Why Now May Be a Good Time to Consider a Roth IRA Conversion

The coronavirus pandemic and the upcoming election has created a great deal of uncertainty for investors. Income tax, furloughs, and job loss are lingering over the heads of many. As people are navigating these unprecedented times, they are becoming more and more unsure about where to and how much to invest. But it’s important to keep in mind that regardless of uncertainty in the market, it’s always a good time to invest for your future. 

The recent stock market meltdown may have dented Americans’ retirement savings, but there’s a silver lining: The downturn made one common retirement strategy less costly for investors.

The strategy, known as a Roth IRA conversion, involves changing a traditional, pre-tax retirement account — such as a 401(k) plan or a qualified individual retirement account — to an after-tax Roth fund. This strategy has some unique benefits when compared with its traditional cousin.

To do the conversion, savers would opt to pay income tax now, while markets are down and tax rates are lower under the Tax Cuts and Jobs Act. Investors who own traditional accounts defer income tax on their savings until withdrawing the money in retirement. Roth savers pay tax up front and don’t pay later. Having at least some Roth funds is beneficial for a few reasons, according to financial advisors. Retirees don’t have to take mandatory withdrawals from Roth accounts, unlike traditional IRA investors, who have to beginning at age 72. Taking Roth distributions could also decrease Social Security taxes and Medicare premiums, which are pegged to one’s taxable income.

In addition, there’s the benefit of tax diversification. Like the concept of investment diversification, tax diversification is important because it reduces the risk associated with unknown future tax rates, advisors said. Data suggest investors aren’t greatly diversifying their retirement accounts from a tax standpoint.

Traditional IRAs held around $7.5 trillion at the end of 2018 — almost 10 times as much as Roth accounts, which had $800 billion, according to the Investment Company Institute. Ultimately, investors should peg a conversion primarily to tax rates — if savers believe their tax rate is lower now than it will be in retirement, a conversion makes sense because it will cost less in the long run, according to tax experts. And, contrary to popular opinion, one’s tax rate doesn’t always fall in retirement, they said.

Tax rates are currently low by historical standards and are likely to increase (rather than fall further) in the future, experts said, given the eventual need to raise federal revenue to reduce the U.S. budget deficit, which is larger as a share of its economy than most other developed countries.

If you are considering a Roth IRA Conversion, please consult with your financial advisor  and your EA/CPA or tax preparer to ensure that this decision is the best for your financial situation. If you would like to discuss the potential of a Roth Conversion, please reach out to us and schedule a free 30-minute consultation

 

How Much Retirement Savings Is Enough? Why Couples May Disagree

As couples combine their finances and start to think about savings, it’s common to go back and forth when discussing retirement and long term goals. While one party may be worried that their expenses will be larger than they think, the other may have a different perspective. The most important piece to know is that it’s okay. It’s normal to have a different perspective on your finances and financial future than others, even your spouse. Nobody has the exact same financial situation, so it’s important to figure out what’s best for you and your family. 

The first step is communication. When discussing your finances, it’s important to communicate and feel open about discussing an often uncomfortable topic such as money. To establish short-term and long-term goals that are successful and reasonable, both you and your significant other must feel comfortable to discuss what they believe is fair. 

The Wall Street Journal highlighted an issue that can get overlooked in retirement planning: the financial burdens that women, in particular, face late in life.

Consider: A survey last year by the National Council on Aging and Ipsos, a polling and data firm, found that fully half (51%) of women age 60 and older are worried about outliving their savings. In the same survey, almost six in 10 women (59%) said they are worried about losing their independence.

Why these fears? The answers, in large part, are tied to longevity and health care.

Women, of course, typically live longer than men—about five years, on average—and are more likely to live their final years alone. In 2019, almost half (44%) of women age 75 and older in the U.S. lived alone, according to the Administration on Aging. Living longer and living alone typically give rise to more health problems. And more health problems equate to more medical bills and, potentially, the need for long-term care. In short, women can face expenses late in retirement that are larger and more painful than many couples might anticipate.

