Tax Planning and Investment Management
Is your investment advisor causing you to pay more taxes than is necessary?
Is your tax advisor thinking only about your taxes and not necessarily about your long-term wealth creation?
We strive to dovetail together those two disciplines – tax planning and investment management – so as to achieve the best results possible for you.
We Provide Solutions With Your IRA Rollovers
What are some of the things that can happen if you don’t correctly handle transactions with your retirement accounts? For example, if you use the wrong terminology regarding IRA transactions, you could make mistakes. You could lose tax deferral status for your hard-earned savings for retirement. You could be forced to pay out unnecessary tax penalties.
We can help you avoid those types of problems.
Here’s a list of some common questions regarding IRA rollovers:
- What is a rollover?
- What is a trustee-to-trustee IRA transfer?
- How is a transfer different from a rollover?
- What are the purposes of doing a rollover?
- What’s the difference between a direct rollover and an indirect rollover?
- What are the rules that govern rollovers?
- What should I do before initiating a rollover or transfer?
- What amounts are eligible for rollover?
- What should I do if I am a non-spouse beneficiary of an inherited IRA?
- What should I do if I have made a mistake with an IRA rollover?
If you have issues with any of these types of questions, give us a call. My team and I would be glad to help you. Our mission is to assist you in turning your retirement dreams into reality through proven, time-tested tax planning and investment solutions.
Rollover of Company Stock
It’s not always a good idea to rollover company stock from a 401(k) plan to an IRA. In fact, doing so might mean you pay more in taxes to Uncle Sam than necessary.
If company stock held in an employer-sponsored 401(k) plan has appreciated, the difference between the amount paid for shares (the cost basis) and the current value of those shares is known as net unrealized appreciation (NUA). For instance, if an investor paid $10 a share for 1,000 shares ($10,000) for stock that is now worth $15 a share, then the investment is worth $15,000, and the NUA is $5,000.
If the shareholder completes a rollover from a 401(k) plan to an IRA, those shares of company stock will be liquidated, along with the other assets in the account, and moved to an IRA where the assets will have an opportunity to continue growing tax-deferred. When the assets are distributed from the IRA, they may be taxed as ordinary income. If the investor is in the 28 percent tax bracket, the taxes owed would be about $4,200.
There is an alternative that could be a better choice tax-wise. An investor can request company stock be distributed in-kind and sent to a taxable account. The stock is not liquidated. The shares are moved to the new account. The investor may owe ordinary income taxes (and penalties if he or she is not yet age 59½) on the cost basis ($10,000). However, the net unrealized appreciation ($5,000) will not be taxed until the shares are sold. Taxes on the cost basis would be about $2,800.
If the investor takes a distribution right away, and the shares have been held for more than one year, the proceeds may be taxed at the long-term capital gains tax rate, which is currently lower than the ordinary income tax rate. If the investor is in the 15 percent capital gains tax bracket, another $750 would be owed in taxes. In this example, the investor could save about $650 in taxes overall.
Please keep in mind this is a hypothetical example and is not representative of any specific situation. Each investor is unique and your results may vary. Executing an NUA strategy seems pretty straightforward, but it can be tricky and not everyone is eligible.
If you would like to learn more, please give us a call and Ron would be glad to meet with you to explain more about this and other useful tax strategies.
How We Helped a Couple Save a Lot in Taxes
“I want to pay off our debts with some of the money from my 401(k) rollover.”
On the surface, that sounded like a noble plan for *Jim and Peggy (not their real names). After all, one of our core values is a debt-free retirement, and we look for ways to make this a reality for folks. Debt is, more than anything else, the enemy of wealth.
Jim and Peggy had worked very hard and had sacrificed a lot over the years as they were raising and launching their children. They had not lived extravagantly at all, but they did have a new car loan and a bank loan. Now that Jim was retiring and was looking at a rather large 401(k) nest egg, he wanted to use a portion of it to get rid of all their indebtedness right away.
A lot of financial advisors who don’t have a direct affiliation with CPAs and tax planners could easily have just gone right ahead with Jim and Peggy’s plan: take out the necessary cash to get rid of the debt and invest the rest.
In contrast, we look carefully at the tax consequences related to investment management and how tax issues impact your overall financial plans. Through our close relationship with the tax professionals at Dickinson & Clark CPAs (we are under the same roof together), we looked for ways to help Jim and Peggy pay a lot less in taxes.
I consulted with one of the CPAs who is part of the CPA firm regarding Jim and Peggy’s situation. He looked at their 2013 tax return and ran a projected tax analysis for 2014 about how much it would actually cost Jim in taxes if he were to take out a large distribution this year. His analysis demonstrated how it would impact the couple to add a large sum to their taxable income for 2014. Then he developed a tax projection for them if they were to wait until the next tax year to take a distribution. In their case, paying off their debt next year when they would be in a lower tax bracket could save them a nice amount of money.
As I explained the tax analysis to them, Jim and Peggy decided to cut back on their monthly expenses for the few remaining months of this year so as not to take out the large distribution this year. They were still committed to paying off their debts as soon as they could, but they clearly recognized the benefits of not tapping in to Jim’s retirement assets to do so right away.
In conclusion, we recognize that this case may not be typical for all clients, and your experience may vary from this as you work with us. However, we would be glad to demonstrate how you too can reap the benefits of our approach to integrating your retirement planning, tax planning, and investment management.
[*Jim and Peggy are fictional names, but they represent the kind of clients we serve.]
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]