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Tag: Taxes

Reduce your taxes throughout retirement with the Perennial Income Model™

Posted on by Scott M. Peterson, ChFC®

How can any retiree make a good decision about reducing taxes in retirement, without first mapping out, and projecting a future income stream?

The answer is. . . they can’t. All of us tend to be short-sighted when it comes to making tax-saving decisions. I say short-sighted because we focus on how we can save tax dollars in the current tax year, without giving long-term tax saving moves little thought. For the retiree, a little bit of planning can go a long way in saving future tax dollars.

A comprehensive retirement income plan must consider a lifetime tax reduction strategy that focuses on how today’s decisions to withdraw money from the various types of accounts will impact their tax liability years into the future. The Perennial Income Model™ from Peterson Wealth Advisors projects future income streams for the retiree enabling them to recognize and organize long-term tax-saving opportunities.

Three retirement account tax categories

Before looking at strategies to maximize your lifetime tax savings, you must first understand the categories of retirement accounts and the tax implications of withdrawing income out of each type of account.

Tax-deferred retirement accounts

The money in IRAs/401(k)s and a variety of other company-sponsored retirement saving plans are 100% taxable upon withdrawal unless you use the Qualified Charitable Distributions exception (to be explained). I am likewise going to lump non-IRA annuities into this category. The difference is that only the interest earned on the non-IRA annuity is taxed upon withdrawal, not the entire value of the annuity.

Tax-free retirement accounts

The funds in Roth IRAs and Roth 401(k)s can be withdrawn tax-free.

Non-retirement accounts (after-tax money)

Investments that are individually owned, jointly owned, or trust owned have their dividends and interest taxed annually. They are also subject to capital gains taxation in years when investments are sold at a profit.

Three strategies to reduce your taxes in retirement

At Peterson Wealth Advisors we utilize our Perennial Income Model to provide the organizational structure to recognize opportunities to reduce taxes in retirement. Let’s consider three of these tax-saving strategies:

1. Managing investment income according to tax brackets

Thankfully, your retirement income stream can come from a mix of tax-deferred, tax-free, and non-retirement accounts used in combination to lower your tax liability.

The key is to determine which of the above categories of accounts should be tapped for future income needs, and when. Tax-efficient income streams that are thoughtfully mapped out at the beginning of a retirement be extremely effective to help minimize your lifetime tax burden.  With advanced planning, you can avoid the costly mistakes of conventional wisdom, such as: withdrawing from after-tax and Roth IRAs early in retirement and waiting to tap into taxable IRAs until the Required Minimum Distribution rules mandate withdrawals at age 73. This mistake results in the retiree paying minimal taxes from retirement date to age 73, then paying high taxes and higher Medicare premiums from age 73 until death. The Perennial Income Model shows us that withdrawing some taxable money from IRAs early in retirement levels out the retiree’s tax burden and keeps the retiree from being forced into higher tax brackets once the RMD rules kick in. When you thoughtfully structure your retirement income streams from a variety of tax locations within your portfolios, you can experience a higher standard of living while still paying very low tax rates.

2. Qualified Charitable Distributions

The most overlooked, least understood, and one of the most profitable tax benefits recognized by forecasting income streams through the Perennial Income Model comes as future Qualified Charitable Distributions are planned. Qualified Charitable Distribution, or a QCD, is a provision of the tax code that allows a withdrawal from an IRA to be tax-free if that withdrawal is paid directly to a qualified charity. Charitable contributions are itemized deductions but because of the high personal exemptions associated with today’s tax code, few itemize. Thus, for those that do not itemize deductions, the only way to get a tax benefit by making a charitable contribution is by doing a QCD. The Perennial Income Model becomes a valuable tool to help the retiree to spread their IRA throughout retirement in coordination of their future charitable giving plans.  By simply altering the way contributions are made to charity, you can make the same charitable contribution amounts and reduce your taxes at the same time.

For more details on Qualified Charitable Distributions for the Latter-day Saint retiree, visit here.

3. Roth IRA Conversions

Converting a tax-deferred IRA into a tax-free Roth IRA can be a valuable tool in the quest to reduce taxes during retirement. Unfortunately, few retirees get it right deciding when to do a Roth conversion, deciding how much of their traditional IRA they should convert, or even deciding if they should convert any of their traditional IRAs at all. As advantageous as Roth IRA conversions can be, they are not free! The price you pay to convert a traditional IRA to a Roth IRA comes in the form of immediate taxation. 100% of the conversion amount is taxable in the year of the conversion. For this reason, investors must carefully weigh whether doing a Roth conversion will improve their bottom line.

Without a projection of future income that the Perennial Income Model provides and the subsequent projection of future tax liability, it is virtually impossible to determine whether a Roth IRA conversion is the right course of action. Perhaps the greatest unanticipated benefit that we have observed since creating the Perennial Income Model is its ability to clearly estimate future cash flows and subsequent future tax obligations for our retired clients. Given this information, the decision of whether to do a Roth conversion becomes apparent.

