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Roth Conversion – A valuable tool to consider before year-end

By:  Scott Fain

This year has been a challenge for many, and though we are certainly not out of the woods yet with the Coronavirus, the election, and other factors, many are glad to see the end of 2020 coming soon.  During these times, planning must go on.  As we move into the fourth quarter, it is a good time to evaluate the potential for Roth conversions before year-end.  

Roth conversions allow you to convert funds currently held in tax-deferred traditional IRAs to Roth IRAs, which then grow tax free.  Currently there is an income limitation and an annual maximum for direct contributions to a Roth IRA, but there are no limits on Roth conversions.  The process of converting the IRA to a Roth IRA involves recognizing the amount of the conversion as income in the current year.  Though an important tool to consider every year, 2020 offers particular opportunities.

Roth Conversion Considerations in 2020:

  1. Annual Required Minimum Distributions (RMDs) have been waived this year.  Roth conversions could be processed in the amount of the otherwise planned income from the waived RMDs.
  2. Various industries have seen lost wages and unemployment during 2020 due to the Coronavirus.  During this unfortunate time that many people have lower income, Roth conversions can be considered to take advantage of the lower tax bracket for the year.
  3. The current tax rates are set to sunset in 2025, unless Congress acts to change that.  Given the stimulus package this year along with other factors, there is certainly reason to expect that Congress will allow those rates to return to pre-2018 levels.  Roth conversions could be utilized to lock in today’s tax rates.

Other Considerations:

  1. Bracket Conversions – A common approach is to look at your current marginal tax bracket and your expected income to identify the amount of room allowable for additional income in that bracket.  For example, a married filing jointly couple with $250,000 in taxable income in 2020 could convert up to $76,600 and remain in the 24% tax bracket.  This can be evaluated each year to fully utilize the current tax bracket, without pushing into the next bracket.  Note – it is important to consider the impact on Medicare premiums, taxability of Social Security, and the trigger of the 3.8% net investment income surtax.
  2. Secure Act – As a result of The Secure Act enacted in January of this year, most non-spouse beneficiaries of IRAs will be required to distribute the funds out of the accounts within ten years.  Prior to the Act, most of those non-spouse beneficiaries would have been able to distribute the balance over their lifetimes.  This change can have a significant impact on the taxation of the income, as the distributions over a shorter period will often push the beneficiaries into higher tax brackets.  Consideration should be given to utilizing the account owner’s tax bracket through Roth conversions to transfer that balance to tax free accounts for the beneficiaries.
  3. Tax Surprises – An important part of retirement income planning often involves leveling out income.  It is often overlooked that, in addition to the impact on marginal tax brackets, spikes in income can cause increases in Medicare premiums and the taxability of Social Security benefits.  For a married couple, these increases can be further magnified by the death of the first spouse to die.  The change from the married filing jointly tax rate schedule to the single schedule can cause the rates to increase more rapidly at lower breakpoints.  Utilizing systematic Roth conversions, particularly prior to the start of RMDs, can be an effective tool to level income.
  4. Open the Door for Backdoor Roth Contributions – Roth conversions can be utilized to “zero out” existing IRA balances to allow for back door Roth contributions.  As mentioned previously, there are income limitations and annual maximums for direct contributions to Roth IRAs.  However, the backdoor Roth Contribution can be an effective strategy for higher income individuals wanting to contribute to their Roth IRAs.  This involves contributing after-tax dollars as a non-deductible contribution to your traditional IRA, and then immediately converting those funds to your Roth IRA.  Again, the income limitations do not apply to the conversions.  This strategy works best when a client has no current IRA balance.  Otherwise, the conversion is considered to be proportional across all IRA dollars and will cause taxation and cost basis tracking going forward.  The initial conversion of the IRAs to Roth IRAs simplifies the process.
  5. Leave Room for Charity – Clients who are charitable should take into consideration their future charitable intentions.  Portions of IRAs planned for qualified charitable distributions (QCDs) should NOT be converted to Roth IRAs.

It is important to note that there is no one-size-fits-all investment strategy, retirement plan, or Roth conversion recommendation.  Decisions can often have unintended consequences that should be considered.  If you have questions or want to know if a Roth conversion would be a good fit for you, please discuss the concept with your financial and tax advisors.

www.CapSouthWM.com

Investment advisory services offered through CapSouth Partners, Inc., d/b/a CapSouth Wealth Management, an independent Registered Investment Advisory firm.  CapSouth does not offer tax or legal advice.  Please consult your tax or legal advisor before making decisions that may have tax or legal consequences. This article is of a general nature only and should not be construed as individual advice.

Which is Right for Your Financial Future? Broker-Dealer vs. RIA

By: Amy Kennedy – Does your financial advisor work at a Registered Independent Advisor (RIA) or a broker-dealer? Do you know the difference?  If not, you are not alone, but you should be aware.  The differences are important when considering your financial future.  Perhaps the most important factor is one that many people are unaware of, whether the financial professional they work with is legally obligated to make recommendations that are in their best interest (not just suitable recommendations).  This legal obligation is referred to as a fiduciary duty.  Let’s review the differences so you can be confident that your financial future is in the right hands.

Investment professionals typically fall into two broad categories: advisors that work at a Registered Investment Advisory (RIA) firm and broker-dealers representatives that work at a brokerage firm.