In a 2017 report, HealthView Services Inc., a provider of software for retirement health-care costs in Danvers, Mass., calculated that a healthy 65-year-old woman retiring in that year and living to age 89 could expect to pay $306,426 for health care, including premiums for Medicare Parts B and D, a supplemental insurance policy, and all out-of-pocket costs, as well as dental and vision care. A man at the same starting age and living to 87 could expect to pay $260,422. (And those projections don’t include the potential cost of long-term care.)

The good news: There are strategies and tools that can help couples prepare for these outcomes, such as long-term-care insurance, life insurance, deferred annuities and reverse mortgages.

Several calculators can provide ballpark figures about medical expenses in retirement, including those from Fidelity Investments, Optum Bank and ICMA-RC, a Washington-based nonprofit that provides retirement plans and services. In addition, MoneyHabitudes.com has activities designed to get people comfortable talking about their finances.

As you can see from the survey data reference above, both men and women often have different expectations on how much money they need for their future, which is normal. Again, make sure to communicate and research with your partner to insure both individuals are comfortable with their finances and savings. Of course, a good financial adviser also can make a difference. But the most important step is to talk about retirement and how your finances might play out before you get there. If you have any questions, or want to discuss retirement with us, please schedule a complimentary 30-minute consultation.

 

IRS Finalizes ABLE Account Regulations: Here’s What to Know

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The IRS recently published final regulations for Achieving a Better Life Experience, or ABLE, accounts for disabled Americans. ABLE accounts aim to help people with disabilities and their families save and pay for disability-related expenses. Even though the contributions aren’t deductible, distributions such as earnings are tax-free to the designated beneficiary if they’re used to pay for qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services, along with other disability-related expenses.

The regulations come in response to and finalize two previously issued proposed regulations from the IRS. The first proposed regulation was published in 2015 after enactment of the ABLE Act under the Obama administration. The second proposed regulation was published in 2019 in response to the Tax Cuts and Jobs Act, which made some major changes to ABLE. 

Eligible individuals can now put more money into their ABLE account and roll money from their qualified tuition programs (529 plans) into their ABLE accounts. In addition, some contributions made to ABLE accounts by low- and moderate-income workers can now qualify for the Saver’s Credit.

The new regulations also offer guidance on the gift and generation-skipping transfer tax consequences of contributions to an ABLE account, as well as on the federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account.

In addition, before Jan. 1, 2026, funds can be rolled over from a designated beneficiary’s section 529 plan to an ABLE account for the same beneficiary or a family member. The regulations provide that rollovers from 529 plans, along with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) can’t exceed the annual ABLE contribution limit.

Lastly, the final regulations offer guidance on the record-keeping and reporting requirements of a qualified ABLE program. A qualified ABLE program must maintain records that enable the program to account to the Secretary with respect to all contributions, distributions, returns of excess contributions or additional accounts, income earned, and account balances for any designated beneficiary’s ABLE account. In addition, a qualified ABLE program must report to the Secretary the establishment of each ABLE account, including the name, address, and TIN of the designated beneficiary, information regarding the disability certification or other basis for eligibility of the designated beneficiary, and other relevant information regarding each account. 

For more information about ABLE accounts or if you have any questions regarding these regulatory changes, please contact us at info@shermanwealth.com or check out our other relevant blogs

Top 6 Tax Tips To Know

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2020 has certainly been an eventful year so far and one that will be remembered for decades to come. Despite the negative impacts of the coronavirus globally, in the world of tax and retirement planning, 2020 has brought opportunities that should be taken advantage of before year’s end. Here are some tax planning ideas to consider before 2020 comes to a close.  

1) ROTH CONVERSIONS

As 2020 winds down, this is the optimum time to project the tax cost of a Roth conversion because most people by this time will have a reliable estimate of their 2020 income and this year’s tax benefits may be the highest ever because of historically low tax rates and possibly lower income due to the pandemic.

Once funds are converted, today’s low tax rates are locked in, plus the funds in the Roth grow income tax free forever and Roth IRAs have no lifetime required minimum distributions (RMDs). Any IRA funds converted will lower these tax-deferred IRA balances and in turn lower the amount of future RMDs that could be exposed to higher taxes.

Some may think they will be in a lower tax bracket in retirement, but that doesn’t often happen, especially after a spouse dies and the surviving spouse sees their tax bills increase when they begin to file as single.