The Perennial Income Model™ as a tax planner

We first designed the Perennial Income Model to provide the structure to reinforce rational decision-making. It started with a focus on helping retirees match their current investments with their future income needs. Now, we see that the Perennial Income Model’s role is much bigger, including providing the structure to be able to see where future tax-saving opportunities can be realized.

To see how the Perennial Income Model can work with your retirement situation, visit PetersonWealth.com to sign up for a complimentary consultation with a Certified Financial Planner™.

Do I Have to Pay Taxes on an Inheritance in Utah?

Posted on by Daniel Ruske, CFP®

Over the course of the relationship with our clients at Peterson Wealth Advisors, it is inevitable that we get to guide the families of our deceased clients through the financial maze of settling an estate. Whether it is the passing of a parent, spouse, or other family member, beneficiaries often question: if, how, and when, the assets they inherit will be taxed. The goal of this blog is to give you a basic understanding of how various types of inheritance are taxed.

Does Utah have an Inheritance Tax?

State inheritance taxes vary widely across the United States. Some states impose an inheritance tax on assets received by heirs, while others do not. The rates and exemptions also differ significantly from one state to another. For instance, Utah is a state that does not impose an inheritance tax. This means that when individuals pass away and leave assets to their heirs, there is no state-level inheritance tax applied in Utah. There are a few states that do have an inheritance tax. It’s essential for individuals to be aware of the inheritance tax laws in their specific state.

Taxes on Inheriting Traditional IRA or 401k Accounts

One category of assets we see is a traditional IRA and 401k accounts. The money in these accounts have been tax-deferred for the life of the original owner, which means income tax has not yet been paid. There are different rules on how a traditional IRA and 401ks are treated at death depending on who is listed as the beneficiary. I will break it down below. 

Spousal Beneficiary

If an IRA holder passes away and has his or her spouse listed as the 100% beneficiary on the account, the beneficiary has the choice to: 

  1. Own IRA – Transfer the decedent’s IRA to their own IRA. Doing this causes no immediate tax consequence and the survivor can then distribute the assets as their own. Taxes are paid on any distribution from the account in the year they are taken. Penalties apply to these distributions if the survivor is under age 59.5 and not eligible for an IRS exception.
  2. Life Expectancy Beneficiary IRA – Transfer the decedent’s IRA to a Life Expectancy Beneficiary IRA (also called Inherited IRA). This option allows the beneficiary to avoid penalties on withdrawals if they are under the age of 5 but requires an annual distribution or Required Minimum Distribution starting either the year after death or the year the original owner would have turned 73, whichever comes later. Required distributions will be covered in more detail below. There is no tax due on the initial transfer from decedent to beneficiary. 
  3. 10-Year Beneficiary IRA – Transfer the decedent’s IRA to a 10-year Beneficiary IRA (also called Inherited IRA). This option also allows the beneficiary to avoid penalties on withdrawals if they are under the age of 5 but has requirements to distribute the account before the 10th year as further described below.
  4. Distribute the Account – With the three options above, there is no immediate taxable event on the transfer of assets. In this option, a spouse listed as a beneficiary of an IRA account liquidates all the money in the IRA and pays taxes on 100% of the account balance in the same year. This is typically only recommended on IRAs with smaller account balances. 

When selecting which option is best for you, make sure to be mindful of your tax bracket to avoid a large tax bill in a single year. Consider consulting a financial or tax professional for assistance.  

Non-Spousal Beneficiary

If an IRA holder passes away and has a non-spouse listed as the beneficiary on the account, the rules are different than when the spouse is listed. The non-spouse beneficiary cannot transfer the account to their own IRA. The assets must be transferred into a new account called a Beneficiary IRA or also called an Inherited IRA. This is very common when a parent passes away. There is no tax due at the time of inheritance if these funds stay in an IRA. However, the IRS does have Required Minimum Distribution (RMD) rules on beneficiary IRA accounts that are different from the RMDs for the original owner. 

  1. If the original owner of the IRA passed away before January 1, 2020, then there will be an annual required distribution that increases each year until the account is fully liquidated. Accounts following this RMD schedule will continue to become less common as 2019 becomes further in the past.
  2. If the original owner passed/passes away on or after January 1, 2020, then the 10-Year Rule applies. The 10-Year Rule states that the owner of the Inherited IRA has no yearly mandatory distribution, but they must withdraw 100% of the account by December 31st of the 10th year after the original owner died. Distributions from an Inherited IRA are taxed as ordinary income. 

Certain exceptions can apply to eligible designated beneficiaries which may allow additional flexibility to the RMD rules. An eligible designated beneficiary is a minor child, someone who is chronically ill or permanently disabled, and individuals who are more than 10 years younger than the original owner. 

