now, there’s no RMDs.   And, when the time comes, your kids will have to liquidate by the end of the 10th year – but the money will be tax free!

There’s a hidden benefit for you, too:  Taxable income is used to determine what percentage of your Social Security is deemed taxable; it’s also used to determine Medicare premiums.   The less money you have in your traditional IRAs, the less the RMDs – and the less taxable income you have.   Hmmm.

If you have a comprehensive financial plan, a Roth conversion analysis should be a normal part of your planning process.   The savings over the life of your plan, and to your kids, could be substantial.   There are a number of issues to be considered, age, possible penalties, etc., so be sure to talk with your financial advisor.  Don’t have one?  See below!

 

Is there a subject you would like to learn more about?  Let me know in just 1 minute!  You can do it here.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Three Tips for Building Family Wealth

There is more you can do, of course; but, these will get you on your way: 

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Jim Lorenzen, CFP®, AIF®

Most people work long hours for 30+ years trying to build wealth for themselves and their families  –  okay, it’s really for the vacation home and a nicer car, but the first part sounds better.

The truth is building family – inter-generational wealth – really isn’t that hard to do.  If you REALLY want to do that, these simple steps will get you started.

  1. Choose your beneficiaries wisely when allocating inheritance money.   Leave tax-deferred accounts (IRAs and non-qualified annuities, for example) to younger family members.  They’re likely in a lower tax bracket and have longer life expectancies for taking the required minimum distributions, which means the distributions will be smaller, as well.    Highly appreciated assets are best left to beneficiaries in higher tax brackets as long as the cost-basis can be stepped up to the current price levels.  This means wealthier recipients can sell the asset with little or no tax consequences.  The high-income beneficiaries would most benefit from the tax-free benefits from life insurance policies.   Life insurance is the most overlooked, yet one of the most valuable tools in the toolbox.   Where else could you create an estate with the stroke of a pen?

  2. Don’t be too eager to drop older life insurance policies.  Some may wonder why keep the policy if they no longer need it.  Those older policies may be paying an attractive interest rate, which is accumulating tax-deferred.  Secondly, those small premiums may well be worth the much larger tax-free payoff down the road.   How to tell?  Start by dividing the premium into the death benefit.  Got the answer?  If you think you’ll pass away before that number (in years), you probably should keep paying.   Remember, death benefits generally pass tax-free!

  3. Convert Grandpa’s IRA to a Roth IRA.    When grandpa passes away, his IRA assets will likely be passed down to children and grandchildren, which means they’ll have to begin taking taxable required minimum distributions (RMDs) – which means they’ll probably be taxed at a higher rate than grandpa would have paid on his own withdrawals (when grandpa passes away, the grandkids are probably in their peak earning years, paying higher taxes anyway.  Why force them into a higher bracket still?).  If grandpa converted some or all of his traditional IRAs to Roth IRAs while alive, this problem wouldn’t happen.  Smart kids might want to encourage this and even offer to pay the tax bill on the conversion now!

Review your financial plan with your advisor?  Don’t have an advisor or a plan?   Hmmmm.  See below.

Jim

————————————

Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Thinking of Giving to Charity? Here are some options for giving!

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Giving to charity?  While most anything can be given to charity, these are the more common forms of donated property:

Cash: Cash gifts are the easiest to give to a charity, both in terms of substantiating the deduction and in determining the value of the gift.  But, cash may be your most expensive option.

Real Estate: Real estate that is owned outright and which has appreciated in value can be given to a charity. The donor can generally deduct the fair market value of the property, up to an adjusted gross income (AGI) percentage limitation. When a charity sells donated appreciated property, the capital gain then escapes taxation, up to AGI percentage limits.

Securities: The best securities to donate tend to be those that have increased substantially in value. As with real estate, the donor can generally deduct the fair market value of the security and the capital gain escapes taxation when the security is sold by the charity.

Charitable Gift Tax Implications:

  • Gifts of cash and ordinary income property are generally deductible up to 50% of the donor’s adjusted gross income (AGI).
  • The fair market value of gifts of long-term capital gains property (e.g., real estate, stock) is deductible up to 30% of AGI. There is, however, a special election through which a donor may deduct up to 50% of AGI if the donor values the property at the lesser of fair market value or adjusted cost basis.
  • Charitable contributions in excess of the percentage limitations can be carried over and deducted for up to five succeeding years.
  • The donor must itemize income tax deductions in order to claim a charitable deduction. A portion of itemized deductions is phased out for taxpayers with an AGI above certain limits.

Life Insurance: If a charitable organization is made the owner and beneficiary of an existing life insurance policy, the donor can deduct the value of the policy as of the date of the transfer of ownership. The donor may then deduct all future amounts given to the charity to pay the premiums. If a charity is named just the beneficiary of an insurance policy on the donor’s life, no current income tax deduction is available. At the donor’s death, however, the donor’s estate receives an estate tax charitable deduction for the full amount of the policy death benefit.