The bottom line here is that a Roth conversion removes the risk and uncertainty of what future higher tax rates can do to your retirement income. Though Roth conversions will still be available in the future, you should still consider doing them in 2020.

2) IRA DISTRIBUTIONS

In 2020, you aren’t even required to take money from your IRA distributions. The Coronavirus Aid, Relief, and Economic Security Act waived required minimum distributions for the year. But even though they aren’t required, you should look into making voluntary IRA distributions anyway because those taking money out of these tax-deferred vehicles in 2020 might be able to do so at lower tax rates.

Since the required minimum distributions are waived for 2020, this presents a one-time opportunity for those subject to the minimums to convert RMDs instead to Roth IRAs (something you can’t normally do). 

Even if you aren’t subject to required minimum distributions, it might pay for you to begin taking taxable distributions to get into the lower tax brackets and begin reducing the future IRA debt that’s building for Uncle Sam. The funds could be used either to convert to Roth IRAs or for gifting or estate planning. For example, the IRA funds withdrawn can be used to purchase permanent cash value life insurance, which after the SECURE Act will prove to be a better estate planning vehicle than inherited IRAs. Like Roth IRAs, life insurance will grow tax free and the eventual proceeds to beneficiaries will be tax free as well which is a good use of IRA funds now. IRA or plan withdrawals taken this year can also be used for gifting to family members.

3) QUALIFIED CHARITABLE DISTRIBUTIONS

Qualified charitable distributions are the most tax-efficient way to make charitable gifts because they reduce taxable IRA balances at no tax cost. The name refers to a direct transfer of IRA funds to a qualifying charity.

The only downside here is that the QCD is only available to IRA owners and beneficiaries age 70½ or older. The distribution is not available from company plans and not permitted to go to donor-advised funds or private foundations. Qualified charitable distributions are limited to $100,000 per year for each IRA owner, not per IRA account. 

Although the SECURE Act raised the required minimum distribution age to 72, the QCD age remains at 70½. This gap means the charitable distributions can begin before RMDs kick in. Even though RMDs were waived for 2020, you can still make these QCDs nonetheless since the charitable distribution still allows you to remove IRA funds at a zero tax cost. If you are giving to charity anyway, and qualify for QCDs, then this is the way you should be doing your giving.

With qualified charitable distributions,  you receive both the standard deduction and the tax benefit in the form of an exclusion from income. An exclusion is better than a tax deduction because it reduces your adjusted gross income, a key figure on the tax return. QCDs are the most tax-efficient way to reduce taxable IRA balances, because they reduce the balances to a zero tax cost.

In addition, there is a provision in the CARES Act that allows for a $300 additional charitable gifting exclusion from income for non-itemizers (for cash gifts).

4) GIFTING

With the exploding deficits and expanding national debt, there is a new urgency for clients to make gifts now, before year’s end, because it may not be an option much longer. Gifts are lifetime transfers as opposed to inheritances received after death.

The 2020 estate and gift tax exemption is $11,580,000 per person ($23,160,000 for a married couple). These figures are scheduled to go back to $5 million and $10 million, respectively, after 2025 (there will also be inflation increases). It pays to use them now or possibly lose them later. These limits apply to lifetime gifts as well as inheritances.

For those who will be subject to a federal estate tax, gifting is less expensive because gifts are tax-exclusive, as opposed to inheritances, which are tax-inclusive. If the funds are left in the estate, the full value of the transfer at death is subject to the estate tax, so the funds used to pay the estate tax are taxed themselves, whereas gift taxes on lifetime transfers are only based on the gift amount received.

There are three tiers of tax-exempt gifting:

  1. The first is $15,000 annual exclusion gifts. These gifts can be made to anyone each year and they do not reduce the gift/estate exemption. These annual exclusion gifts are always tax free—even if the exemption is used up.
  2. Unlimited gifts for direct payments for tuition and medical expenses. These gifts can be made for anyone, the amounts are unlimited, and they do not reduce the gift/estate exemption. These gifts are also always tax free—even if the exemption is used up.
  3. The $11,580,000 lifetime gift/estate exemption in 2020. The IRS has stated that there will be no clawback if these exemptions are used now, even if the exemption is later reduced, so you must use it or possibly lose it.