Taxes on Inheriting Roth IRA Accounts

Inheriting a Roth IRA account is very similar to a Traditional IRA account. The rules regarding Roth accounts vary depending on the type of beneficiary and required distributions do apply. However, distributions from a Beneficiary Roth IRA (also called Inherited Roth IRA) are tax-free assuming the 5-year rule has been met.

Taxes on Inheriting a Home, Real Estate, and Other Non-IRA Investment Accounts

It is common for decedents to leave non-retirement assets to their beneficiaries. The most common types of non-retirement assets include individual investment brokerage accounts, joint investment brokerage accounts, and real estate. 

To understand the taxation of non-IRA assets you must first understand what the term “cost basis” means. Cost basis refers to the portion of an asset you own that has already been taxed. For instance, if John purchased a stock in his individual brokerage account for $100,000 and it grows to $125,000, John’s cost basis is $100,000 and his capital gain is $25,000. If John sold this asset, a capital gain tax would only be owed on the $25,000 gain and not on the original $100,000 basis.  

Under current law, at the death of the owner of a non-IRA asset, the value of the account receives what is called a “step-up in basis.” This means that any growth (or losses) that have occurred on the asset reset to the fair market value of the asset at the date of death. For example, if John invested $100,000 into an individual investment and it grew to $125,000, his cost again would be $100,000. However, if John passed away without selling the asset, at John’s death his cost basis is “stepped-up” to $125,000. John’s beneficiaries will not have to pay capital gain tax on the $25,000 gain.

The step-up in basis differs for married couples holding property jointly depending on what state you live in. However, in general, the following rules may apply: There are community property states and non-community property states.

Community Property States: 

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.  

When one spouse dies, the asset typically receives a full step-up in basis to its fair market value at the date of the deceased spouse’s death. This means that the surviving spouse’s share and the deceased spouse’s share both receive a step-up on the basis. 

For Example: John and Jane jointly own an asset in a community property state. They bought the asset years ago for $500,000 and it is now worth $1,000,000. If John passes away, the full value of the asset would be stepped-up to the fair market value. Jane’s new basis on the asset is $1,000,000 and she could then sell the asset with little to no tax impact. 

Non-Community Property States: 

In non-community property states, the step-up in basis rules are different from those in community property states. For instance, if the property is held in joint tenancy, the step-up in basis applies only to the deceased owner’s share. When one owner dies, their share of the property receives a step-up in basis to the fair market value at the date of death while the surviving owner’s share retains its original basis. 

For example: John and Jane jointly own an asset in a non-community property state, if John passes away, only his 50% share receives a step-up in basis to its fair market value at the date of his death. Jane’s 50% share retains its original basis. Jane’s new basis on the asset is $750,000. However, it is important to note that Jane now holds the asset individually and will receive a step-up in basis on the full value at her death. 

In my experience, in both community and non-community property states, beneficiaries pay little to no tax on the inheritance of real estate because the basis is stepped up to the fair market value at the date of the second spouse’s death. 

Step-up in basis rules can change over time and tax laws do vary. Please consult an attorney specializing in estate planning and tax matters to understand the specific implications and requirements in your situation.

When does estate tax apply?

Estate tax, also called inheritance or death tax, is imposed on a deceased person’s estate before assets go to heirs. It is calculated on the total value of their assets, minus deductions, and exemptions. 99+% of estates do not pay federal estate tax. However, if your estate exceeds the applicable estate tax exemption threshold, your estate may be subject to estate tax. The exemption laws and amount of the exemption changes over time.

However, the federal estate tax exemption for 2023 is $12.92 million per person, which means that for a married couple, their exemption is over $25 million. If the total value of the estate, including assets such as property, investments, and cash, exceeds the exemption, the estate may owe estate taxes on the amount exceeding the exemption. It is extremely rare for estates under the threshold to pay estate taxes.

Inheritance Taxes: Conclusion

As you can see, there are many ways that inheritances are treated when being taxed. It is important that the beneficiaries understand all the tax liabilities associated with their inheritances and then formulate a plan to reduce the tax burden in their own situation. We find that clients are usually relieved to hear that in most cases there is no initial tax bill due to receive the inherited assets and that they have several options available to distribute retirement assets at a later date.

If you have any questions or concerns about your specific financial circumstances, do not hesitate to contact Peterson Wealth Advisors. Our team is dedicated to helping you find the best solutions to meet your financial goals. Additionally, if you require additional support with estate or tax planning, we can connect you with qualified professionals who can help you with your needs.

Note: The information applies to individuals listed directly as the beneficiary on decendent’s accounts. If a trust or estate, consult an estate planning attorney for the taxability of those assets. This post is not intended to be tax or legal advice. Please consult a professional for your specific situation.