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Tax-Advantaged or Tax-Deferred? Do you know the difference?- copy

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Tax-deferred and tax-advantaged are two terms often used interchangeably and, as a result, often lead to a lot of confusion; but, the difference can be significant in planning how you will be drawing income from your nest-egg during your retirement years.  The key, of course, is to discover your options and do advance planning.

Tax-deferred investing is familiar to us.  Many employers match employee contributions up to a certain dollar amount to a company-sponsored retirement account, which usually offers tax-deferred growth.  Contributing to your account up to the employer match is a significant first step to retirement success.

However, many have found that their company-sponsored plan has proven inadequate due to contribution limits and other factors.  Most investors would likely be well served seeking out other sources of tax-advantaged retirement funds.  When used properly, tax-advantaged money is taxed up-front when earned, but not when withdrawn.  This approach may seem costly; but, that view may very well be short-sighted and far more costly.

Let’s take a look at a hypothetical example of tax-deferred and tax-advantaged money at work.  Our fictitious couple, Mitch and Laura, are starting retirement this year and will need $50,000 in addition to their Social Security benefits.  Assuming a 28% state and federal tax rate, they’ll actually need to draw $69,444 from their retirement account to meet their needs.*

Tax Deferred

Need = $50,000

Taxes = $19.444

Total Withdrawal required to meet spending need: $69,444

What if Mitch and Laura had balanced their portfolio with a tax-advantaged funding source?  What if they could pull the first $30,000 from the tax-advantaged source and the rest ($27,777) from the tax-deferred source?  What would that look like?

its-about-timeTax Deferred Combined with Tax Advantaged

Tax-Advantaged money = $30,000

Tax-Deferred money = $20,000

Taxes = $7,777

Total Withdrawal to meet needs and taxes = $57,777

Because Mitch and Laura balanced their portfolio, they saved $11,667 each year during retirement – almost 24% of their year’s living expenses each year!   Simple math reveals a savings of over $116,000 during ten years of retirement; and it they’re retired for 30 years, as many are, the savings is over $350,000, not counting what they could have made by leaving the money invested – which could be rather substantial:  At just 3.5% annualized, the total would come to over $600,000!

A Plan that Self-Completes

Most savings plans, including employer-sponsored retirement plans, are dependent upon someone actually continuing to work and actively contributing to the plan.   If work and contributions stop, the plan does not complete itself.    

It’s been my experience that relatively few individual investors have self-completing retirement plans, while a rather large percentage of high net-worth investors do.

What financial tool can accomplish the goal of being self-completing?  Not stocks, bonds, mutual funds, or even government-backed securities of any type.   There’s only ONE I know of – and, it’s tax-advantaged, too.   Believe it or not, it’s a “Swiss Army Knife” financial tool called life insurance.    It’s not your father’s life insurance; it’s specially designed

It can ‘self-complete’ a retirement plan – and it doesn’t matter if the individual dies early or lives a long life.  Few people realize they can win either way.    As I said, stocks, bonds, real estate, commodities, and company retirement accounts simply can’t match it; but, the design must be customized.

If you’d like to learn more about this and other smart retirement strategies, feel free to contact me.

————–

 

*This has always been a source of misunderstanding for many individual investors:  The fact is not all the money in Mitch and Laura’s retirement account belongs to them.  Their retirement account might show a $500,000 balance, for example, leading them to believe they have $500,000.  The truth is less comforting.  The truth is, given a 28% tax-bracket, that $140,000 of that money belongs to the government, not Mitch and Laura.  They’ll likely never see it.  Their real balance – the one the statement doesn’t show them – is $360,000; and, as we’ve seen, they’ll need to draw-down $69,444 each year to meet their needs.  How long do you think that money will last?

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Tax-Advantaged is Better than Tax-Deferred! Do you know the difference?

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Tax-deferred and tax-advantaged are two terms often used interchangeably and, as a result, often lead to a lot of confusion; but, the difference can be significant in planning how you will be drawing income from your nest-egg during your retirement years.  The key, of course, is to discover your options and do advance planning.

Many employers match employee contributions up to a certain dollar amount to a company-sponsored retirement account, which usually offers tax-deferred growth.  Contributing to your account up to the employer match is a significant first step to retirement success.

However, many have found that their company-sponsored plan has proven inadequate due to contribution limits and other factors.  Most investors would likely be well served seeking out other sources of tax-advantaged retirement funds.  When used properly, tax-advantaged money is taxed up-front when earned, but not when withdrawn.  This approach may seem costly; but, that view may very well be short-sighted and far more costly.