Gifts made now in 2020 lock in today’s gifting limits. There is no guarantee that these limits will hold up in the future.

5) UPDATING ESTATE PLANS AFTER THE SECURE ACT

The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries. This is effective beginning with deaths in 2020, so it is imperative to check your IRA and company plan beneficiary forms to reveal what may be the largest single asset in your estate plan.

Most non-spouse beneficiaries will be subject to the new 10-year payout rule, meaning that the entire inherited IRA will have to be withdrawn by the end of the 10th year after the IRA holder dies.

This includes most trusts named as IRA beneficiaries, and you might need to make changes; for example, most conduit trusts will not work as originally planned since the entire inherited IRA will be left unprotected in trust after the 10 years. Many of these trusts will have to be upgraded to discretionary trusts to maintain the trust protection beyond the 10 years. But even then, the inherited IRA funds will still be taxed when that decade has passed, and that tax will be at high trust tax rates for any funds remaining in the trust and not distributed to the trust beneficiaries.

One solution here is to convert these IRAs to Roths to eliminate the post-death trust tax exposure or withdraw IRA funds now and purchase life insurance, which is a better and more flexible asset to leave to a trust.

You should review any IRA estate plans, which begins with a beneficiary form review. Check to make sure that contingent beneficiaries are named and up to date. Make sure that the estate plans will still accomplish your goals after the changes brought about by the SECURE Act.

6) W-4 UPDATES AND WITHHOLDINGS CHECK

The federal income tax is a pay-as-you-go tax. Taxpayers pay the tax as they earn or receive income during the year. Taxpayers can avoid a surprise at tax time by checking their withholding amount. The IRS urges everyone to do a Paycheck Checkup in 2020, even if they did one in 2019. This includes anyone who receives a pension or annuity. 

The best way to make sure you are withholding the right amount is to use the Tax Withholding Estimator on IRS.gov. The Tax Withholding Estimator works for most employees by helping them determine whether they need to give their employer a new Form W-4. They can use their results from the estimator to help fill out the form and adjust their income tax withholding. If they receive pension income, they can use the results from the estimator to complete a Form W-4P, Withholding Certificate for Pension and Annuity Payments PDF. To change their tax withholding, employees can use the results from the Tax Withholding Estimator to determine if they should complete a new Form W-4 and submit to their employer. Don’t file with the IRS.

These 2020 year-end retirement, tax and estate planning moves will enhance your retirement savings that will soon be exposed to potential tax increases after 2020. Given the current state of our economy, it is best for you to consider these options now, since it’s likely many of these things will be changing in the near future. These tips have been prepared for informational purposes only and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Check out our website for more information! 

What to Do If You Don’t Have a 401(k)

Piggybank on wooden table with stacks of coins beside it. A hand putting a coin into the piggy bank.

As the coronavirus sweeps the world and people take a step back to look at their finances for the long term, we are seeing that about half of workers don’t have access to a retirement plan at work.  That means that even as 50% of workers can take advantage of automatic payroll deductions and contribute $19,500 or more to a tax-advantaged company retirement plan, about the same percentage is on the outside looking in.

Some of these people may work for companies that offer plans, but are not eligible to contribute because they either don’t meet the criteria or they are part-time employees. Some may be self-employed, which leads to other retirement savings options and others may simply work for a firm that doesn’t offer a plan at all.

So, as people start putting a tighter rein on their finances during this economic recession, it’s important to discuss retirement saving options for those who do not have access to one through their company.  Below we will share several options for people in this situation according to an article by MorningStar.

1) Invest in an IRA.

A good first stop for any worker who has earned income is to simply fund an IRA to the maximum–$6,000 for investors under age 50 and $7,000 for those over 50. Such accounts are very easy to set up, and the money can be invested in a huge array of options. Contributing to an IRA can provide a terrific building block for retirement security. A person assiduously investing $6,000 a year in an IRA for 40 years who enjoyed 6% growth on her money would have a little over $920,000 at the end of the period.

2) Assess whether self-employment accounts are an option.