Reduce your taxes throughout retirement with the Perennial Income Model™

Posted on by Scott M. Peterson, ChFC®

“You must pay taxes. But there is no law that says you gotta leave a tip.” -Morgan Stanley

How can any retiree make a good decision about reducing taxes in retirement, or any financial professional recommend a proper course of action, without first mapping out, and projecting a future income stream?

The answer is . . . they can’t. Retirees often end up making only short-term, immediate tax-saving decisions, while missing out on more advantageous, long-term tax reduction opportunities because neither they nor their advisor project income streams across a full retirement. Focusing only on the current tax year ends up costing retirees many thousands of dollars because they fail to recognize, and then to organize, their finances to take advantage of long-term opportunities to reduce taxes.

A comprehensive retirement income plan must consider a lifetime tax reduction strategy that focuses on how today’s decisions to withdraw money from the various types of accounts will impact their tax liability years into the future. The Perennial Income Model™ is the ideal tool to help retirees recognize and organize long-term tax-saving opportunities to keep more of their wealth.

Three retirement account tax categories

Before looking at strategies to maximize your lifetime tax savings, you must first understand the categories of retirement accounts and the tax implications of each. How your investments are taxed depends on the type of account in which they are held. There are three categories of accounts to consider:

Tax-deferred retirement accounts

The money in IRAs/401(k)s and a variety of other company-sponsored retirement saving plans are 100% taxable upon withdrawal unless you use the Qualified Charitable Distributions exception (to be explained). Non-IRA annuities can likewise be lumped into this category with the exception that only the interest earned on the non-IRA annuity is taxed upon withdrawal, not the entire value of the annuity.

Tax-free retirement accounts

The funds in Roth IRAs and Roth 401(k)s can be withdrawn tax-free.

Non-retirement accounts (after-tax money)

Investments that are individually owned, jointly owned, or trust owned have their dividends and interest taxed annually. They are also subject to capital gains taxation in years when investments are sold at a profit.

Three strategies to reduce your taxes in retirement

At Peterson Wealth Advisors we use our Perennial Income Model to provide the organizational structure to recognize and benefit from major opportunities to reduce your taxes. Let’s consider three of these tax-saving strategies that can benefit you in retirement:

1. Managing investment income according to tax brackets

Thankfully, your retirement income stream can come from a mix of tax-deferred, tax-free, and non-retirement accounts used in combination to lower your tax liability. Even though income stemming from tax-deferred accounts is 100% taxable, Roth IRA funds can be withdrawn tax-free and money coming from non-retirement accounts hold investment dollars that can oftentimes be withdrawn with limited tax consequences.

The key is to determine which of the above categories of accounts should be tapped for future income needs . . . and when. Tax-efficient income streams that are thoughtfully mapped out at the beginning of a retirement, as we do with the Perennial Income Model, can be extremely effective to help minimize your lifetime tax burden.  With advanced planning, you can avoid the costly mistakes of conventional wisdom: paying almost zero tax from retirement date to age 72, then paying high taxes and higher Medicare premiums until death. The Perennial Income Model shows us that it is better to pay minimal taxes from retirement date to age 72, along with how to be able to pay minimal taxes and minimal Medicare premiums from age 72 to death. When you structure your retirement income streams from a variety of tax locations within your portfolios, thoughtfully planned out, you can experience a higher standard of living while still paying very low tax rates.

2. Qualified Charitable Distributions

The most overlooked, least understood, and one of the most profitable tax benefits recognized by forecasting income streams through the Perennial Income Model comes from the use of Qualified Charitable Distributions. A Qualified Charitable Distribution, or a QCD, is a provision of the tax code that allows a withdrawal from an IRA to be tax-free if that withdrawal is paid directly to a qualified charity.  Our clientele consists of retired people who regularly donate generous sums to charities. By simply altering the way contributions are made to charity, you can make the same charitable contribution amounts and reduce your taxes at the same time.

The ability to transfer money tax-free from an IRA to a charity has been around for a while, but the doubling of the standard deduction from the 2018 Tax Cuts and Jobs Act, was the catalyst that brought this valuable benefit to the forefront. With larger standard deductions, only 10% of taxpayers itemize deductions. Here is the catch: you only get a tax benefit from making charitable contributions if you itemize your deductions, and with the higher standard deduction, fewer of us will be itemizing. So, a 65-year-old single taxpayer, with no other itemized deductions, could end up contributing up to $13,000 and a 65-year-old couple could end up contributing up to $27,000 to charity and it would not make any difference on their tax returns, or their tax liability, because both generous charitable contribution amounts were lower than the standard deduction. So, they will just end up taking the standard deduction. Another way of saying this is that these charitable donors will not receive a penny’s worth of tax benefit for giving so generously to charity.

