Keeping more of what you earn is a fundamental part of proper financial management. Congress has established certain tax-deferred savings plans to help. There are other tax strategies of which investors should also be aware. Let’s take a look at helpful tax ideas that may be suitable for your retirement plan and your taxable portfolio.

As laws, opportunities and your circumstances change, it is important to revisit your approach to taxes. I think that it is equally important that your advisor work with your accountant and tax attorney to increase the probability of the best outcome for you. Important changes that have come about in the past few years include the Tax Cuts and Jobs Act of 2017 and the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019).

Tax Cuts and Jobs Act

Most people are aware of the significant changes made to the tax code with this legislation. However, don’t overlook the fact that many parts of the legislation will sunset or expire in 2025. One provision expiring that will affect high net-worth investors is the estate-tax exclusion. Prior to this act, estates could exclude $5.6 million from estate taxes. TCJA increased the amount to $11.2 million, but sunsets this amount in 2025.

If your estate is now above $11.2 million, or if you anticipate that it may become worth that amount by 2025, then you may want to discuss an A/B trust with your tax attorney. It maximizes the exclusion for a married couple.

The SECURE Act

The SECURE Act, passed and signed into law in December 2019, makes significant changes to retirement planning. Most changes are helpful to investors. But with the elimination of the Stretch IRA, your estate plan will most likely need attention.

• Changes to Stretch IRA and Distributions

The Stretch IRA was a concept available to beneficiaries of traditional IRAs in which beneficiaries could withdraw distributions throughout their life expectancy. Including a Stretch IRA into estate planning was a common practice.

However, under the SECURE Act, the beneficiary must deplete the account within 10 years after inheritance, unless exclusions apply. For example, withdrawals based on life expectancy are still available for spouses, disabled beneficiaries and minors.

There are new distribution rules, too. Distributions without penalty under normal circumstances still begin at age 59½ if you choose to go that route. However, you can now leave your money tax deferred and not take Required Minimum Distributions (RMDs) until age 72. IRS tables lay out your expected distributions based on account value and age.

Roth IRAs do not have RMDs. From a tax position, it is a different strategy with different provisions. I’ll dive into an explanation of the Roth version in a later article. Be sure you subscribe to my newsletter so you don’t miss it!

IRA Provisions

Here are the current provisions governing IRAs:

• Individuals with earned income or alimony can establish IRAs, no joint accounts.
• If the individual participates in a retirement plan at work, they may be limited on how much they can deduct based on income.
• Deduction limits for individuals participating in a qualified plan with their employer are as follows:
  • Married Filing Jointly: Fully deductible up to $103,000 MAGI (Modified Adjusted Gross Income), no deduction at $123,000 and a partial deduction in between the above numbers.
  • Single filers: Fully deduct their contributions up to $64,000 and phases out until no deduction at $74,000.
• Roth IRAs have contribution limits based on filing status. Individuals filing Single can make a $6,000 contribution if MAGI is less than $122,000 and partially phases out until MAGI is greater than $137,000 when the individual is no longer eligible to contribute. For Married Filing Jointly, contributions are permitted when MAGI is below $193,000 and phases out to zero above $203,000.
• The 2019 tax year is the last year that individuals must be younger than 70½ to establish or contribute to a traditional IRA.
• The IRA is established for the benefit of the individual in a custodial account or a trust.
• Contributions must be in the form of cash or check. Stocks or other assets cannot be transferred or deposited into the account.
• Contribution limits for the 2019 tax year, which can be made up until July 15, 2020, can be up to 100 percent of earned income or $6,000, whichever is less. The tax-filing deadline was extended because of the coronavirus complications related to conducting business. Married couples can claim up to $12,000 even if only one spouse had earned income. Individuals at least age 50 during 2019 can contribute an additional $1,000 catch-up.
• Funds cannot be invested in life insurance policies, art, metals or other collectibles. ETFs that hold metals or publicly traded companies that engage in collectibles can be placed in an IRA, but special rules apply.
• IRAs cannot be used as collateral for loans. Doing so causes the pledged amount to be treated as a distribution.

Strategies for Other Tax-Favored Plans

It is not uncommon to have a 401(k) or other type of savings plan left at a previous employer. It is important for the forgotten plans to be rolled over to an IRA for better management of your overall strategy by your advisor. Do this through a trustee to trustee transfer, letting the IRA custodian do the work. They will initiate the transfer and the process will avoid constructive receipt, which triggers a taxable event that forces you to include the amount in that year’s taxable income.

College savings via 529 Plans offers tax advantages to the growth of the portfolio. States sponsor these plans, and if the investor lives in the same state as the plan they adopt, the contributions are often tax deductible from state taxes and grow tax-deferred. When you withdraw money, it is tax free for qualified college expenses.

Annuities’ earnings are inherently tax deferred until you withdraw them. Even after maxing out your IRA, you still have the tax status of annuities from which you can benefit. Some annuities have investment options or sub-accounts in which your assets are invested with professional money managers. Even the realized capital gains that occur when you reallocate or the money manager’s profits are tax deferred. There are IRS and insurance company rules that will affect your experience. My role is to help you find the right annuity for your needs.

Additional Tax Strategies

There are additional nuggets in the tax code that you can use in taxable accounts. Let’s look first at investment losses. When you sell an investment at a loss, you can offset taxable gains. If you do not have sufficient taxable gains in a tax year, you can carry the loss forward to future years. Up to $3,000 of loss for a married couple or $1,500 for a single filer can be charged off against ordinary income, too. Whether it’s short term or long term, losses make a difference.

To capture the loss and then repurchase the same holding, you need to be out of the investment for at least 31 days. When reinvesting the proceeds in less than 31 days, IRS Code requires that the securities be substantially different to take the loss. For example, selling a stock ETF and buying a bond mutual fund would be substantially different. Or even selling a large cap growth fund and buying a mid-cap value fund would qualify.

• Dividends and Capital Gains

The source of your investment income and gains dictates how it is to be taxed. Qualified dividends are taxed at a rate equal to the Capital Gains Tax Rate. For example, an investor filing married with an income between $78,751 and $488,850 would pay 15 percent tax while the maximum ordinary income tax rate would be 35 percent.

Short-term capital gains or realized gains on securities held less than one year are taxed as ordinary income. Long-term gains enjoy a reduced rate from 0 to 20 percent depending on your income. Interest from CDs and other bank products as well interest from taxable bonds are taxed as ordinary income.

• Taxation of Bonds

Government-issued bonds enjoy a certain level of tax-free status provided by the constitutional doctrine of intergovernmental tax immunity and confirmed by the U.S. Supreme Court. Municipal bonds issued by cities, counties and states are free from federal taxes, and federal government-issued bonds are free from state and local taxes. Most states also dictate that their issued bonds are tax-free to their residents. You will enjoy a little tax relief while you gain diversification and income.

Tax strategy is as important as your investment strategy — and, ideally, both work well together. Let’s take a look at your portfolio along with your tax strategy. Email me at info@pfswealthgroup.com to start the conversation.

All the best,

Vincent