For people who are self-employed, there are a host of options for tax-advantaged retirement savings. Some of them are quite similar to what 401(k) investors have, except that there can be setup costs and oversight responsibilities. An investment in a conventional IRA, an individual 401(k), a SEP or SIMPLE IRA’s are all good investment ideas.

3) Assess whether an HSA is an option.

While by no means a first line of defense for people without a 401(k), a health savings account is a decent ancillary retirement account option for people covered by a high-deductible healthcare plan.

4) Invest in a tax-efficient way in a taxable brokerage account.

While it’s ideal to invest in vehicles that provide some type of a tax benefit, people without a company retirement plan can also invest tax-efficiently inside of a taxable account. The key is to select investments that incur few taxes on an ongoing basis.

5) Be part of the solution.

Finally, if you work for a small employer that lacks a company retirement plan, consider offering to assist your employer in figuring out how to get one off the ground. Setting up such a plan has gotten cheaper and less complicated in recent years, and your employer may welcome a financially savvy partner to help with some of the research and vetting.

As always, if you have any questions about your current 401(k) or need help investing money in order to supplement a lack of one, please reach out to us and we would be happy to discuss your future financial goals.  

Top 5 Pieces of Financial Advice

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As we are all adjusting to the new norm that the coronavirus pandemic has created in our world, we are also learning pieces of advice that we could share from this experience. When going through an economic crisis, it’s important to keep some tips at top-of-mind to help you navigate the bumpy waters. In a CNBC Select Article, we found 5 great pieces of financial advice that we want to share with you to put in your financial repertoire.

First and foremost, try not to accumulate credit card debt. Racking up credit card debt can have very negative long term consequences, so it’s important that you pay the full balance on time. When you do not pay the full balance on time, your card will quickly accumulate interest, which often can get so high that it’s hard to pay off. 

According to recent Federal Reserve data released in September, the average interest rate for all credit card accounts is 14.87%. Among accounts assessed interest, or accounts with outstanding finance charges, the average interest rate rises to 16.88%. But for consumers with credit scores below 670, interest rates can near 30%, CNBC Select reports.

Next, make sure you don’t buy things you can’t afford. Although this one seems obvious, it’s much more common than you think. Avoid overspending and spending on things you can live without. Start putting that extra money into savings accounts where you can be accruing interest and earning money. 

Third, invest the year’s expenses or anything saved after you have the year’s expenses saved? Before the pandemic, many people were saying how you should have several months of rent and expenses in a savings account for a rainy day, but as we have seen the economic hardships the coronavirus has inflicted upon our society, we are suggesting to save about a year’s worth of expenses before investing it elsewhere. 

Fourth, start to think like a savvy businessman or woman. Learn to negotiate. Especially in the world we are living in today, make sure you are constantly looking for deals and inquiring about credit card versus cash options. Oftentimes, places will charge you less if you pay in cash. So, before swiping that card, make sure you think about all your options. 

Lastly, buy in bulk. With Amazon becoming increasingly popular and making it possible to get what you need in a matter of hours, take advantage of deals and places you can buy in bulk. If you can save a few dollars here and there, take advantage of it. It’s important to be a smart shopper, especially when buying something pricey, such as groceries for a large family. 

By implementing some of these basic money management tips into your daily routine, you will find yourself becoming a more savvy shopper and saving more money. It is especially important during an economic recession to take these concepts into consideration and make the most of your finances. If you have any questions on other ways you can maximize your financial portfolio and find places in your budget where you can save money, please reach out to us at info@shermanwealth.com or visit our site at www.shermanwealth.com. Check out our other blog posts for more financial advice and tips! 

 

Here’s How The Pandemic Has Upended The Financial Lives Of Average Americans: CNBC + Acorns Survey

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From jobs to savings to retirement plans, the coronavirus pandemic has upended many Americans’ financial lives. While millions are still unemployed, many have seen their emergency savings run dry and others are figuring out ways to cope with the financial burden of the economic recession. However, not all aspects of the financial impact of the pandemic are necessarily negative.

According to CNBC and an Acorns Survey, many are saving more and spending less. In fact, 46% of the respondents said they are “more of a saver now” compared to before the pandemic. Additionally, 60% consider themselves “savers,” up from 54% last year. The poll, conducted by SurveyMonkey Aug. 13-20, surveyed 5,401 U.S. adults and has a margin of error of +/-2%.