Doing a direct transfer of funds to a charity by doing a QCD versus the traditional writing a check to a charity, can restore tax benefits lost to charitable donors. QCDs are only available to people older than age 70 1/2, they are only available when distributions come from IRA accounts, and a maximum of $100,000 of IRA money per person is allowed to be transferred via QCD to charities each year.

3. Roth IRA Conversions

Converting a tax-deferred IRA into a tax-free Roth IRA can be a valuable tool in the quest to reduce taxes during retirement. Unfortunately, few retirees get it right deciding when to do a Roth conversion, deciding how much of their traditional IRA they should convert, or even deciding if they should convert any of their traditional IRAs at all. Without a projection of future income that the Perennial Income Model provides and the subsequent projection of future tax liability, it is virtually impossible to determine whether a Roth IRA conversion is the right course of action. Perhaps the greatest unanticipated benefit that we have observed since creating the Perennial Income Model is its ability to clearly estimate future cash flows and subsequent future tax obligations for our retired clients. Given this information, the decision whether to do a Roth conversion becomes apparent.

As advantageous as Roth IRA conversions can be, they are not free! The price you pay to convert a traditional IRA to a Roth IRA comes in the form of immediate taxation. 100% of the conversion amount is taxable in the year of the conversion. For this reason, investors must carefully weigh whether doing a Roth conversion will improve their bottom line.

Too much of a good thing usually turns a good thing into a bad thing. So, it is with Roth conversions. Excessively converting traditional IRAs into Roth IRAs without fully considering the tax consequences, can cause some investors to pay more tax than they otherwise would if they didn’t do a Roth conversion in the first place. So, it’s important to recognize when, and when not, to do a Roth conversion.

The Perennial Income Model™ as a tax planner

We first designed the Perennial Income Model to provide the structure to reinforce rational decision-making. It started with a focus on helping retirees match their current investments with their future income needs. Now, we see that the Perennial Income Model’s role is much bigger, including providing the benefit of reducing your taxes throughout the entirety of your retirement.

How Tax Withholding Affects Your Tax Refund

Posted on by Daniel Ruske, CFP®

Every year, around March and April, we begin to hear people talk about the big plans they have to spend their anticipated tax refund. Some plan vacations to various destinations around the world, others plan to pay off debt, or add to their savings. All too often, this anticipated windfall turns into an unwelcomed tax bill to the IRS.

We have found that many individuals may not know what goes into calculating their yearly income taxes and why they may or may not get a tax refund. This article will serve as a simple reminder of the fundamental components that determine your tax refund.

What Does it Mean When Taxes are Withheld?

Tax refunds are not gifts from the government that you receive for filing your taxes. They are a return of your dollars that you have overpaid in taxes during the year. In most cases, when you receive some form of taxable income whether it be from a pension, Social Security, or a distribution from a retirement account, a portion of your payment goes directly to the IRS, or toward paying your state income taxes. This is known as withholding. So, tax withholding is money that goes directly to the IRS.

What are Tax Refunds?

You, the taxpayer, controls how much of your payment goes towards paying the IRS and the state. Due to tax deductions, tax credits, or a miscalculation, a household may over or under withhold the required yearly income tax they owe. An over payment of taxes will result in a tax refund, and an under payment will result in owing a tax liability. So, you, not the IRS or your state government, decide whether you get a refund each year because you determine how much is withheld from each paycheck.

The amount of your tax refund or liability received at the end of the year is not a good indication of your total yearly income tax liability. For example, a large refund does not mean your taxes are low, and having to write a check to pay state and federal tax does not mean your taxes are high. Receiving a refund or paying a liability is a reconciling of the income tax dollars you are required to pay.

Tax Withholding

Tax withholding can be adjusted on income from Social Security, pensions, distributions from IRAs, and salaries. You can also make an estimated quarterly payment directly from your checking account. So, if a person is looking for a large tax refund, they should increase the amount of taxes that are withheld throughout the year and the IRS will return it to them in the form of a refund.

Does it Matter if I Over-withhold or Under-withhold?

What happens if you withhold too much on taxes?

In most cases, the goal is to withhold taxes in the amount that will result in as small of a refund, or tax liability as possible.

However, incomes, salaries, and laws can all change throughout the year making it difficult to achieve the goal of a net zero tax refund or tax liability.

So, is it better to overpay taxes during the year and get a refund? The answer… it depends. It comes down to preference. Individuals who prefer to receive a tax refund check during tax season should look to over-withhold. Individuals who prefer to have extra cash throughout the year, even if that means paying a tax bill come tax time may prefer to under-withhold.

There are two extremes that help explain the concept of withholding and tax refunds.