Let’s take a look at a hypothetical example of tax-deferred and tax-advantaged money at work.  Our fictitious couple, Mitch and Laura, are starting retirement this year and will need $50,000 in addition to their Social Security benefits.  Assuming a 28% state and federal tax rate, they’ll actually need to draw $69,444 from their retirement account to meet their needs.*

Tax Deferred

Need = $50,000

Taxes = $19.444

Total Withdrawal required to meet spending need: $69,444

What if Mitch and Laura had balanced their portfolio with a tax-advantaged funding source?  What if they could pull the first $30,000 from the tax-advantaged source and the rest ($27,777) from the tax-deferred source?  What would that look like?

its-about-timeTax Deferred Combined with Tax Advantaged

Tax-Advantaged money = $30,000

Tax-Deferred money = $20,000

Taxes = $7,777

Total Withdrawal to meet needs and taxes = $57,777

Because Mitch and Laura balanced their portfolio, they saved $11,667 each year during retirement – almost 24% of their year’s living expenses each year!   Simple math reveals a savings of over $116,000 during ten years of retirement; and it they’re retired for 30 years, as many are, the savings is over $350,000, not counting what they could have made by leaving the money invested – which could be rather substantial:  At just 3.5% annualized, the total would come to over $600,000!

A Plan that Self-Completes

Most savings plans, including employer-sponsored retirement plans, are dependent upon someone actually continuing to work and actively contributing to the plan.   If work and contributions stop, the plan does not complete itself.    

It’s been my experience that relatively few individual investors have self-completing retirement plans, while a rather large percentage of high net-worth investors do.

What financial tool can accomplish the goal of being self-completing?  Not stocks, bonds, mutual funds, or even government-backed securities of any type.   There’s only ONE I know of – and, it’s tax-advantaged, too.   Believe it or not, it’s a “Swiss Army Knife” financial tool called life insurance.    It’s not your father’s life insurance; it’s specially designed

It can ‘self-complete’ a retirement plan – and it doesn’t matter if the individual dies early or lives a long life.  Few people realize they can win either way.    As I said, stocks, bonds, real estate, commodities, and company retirement accounts simply can’t match it; but, the design must be customized.

If you’d like to learn more about this and other smart retirement strategies, feel free to contact me.

————–

 

*This has always been a source of misunderstanding for many individual investors:  The fact is not all the money in Mitch and Laura’s retirement account belongs to them.  Their retirement account might show a $500,000 balance, for example, leading them to believe they have $500,000.  The truth is less comforting.  The truth is, given a 28% tax-bracket, that $140,000 of that money belongs to the government, not Mitch and Laura.  They’ll likely never see it.  Their real balance – the one the statement doesn’t show them – is $360,000; and, as we’ve seen, they’ll need to draw-down $69,444 each year to meet their needs.  How long do you think that money will last?

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

What if Retirement Plan Statements Stated the Facts?

iStock_UncleSamLiftingWallet_MediumThe next time you open your 401(k) or IRA statement and see your current balance, it might be worth remembering it isn’t true.  The balance, you see, isn’t all yours!

Remember how many times you’ve heard the phrase tax deferred?     You’ll avoid taxes only as long as you leave the money untouched; of course, by age 70-1/2 or thereabouts you’re going to have to take some money out, whether you like it or not, because Uncle Sam wants his cut.

Then, the truth hits:  You’ve been growing money for Uncle Sam, too!

If you’re in a combined state and federal income tax bracket of 33%, it means only 66% of the balance you see on your statement is really yours – or ever will be.

For example, if your tax-deferred retirement plan statement indicates you have $500,000, remember it’s illusory.  Your tax bracket will 6a017c332c5ecb970b01a73dd6e411970d-320widetermine how much Uncle Sam will get – and Uncle Sam is not only the one who ‘writes the rules’, he also determines when he wants to do it.

If your combined state and federal tax bracket is 30%, for example, Uncle Sam’s balance in your account is $150,000.  Your balance is $350,000 – unless Uncle Sam changes his mind about your bracket.

So, the next time you look at your tax-deferred balance, you might want to whack-off Uncle Sam’s cut and enter the remaining balance on your own balance sheet – it will probably be a closer representation of what you really own when all the dust settles.

There are some steps you can take to reduce or potentially eliminate income tax in retirement, if you’re prepared to do what it takes today.

You have to ask yourself:

  • With an aging population demanding services, do I feel confident Uncle Sam won’t raise taxes in the future on those who’ve worked and saved?
  • With the “official” national debt over $19 trillion – and the real debt more like $89 trillion – do I feel confident Uncle Sam will simply manage better and keep taxes where they are on those who’ve worked and saved?

If you feel good about trusting their management of your money over the next thirty years, you may even be content with your tax status moving forward.  If not, you may want to begin exploring your options.

IFGi_4 Steps to a Tax Free Retirement_001Here’s a short report you might find interesting as a first step in your process.

You can access it here.  I hope you find it helpful.

 

Jim

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RESOURCES:

 

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Visit the IFG Website!

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.