Taking the Long View: ROTH conversions and non-spouse beneficiaries after the SECURE Act:

In previous installments, we discussed the tax planning benefits associated with strategic ROTH conversions, especially prior to age 72 when Required Minimum Distributions begin.  As you will remember, these conversions may be done each year to convert pretax retirement accounts that have never been taxed, to tax free ROTH accounts. The conversion creates taxable income, but can be done in the years when you are in a lower marginal tax bracket. The goal is to intentionally fill up the lower tax brackets now with ROTH conversions, rather than waiting until age 72 and beyond when your marginal tax bracket may be much higher. But the recent SECURE Act provides another benefit of ROTH conversions, specifically to non spouse beneficiaries. The SECURE Act eliminated the very preferential stretch IRA treatment given to non-spouse beneficiaries of pretax retirement accounts. Prior to the law change, your beneficiary could receive an inherited IRA and “stretch”...

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The Key to Paying Less Tax in Retirement

In our last tax planning segment, we discussed the opportunity to maximize contributions to tax-favored retirement accounts.  Let me repeat my original premise: as a general rule, it is advisable to fill up each tax-favored retirement account for which you are eligible, to the maximum limit possible, given the amount of liquid funds available.  To do otherwise is to forgo a tax benefit and miss an opportunity that will increase your wealth over time. With that said, we are faced with the choice of contributing to pretax retirement accounts versus ROTH based accounts.  Many individuals select the pretax option during their highest earning years to find immediate tax relief.  However, this strategy, if pursued exclusively, creates a challenge in retirement.  We may find that our retirement income will be exposed to an equal or even higher marginal tax rate in the future.  Here are some of the contributing factors. While contributions...

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Tax Planning Opportunities: Tax Favored Retirement Account Contributions

Back in February, we anticipated writing an ongoing series of articles on the measurable value of forward-looking tax planning, a topic that we spend a lot of time thinking about here at Level Financial Advisors.  We posted the first article, but then COVID 19 intervened in all of our lives and our attention turned to the more immediate topics resulting from the crisis. This article brings us back to the tax planning theme and focuses on the use of tax favored retirement accounts.  There are two distinct components to the planning function.  First, we must make decisions about new contributions during our working years and then, just as importantly, make decisions about how to best distribute the funds from the accounts in the future. This article will focus on contributions and the next in the series will address distributions. We must add a note of caution as some families are facing reduced...

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Retirement Planning During A Global Pandemic

One of the benefits of financial planning is proactively preparing for periods of financial instability and chaos. Clearly, we are in such a period as all of us are experiencing the full range of anxiety and insecurity caused by: The health risk to ourselves and our loved ones. The sense of isolation and disruption. The financial impact on our income and investments. The fear of the unknown; this is unprecedented! Let’s acknowledge that the specific nature of the pandemic and the emotional impact of being isolated were not factors that many folks anticipated or planned for. And while it is impossible to avoid the emotional discomfort, we can gain some measure of security by applying logic, research, and smart strategy to the things we can control, especially within our finances. The economic impacts of this crisis have been experienced before and a good financial plan can address these periods of instability and...

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The Difference Between Tax Preparation and Tax Planning

In the first quarter of each year, much of America turns their attention to filing tax returns. It’s not something we relish, but necessary to comply with the tax code.  So this year, while you are forced to think about taxes and perhaps have all the important documents in front of you, make a decision to also do some tax planning. So what’s the difference between tax preparation and tax planning?  That is an important distinction.  Tax preparation requires us to look back upon the past year and provide an accounting to the IRS about the amount of tax we owe.  While your tax preparer will use every technique to minimize this amount, the opportunities to improve your tax picture for the past year are somewhat limited. Conversely, tax planning is forward looking to the coming tax year and beyond.  It’s quite understandable that your tax preparer may not be in a...