  • Under-withholding: A couple has a taxable income of $81,050 in 2022 and withholds nothing. Their paychecks will be higher throughout the year, but when they file their taxes, assuming no penalty applies, they will owe a federal tax bill of $9,315.
  • Over-withholding: A couple has the same taxable income of $81,050 in 2022 and withholds $14,315. Their paychecks throughout the year will be lower since a higher portion is going to tax withholding. Instead of owing $9,315 at the end of the year, they will receive a refund of $5,000 because they over withheld.

It is important to understand that, assuming no under-withholding penalty applies, over or under-withholding taxes throughout the year does not result in a larger or smaller total tax liability. The only difference is the timing of when the taxes are paid.

When do Underpayment Penalties Apply?

You may be thinking, “Well if the timing of my tax payments doesn’t impact the amount of total tax I pay, then I won’t withhold anything all year and invest the tax payments in a high yield investment account. I can then pay my full tax bill at the end of the year and keep the interest I earn.” This can be a reasonable strategy assuming two things.

First, you don’t lose money in your investment over the course of the year, and second, you don’t pay more in underpayment penalties than you make in interest. In most cases, you can avoid an under-withholding penalty if you withhold at least 90% of the tax due for the current year, or if you withhold 100% of the previous year’s tax liability.

You Owe What You Owe

Whether you are looking for a tax refund, or you prefer to not give the government an interest free loan and plan on paying your tax liability every April, you can rest assured knowing that as long as you satisfy the minimum withholding requirements, your total tax obligation will be the same.

The SECURE ACT: Tax Law Changes for IRA’s that Impact Retirees

Posted on by Scott M. Peterson, ChFC®

As 2019 came to a close, the president signed into law a sweeping series of changes that will affect how we save for retirement as well as the distribution of IRA proceeds. The new law is officially entitled the Setting Every Community Up for Retirement Enhancement Act, but it is more commonly known as the SECURE Act. This new law includes both welcome changes as well as some controversial elements. As I said, the changes brought about by the SECURE Act were sweeping, but I am only going to highlight those changes that impact the retiree.

First, let’s address the more controversial parts of the law. There is a change to the rules that govern inherited IRAs, or so-called stretch IRAs.

Stretch IRAs

Previously, if you inherited an IRA, you were allowed to take distributions from the retirement account over your life expectancy. That is to say, a healthy 40-year-old person who inherited an IRA from their parents or grandparents could withdraw the funds over several decades.

While there are exceptions for spouses, minor children (until they reach the age of majority), disabled individuals, the chronically ill, and those within 10 years of age of the decedent, the new law requires that you withdraw the assets from an inherited IRA account within 10 years if the decedent passed away after December 31, 2019. There are no changes to inherited IRA accounts for those who died prior to 2020.

In the past, we have commonly recommended that an IRA participant’s spouse be listed as the primary beneficiary and the children be listed as secondary beneficiaries (not the family trust). This, most likely, may still be your best option, but the new law makes listing the children individually as beneficiaries less tax advantageous than before the new tax law went into effect. We look forward to discussing alternatives with you to make sure your family has the right beneficiary designation going forward.

Long Overdue Changes:

While the law governing stretch IRAs is creating challenges, there are also big, positive changes that we believe are long overdue.

  1. If you turned 70½ after January 1, 2020, the initial required minimum distribution (RMD) for a traditional IRA is being raised from 70½ to 72. Those who turned 70½ prior to January 1, 2020, are still required to take RMDs based on the old rules.
  2. You may now contribute to a traditional IRA past the age of 70½, if you are working and have earned income. Previously you were unable to make IRA contributions past age 70½.
  3. Many of you donate to charity directly from an IRA by making a Qualified Charitable Contribution (QCD). Now, even though some of you will not have RMDs until age 72, you are still able to donate to your charities using a QCD starting at age 70½.

Hopefully, this sheds some light on the parts of the SECURE Act that most likely apply to your situation. We appreciate the trust you have placed in us and we look forward to answering any additional questions that you might have.

Peterson Wealth Advisors has taken the academically brilliant idea of time segmentation and transformed it into a practical model of investment management that we call “The Perennial Income Model™”. To get a better understanding of the Perennial Income Model™ you can request our book “Plan on Living, a Retirees Guide to Lasting Income and Enduring Wealth”. For specifics on how the Perennial income Model™ could be applied to your retirement income plan, schedule a complimentary consultation with one of our Certified Financial Planner™ professionals. 

How the CARES Act Impacts Retirees

Posted on by Scott M. Peterson, ChFC®

We are all on information overload these days, so I am trying to only share information with you that is pertinent and that directly impacts your situation as a retiree.

Our government sprang into action this past week to create an unprecedented stimulus package to combat the financial effects of the coronavirus. The new law resulting from this stimulus is called the Coronavirus Aid, Relief, & Economic Security Act or the CARES Act. The CARES Act covers a lot and it contains provisions that are designed to benefit individuals as well as businesses. I think it is important for you to understand some of the major provisions of this new law but the following is not intended to be an all-encompassing review of the CARES Act. I simply want to outline those provisions of the stimulus package that most impact retirees.