 

About half, or 49%, said their monthly spending has decreased, compared to 33% last year. Some of those savings can be attributed to the fact that people stayed home and didn’t do things like dining out, said personal finance expert Jean Chatzky, co-founder of HerMoney.

While many have been struggling to get by these last few months, many have learned how to manage their money better despite the economic recession. People have learned how to go to the grocery store less and have utilized meal planning and money saving-skills, such as coupon-clipping and deal searching. They also have begun to really take a look at their monthly or annual subscriptions, removing themselves from services they don’t really use or need. By prioritizing wants versus needs and taking a look at how much money is going out each month, people have picked up better spending habits that will help them navigate these bumpy waters ahead. 

With extra cash and savings in the bank, it’s important to talk with an advisor about options and investing that makes the most sense for you, whether it be saving for retirement, college tuition, or something else. If you have any questions for us, please reach out at info@shermanwealth.com and we would be happy to set up a time to discuss a financial plan for your future.

 

How Much Longer Until The US Economy Is Back To Normal? This New Index Shows We Have A Long Way To Go

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As we approach the six month mark from when COVID-19 turned our world upside down, we are beginning to adjust our lives to this new “normal”. As we continue to adapt to this different way of life, some things are seeming back to the way they were before, but much remains new and strange. We are going about our days wearing masks and social distancing, watching our favorite sports teams play in “bubbles”, empty stadiums and arenas, and spending our work day in sweats and from the comfort of our homes. 

As we begin to normalize some of these news ways of living, it raises the question of how far we really are from our old way of life? How much progress are we making towards this new “normal” that will be our future? As of right now, we’re seeing what’s called a “K” shape recovery, which is that the stock market is recovered, but the economy and mainstreet remains suffering. People are wondering if there will be a double dip recession potentially in the fall and winter months if the virus comes back. 

We’ve been thinking about how to tackle these difficult and unknown questions and found an interesting article by CNN Business and Moody’s Analytics, which raises some of these questions as they relate to the economy.

According to their analytics team, the U.S. economy remains far from normal. Based on the back-to-normal Index that they constructed, which takes into account 37 indicators, including traditional government stats and metrics from a host of private firms to capture economic trends in real time, the U.S. economy was operating at only 78% of normal as of August 19th. They are using the economic data from prior to when the pandemic struck in early March as a baseline as “normal”. They are saying that the “economic activity nationwide is down by almost one-fourth from its pre-pandemic level-far from normal”. 

Even though that data is not so promising, it’s important to note that it is substantially better than the darkest days of the pandemic in mid-April, when we were unsure of how dangerous this virus could be. As business re-opened between mid-April and mid-June, according to their back-to-normal index, the economy opened too quickly, with many surges in coronavirus cases throughout the summer leading to states halting their reopening plans. The back-to-normal index also calculated that states who locked down harder early on are now enjoying lower infection rates and stronger economies and “states that were quicker to end shelter-in-place rules and to reopen in the spring have paid an economic price.”

While our country is recovering slowly but surely from this deadly pandemic that has swept our world, we still have ways to go to reach our pre-pandemic “normal”. While the economy still needs time to recover, it’s the best time to think about your finances and how to manage your money to make sure you come out of these unprecedented times strong. Find out how much risk you are taking on, what investments you have and where you want to be given the circumstances and with the all time highs in the markets. If you have any questions about your portfolio or ways you can manage your money during these rocky times, please reach out to us and we’d be happy to help. 

What’s Ahead For Your Taxes If Biden Takes The Presidency

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With the election around the corner and recent news of Joe Biden’s running mate, Kamala Harris, we wanted to take a look at his proposed tax plan and what impact it may have on the finances and current tax plans of Americans.

As Biden accepts his party’s nomination for president this week at the Democratic National Convention, high-income earners are beginning to wonder if it’s time to revisit their tax plans. Indeed, taxpayers with taxable income over $400,000 could see their individual income taxes tick up under a Biden presidency. The former vice president has also called for raising taxes on wealth transfer.