Broker-Dealers

Examples of Broker-Dealers are Morgan Stanley, Merrill Lynch, and Wells Fargo. These firms are often referred to as “full-service brokerages”.  They generally offer a wide range of financial products and their brokers are usually incentivized to cross-sell these products. For the consumer, one advantage of this is they have access to a wide range of products through one broker.  The downside for the consumer is that many of the products come from the broker-dealer and may not be the best fit for them. Broker-dealers are held to what is referred to as a suitability standard when offering financial and investment advice. In this case, the broker only must provide recommendations that they believe are appropriate given a client’s situation; they do not have to recommend what they believe is the best option. Most investment professionals operating under the suitability standard are known as registered representatives and their oversight is through a self-regulatory organization called the Financial Industry Regulatory Authority (FINRA).

Independent Registered Advisors (RIAs)

A registered investment advisory (RIA) firm is usually comprised of a small number of financial advisors that offer clients investment advice and often other services such as financial planning and estate planning. An investment advisor representative working within a registered investment advisor (RIA) is a fiduciary. They are legally required under the Investment Advisers Act of 1940 to act in the best interests of clients.  This means client interests come before their own interests, conflicts of interests should be avoided to the extent possible, and, where a conflict of interest exists, it must be disclosed. RIAs are monitored by the Securities and Exchange Commission (SEC). The fiduciary duty is the highest standard of care under U.S. law

 Hybrid Advisor

Some investment professionals operate within a hybrid model.  A hybrid advisor conducts business with clients that is both fee-based and commission-based, and they are usually registered with the SEC and FINRA.  A hybrid advisor may or may not be a fiduciary and may operate in both capacities depending upon the service or product being considered.

How Your Advisor is Compensated

In addition to the fiduciary standard, another major difference in RIAs and broker-dealers is the way they are compensated. RIAs typically charge their clients a fixed percentage of assets under management or a set dollar amount. Broker-dealers often receive a high percentage of their compensation through commissions based on the investment products they recommend and sell and through incentives from cross-selling other products and services available within their company.

Which to Choose?

Hopefully this information serves as a guide in choosing the financial professional that is right for you.  When deciding, ask yourself this question, “Do you want to receive advice that’s objective and based solely on what’s best for you and your financial situation, or do you want to receive advice that could be influenced by how the advice financially benefits the financial professional?”

If you have questions about the differences in RIAs and broker-dealers, give us a call at 800.929.1001 or visit our website at www. CapSouthWM.com or https://capsouthwm.com/about-us/fiduciary/ to read more about the Fiduciary Standard. 

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent Registered Investment Advisory firm. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

The Cost of Medical Care

When uninsured people end up in the hospital, “sticker shock” can follow. Just a quick look at the current medical care prices for procedures can be sobering.

How much does a CT scan cost? Between $250 to $1,500, depending on where it is performed. Need a stent in your heart? The average cost of that delicate procedure is now close to $20,000. How about a knee replacement? That surgery may run anywhere from $15,000 to $35,000.1,2

Are these the only costs associated with a hospital or outpatient visit? Not quite. Think of the cost of the room, the medications, the anesthesia. Fortunately, many Americans have health coverage, so they only have to pay a fraction of the expenses linked to these and other procedures. Those without health coverage may find themselves in financial pain.

These days, you may take a big financial risk if you go without health insurance. Just one accident or one surprise trip to the hospital, and you may be left with a debt rivaling an auto loan.

If you need to pay for your own health coverage, the cost may be well worth it. Imagining that you can go without it for the next five or ten years may not be realistic, even if you are a millennial or a member of Generation Z just leaving college. You might have a five-figure debt already; could you handle another one, perhaps, with little or no warning?

Just how much does it cost to self-insure? Well, here is one estimate. According to the Kaiser Family Foundation (KFF), a hypothetical 40-year-old non-smoker making $30,000 per year is projected to pay an average of $492 per month for a benchmark health insurance plan for 2020. That works out to $5,904 for a year. The KFF reports, though, that the monthly cost could fall to as little as $199 with the help of a premium subsidy via federal or state government. This year, the mean monthly cost of a Silver plan after a premium subsidy is $207.3

Here is another projection. Looking at the 38 states in which residents buy coverage through Healthcare.gov, Investopedia calculates the average monthly cost of a benchmark plan at $413 for a hypothetical healthy 27-year-old, a price which could be lowered once subsidies are applied.4

You can choose to put off paying a few thousand dollars a year for health insurance, but in doing so, you are also choosing to assume a great financial risk. A major medical procedure can cost as much as a new car or college education.

Keep in mind that this article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your financial or health care professional before modifying your insurance strategy.

If you are uninsured, take some time to look at your choices with someone who knows the insurance market. Do it today, as you never know what tomorrow could bring.

To further discuss your healthcare options and how to prepare for your future, contact CapSouth at 800.929.1001 or visit our website at www.capsouthwm.com https://capsouthwm.com/services/financial-estate-planning/

1. Vox, December 17, 2019
2. HealthGrades.com, August 28, 2019
3. HealthMarkets.com, March 30, 2020
4. Investopedia, October 28, 2019

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with CapSouth Wealth Management. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Copyright 2019 FMG Suite.

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

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