  1. Eligible taxpayers will receive a tax rebate check. The amount of the tax rebate is $1,200 per person plus $500 per dependent child. The amount of the check is reduced by a phaseout provision for individuals who made over $75,000 and couples that made over $150,000 last year, or in 2018 if you have not filed your 2019 taxes. Starting in May, you should begin to see this money deposited in the checking account that receives your tax refund or into the account where your Social Security check is deposited. If the government has no checking account on file for you, you will receive a check in the mail. Please be careful of scams! Nobody from the government will be calling or emailing you regarding this rebate!
  2. Many retirees begrudgingly take money that they don’t need out of their IRAs once they are age 72 (previously was age 70.5) because the required minimum distribution rules stipulate that they such a distribution. The CARES Act has eliminated the IRA required minimum distribution requirements in 2020. Retirees who have taken required minimum distributions within the last sixty days can redeposit their RMD to eliminate the tax on those distributions. For retirees who donate to charity: It can still be advantageous to make charitable contributions directly from your IRA to your charity even though there is not a required minimum distribution obligation in 2020.
  3. The tax filing deadline has been extended from April 15th to July 15th. This means that the date to make 2019 contributions to IRA and HSA accounts has also been extended to July 15th.

There are additional provisions and benefits associated with the CARES Act for those that have contracted the virus, have a spouse that has contracted the virus, or if you have lost your job as a result of the coronavirus. I won’t mention those benefits here but you should be aware that they exist if you are unfortunate enough to fall into this category.

Strategic Opportunities in a Market Decline

Posted on by Scott M. Peterson, ChFC®

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill

As I watch the emotional reaction of investors during market turbulence, I concur with Churchill as I see individual investors categorize themselves into two separate camps. They are either victims or they are opportunists.

Beyond reminding the self-prescribed investment victim of the overwhelming historical evidence of the resiliency of the stock market, there is little that can be done to save them from themselves as they panic and sell as markets decline. Therefore, let’s not waste our time discussing how to rescue the lemmings as they throw themselves off a cliff

Let us focus instead on the positive steps that can be taken by an investment opportunist when stock markets retreat. There is so much that can and should be done in every financial crisis. The prepared opportunist can turn today’s temporary stock market lemon into tomorrow’s lemonade.

An investment opportunist recognizes that every downturn is temporary, every bear market is eventually followed by a bull market, and that the stock market will eventually go on to reach new record highs. There has never been an exception to this pattern, only the timing and duration of the bear and bull markets is uncertain.

Six ways to take advantage of a temporary market downturn:

1. Roth IRA Conversion

A traditional IRA will someday be taxed while a Roth IRA grows tax-free. Therefore, Roth IRAs are more advantageous to own than traditional IRAs. You can convert a traditional IRA to a Roth IRA, but you must pay income tax on the entire amount of the traditional IRA that you convert. So, let’s say you own 10,000 shares of ABC stock that are priced at $10 per share. The value of your investment is therefore $100,000. If you were to convert these 10,000 shares at the $10 price you would need to pay income tax on the $100,000 converted to a Roth IRA.

In a down market, an opportunist would realize that his ABC stock is now only worth $7 per share. If he were to convert all 10,000 of his shares that are now worth only $70,000, he would only have to pay tax on the $70,000 Roth conversion, not the full $100,000. When the price of ABC stock rebounds to $10 per share our optimists would have $100,000 worth of Roth IRA value but they would have paid tax on $70,000 worth of Roth IRA conversions.

2. Refinance Your Mortgage

When the stock market recedes, it is common for the Federal Government to step in and attempt to jump-start the economy. They do this is by reducing interest rates. This move will often temporarily reduce mortgage interest rates. The opportunist would jump at the chance to refinance their mortgage because a thirty-year, $300,000 mortgage with a 3.5% interest rate costs $60,000 less over thirty years than the same mortgage with a 4.5% interest rate.

3. Fund IRA/Increase 401(k) Contributions

An easy way to take advantage of a temporary market downturn is to contribute additional funds to retirement accounts. We have all heard the maxim, “buy low, sell high”. Well, then buy when equities are selling at a discount.

Some of you will remember the years 2000-2009 which was the worst decade for investing since the great depression. Large stocks ended the decade at the same levels that they began the decade. That’s right, ten years with zero growth. The pessimist would say, “I am glad, or I wished, that I missed out on that disaster”. Meanwhile, for the opportunist, this decade was a wonderful investment opportunity! As markets went down the opportunist systematically purchased depleted equities in their 401(k)s and IRAs at a substantial discount. These once depleted shares are now worth 400% of their 2009 value and that’s taking into consideration the latest downturn.