Below we will outline Biden’s proposed tax plan, which CNBC has sliced into two categories, income taxes and estate planning. 

Income Tax 

On the income tax side, Biden calls for raising the top individual income tax rate to 39.6% from 37%, and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.

He’s also talking about an increase to payroll taxes. Biden would apply the 12.4% portion of the Social Security tax — which is normally shared by both the employee and employer — to earnings over $400,000, the Tax Policy Center found. Currently, the Social Security tax is subject to a wage cap of $137,700 and is adjusted annually.

Finally, Biden would also boost rates on long-term capital gains and qualified dividends to 39.6% — the same top rate as ordinary income — for those with income over $1 million, according to theTax Foundation.  The long-term capital gains tax rate in 2020 is 20% for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly).

Estate Planning 

Last month, the Democratic presidential contender collaborated with Sen. Bernie Sanders, I-Vt., and the two formed six task forces to release a 110-page policy document. The document gives some insight on what we might expect from a Biden administration. “Estate taxes should also be raised back to the historical norm,” the task force wrote in the policy plan.         

Indeed, the Tax Cuts and Jobs Act roughly doubled the amount that you can transfer to other people — either at death or as a gift during life — without facing the 40% estate and gift tax. The gift-and-estate tax exemption is $11.58 million per individual in 2020.

Biden has set his sights on the “step-up in basis,” a provision in the tax code that allows an individual to hold onto an asset for years, watch it appreciate and then bequeath it to an heir at death. The owner’s basis — the original investment in the asset — steps up to market value at death, which means the heir is subject to little to no capital gains taxes if he sells it. Biden proposes taxing the unrealized capital gains in the asset at death, which essentially does away with the step-up. Wealthy households are likely to use gifting strategies to head off this change, said Bertles of Tiedemann Advisors. “This can be as simple as giving assets to a trust or outright to kids or grandkids while using the exemption,” he said.

Make sure to take a look at Biden’s proposal and think about how that may impact your situation. In just a few short months, this plan could be put into effect, so start thinking about any changes you could make to your tax plan and talk to an advisor for some guidance. As always, we are here to help if you have any questions regarding what these changes could mean for you. 

 

You’re Running out of Time to Reverse this Retirement Withdrawal and Save on Taxes

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Required Minimum Distributions (RMDs) are the annual withdrawals you must take from your individual retirement account and 401(k) plans after you reach age 72 (or age 70 ½ if you turned 70 ½ prior to January 1, 2020).  The CARES Act, the coronavirus relief act that took effect this spring, allowed retirement account holders to bypass required minimum distributions for 2020. Those that inherited IRAs are also allowed to skip the RMD this year.  (https://www.irs.gov/pub/irs-drop/n-20-51.pdf)

For those of you who have taken a Required Minimum Distribution (RMD) from your retirement savings at some point in the year, the clock is ticking for you to put that money back. If you already took the money out, you have until August 31st to put it back.  However, you shouldn’t wait much longer than August 20th, as there are several steps and contacts involved in the process. In order to avoid any errors in the transaction, it is advised to return any RMD funds as soon as possible. It’s important to note that this RMD waiver only qualifies for 2020, meaning next year you’ll be required to take your distribution as per usual. 

RMDs from traditional IRAs and 401(k) plans are subject to income taxes, so waiving the distribution or returning the funds could help you save on levies. But, make sure to give back the income taxes your custodian may have withheld, not just the net amount you may have received.

In other cases, some retirees opt to split their annual RMDs into 12 monthly disbursements, which means they have to return their monthly RMDs. In this scenario, you may have taken multiple distributions over the course of the year. Therefore, you’ll have to contact your custodian and have them hold the payments for the remainder of the year. You are allowed to replace the payments you have already received, too, but just ensure you cover the taxes withheld and act quickly.

Lastly, since the tax rules changed so rapidly this spring amid the coronavirus pandemic, savers should ensure that their custodians are marking the transaction as a “return of funds” and not a “contribution”, where you’d essentially be getting additionally taxed. 

Make sure to talk with your custodian to see if you are squared away and eligible to return your mandatory distribution for the year. If you have any questions or concerns about your RMDs, please reach out to us at info@shermanwealth.com and we’d be happy to assist you in any way.