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Medicare and Tax Planning: Managing The Premium Surcharge

In a previous blog post (Converting Your Retirement Nest Egg to Income), I argued that higher income individuals must juggle a far more complex and unique set of variables in retirement than they faced in their working years, if they hope to be as efficient as possible with their accumulated wealth.  Many of the variables are tax related and interrelated, in that a change to one may change the others. While complicated, a holistic, forward-looking planning process pays big dividends in tax efficiencies that can stretch your retirement nest egg.  This post will focus on one specific variable; the Medicare Premium Surcharge, called the Income Related Monthly Adjustment Amount or IRMAA. Wait, what does Medicare premiums have to do with retirement tax planning?  At the risk of oversimplifying, here is a quick summary explanation (for those interested, here’s a more detailed look from the IRS): Medicare is our system of retiree health...

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Converting Your Retirement Nest Egg to Income

The moment you realize you don’t actually know how to make your savings last.

Let’s assume that you’re completing a solid career, have earned a good income and through thrift and discipline, accumulated a significant nest egg for retirement.  Sounds good so far, right?  But as you approach retirement, the thought may occur to you: “I don’t really know how to convert this nest egg into retirement income when I stop working”. Well, you’re not alone.  In our experience, there is a fair amount of angst that accompanies this much anticipated life event, and for good reason.  Compared to the working years, there are many unique moving parts and complexities to consider in retirement that most individuals have never had to think about.  Building wealth while earning a healthy income is pretty one dimensional. For most individuals, it’s about setting aside regular long term savings and investments in the most tax effective manner possible.  With relatively high marginal tax brackets, individuals tend to build their retirement nest eggs with pretax contributions first; usually through contributions...

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Social Security Timing: Choosing the Right Strategy

For most retirees, Social Security is an essential component of financial security.  It is estimated that Social Security benefits account for one-third of all retirement income each year.  Despite its significance, it appears that many retirees are not optimizing their benefits and losing out on substantial income over their lifetimes.  The Social Security claiming options are complex and there is no one strategy that is the right fit for everyone; however, one of the common errors is claiming too early.  Only 4% of retirees wait until age 70 to claim the maximum retirement benefit.  A recent study estimates that US retirees would generate an additional $111,000 of income on average over their retirement years if they optimized their Social Security benefit selection.   Many factors may influence the decision to claim early, with poor health and a reduced life expectancy being the most common. There is a break-even life expectancy calculation that is important to consider: how long must I live before the maximized age 70 Social...

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What is an inverted yield curve and why does it matter?

If you have been tuned-in to the financial press recently, you will have noticed a great deal of attention surrounding the concept of an inverted yield curve.  Why all the excitement and alarm?  While the topic can be quite complex, here is a quick primer. The Yield Curve:  This is an important metric to economists.  It is a simple graph that plots the yields of U.S. Treasury obligations of all different maturities.  Remember, Treasuries (bills, notes and bonds) are debt instruments issued by the US Government; it’s how they borrow money.  The Treasury’s “maturity” describes how long before the bond is repaid and ranges from 1 month to 30 years.  The vertical axis of the graph measures the % yield paid by the bond.  The horizontal axis measures the length of all the maturities. Normal Yield Curve:  Under normal conditions, the curve created by plotting the points on the graph is upward sloping.  It indicates that interest rates increase with each longer maturity.  At the most basic...

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Secure Act: What You Need to Know

It appears that concern over the retirement readiness of American workers has reached a point where both Houses of Congress are poised to pass new legislation with broad bipartisan support.  The House version of the legislation is called the SECURE Act and has twenty-six individual components impacting either an employer’s ability to offer retirement benefits to its employees or an employee’s ability to save more easily and effectively for retirement.  Here is a quick summary of the more impactful provisions: Employer related: Multiple-Employer Plans (MEP’s)- Small employers are often discouraged from offering retirement plans due to the corresponding cost and administrative burden.  The SECURE Act expands on previous efforts to allow small employers to band together to form Multiple-Employer Plans thereby sharing costs and admin duties.  The act broadens and liberalizes the rules allowing small firms that do not share a common geographic area, trade, industry, or profession to join the...

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