Those who make annual contributions to retirement accounts should contribute when markets plummet. Those who systematically contribute to 401(k)s should consider reallocating conservative investments within their 401(k)s to equities and/or increasing their 401(k) contribution rates.

4. Rebalance Your Portfolio

There is proven value and additional security when investors diversify their investments. Few would argue that diversifying or creating the proper mix of investments to accomplish specific goals is important. The challenge is keeping portfolios diversified. As markets fluctuate, portfolios get out of alignment as top-performing investments become a bigger allocation and underperforming investments shrink to a lesser allocation of the original portfolio mix. Rebalancing brings the investments back to the original mix. The process of rebalancing requires buying and selling securities which ofttimes create unwanted taxable gains. Rebalancing can be accomplished during market downturns with greater tax efficiency because the capital gains incurred are less as depleted equities are sold.

If it so happens that your rebalancing requires purchasing equities to bring your portfolio back to its original composition, then rebalancing adds additional value as temporarily beaten up equities are purchased at discounts.

5. Tax Loss Harvesting

Let’s say that Clara bought a mutual fund three months ago for $100,000. Because of the recent slide in equities, this investment is now only worth $80,000. Clara could simply hold on to that investment and wait for it to rebound to $100,000. There would not be any tax benefits or consequences by waiting for the depleted shares to rebound.

However, Clara is an opportunist and hates paying income taxes. She decides to sell the diminished investment and create a $20,000 capital loss which would benefit her taxwise. She then invests the $80,000 into a very similar investment to that which she sold and when the market rebounds she would still have the $100,000 of value plus a $20,000 capital loss that could save her several thousand dollars in income taxes.

6. Invest Excess Cash

The most important criteria to consider when deciding how to invest is time horizon, or how long money can be invested until it is needed. Money that will be required in the next five years for a purchase or for income should not be invested in equities because of the short-term volatility that accompanies the stock market. Money needed between five to ten years should be moderately invested into a mix of equities and fixed-income investments. Money that will not be needed for ten years and beyond should be invested in equities to help fight inflation. Market corrections provide opportunities to reassess portfolios and put money that is on the sidelines to work.

A Concluding Thought

The richest men in the world, from every generation, did not get that way by betting against the ingenuity and indomitable spirit of the human race to create a better life for itself. Successful investors have always been richly rewarded for their willingness to invest in the future. This generation is no exception. Today’s optimists, or those willing to invest a better tomorrow, are thriving.

3 Strategies to Deal with your RSU Tax Bomb

Posted on by Mark Whitaker, MS, CFP®, CRPC

An old friend of mine works for a technology company in Utah. The company was recently acquired, and he will receive $1,000,000 from the company’s Restricted Stock Unit Plan. He is already in a high tax bracket from his regular income and his RSU payout will only compound his tax problems. He stands to lose between 40-45% of his RSU payment to taxes!

So how does one deal with the RSU payment tax bomb?

A little bit of proactive tax planning can go a long way to help you keep more of your RSU benefit now and help you secure your future.

3 strategies for reducing the tax hit from your RSU payment

1. Max out your 401k contributions

This idea is simple, so simple in fact that many people will probably overlook it. For 2025 you can contribute $23,500 on a pre-tax basis, and an extra $7,500 on top of that if you are over age 50. If you are not on track to max out your 401k, talk with your HR department to make the switch. In the year you receive your RSU payment, you will want to make sure that your 401k contributions are happening on a pre-tax basis. Roth 401k contributions may have made sense in past years, but it will not be your best option in the year of an RSU payment.

2. Fund a 529 education account for each of your children

Utah offers a 5% tax credit for contributions up to $4,000 per qualified beneficiary. This means you can get a $200 tax credit for each child. With a 529 account, you are not only reducing your taxes this year, but all the growth is also tax free and will be tax free when it is taken out to pay for college down the road.

3. Pre-pay multiple years of charitable donations

This is the most powerful tax reduction strategy available through the use of a Donor Advised Fund. A donor advised fund, or DAF for short, is like a charitable investment account that holds your charitable dollars until you ultimately decide where you want those charitable dollars to go. The value of the DAF is that you will receive a tax deduction in the year when you need it most and the money you donate to the DAF can then be parsed out in future years to pay church donations or to support other charitable causes in the community.

The funds can even be used to pay for the missions of your children and even grandchildren! Another unique benefit of a donor advised fund is that the money that is placed in the fund can be invested. This means your initial contribution to the DAF can potentially grow to enhance the future value of your contribution to your charities.

One last piece of advice: buying a product is not the solution, having a plan is. There are plenty of salesman who are eager to earn a commission by selling you a product, but what you really need is a plan. At Peterson Wealth Advisors we have been helping successful professionals and retirees with complex financial planning decisions since 1986. Click here to learn more and schedule a complimentary consultation to review your situation with one of our experienced advisors!