Tag: Taxes

Social Security: The $64,000 Question

December 28, 2020
Retirement, Retirement Planning, Social Security

One of the most common questions people ask about Social Security is when they should start taking benefits.

This is the $64,000 question. Making the right decision for you can have a meaningful impact on your financial income in retirement.

Before considering how personal circumstances and objectives may play into your decision, it may be helpful to preface that discussion with an illustration of how benefits may differ based upon the age at which you commence taking Social Security.

As the accompanying chart reflects, the amount you receive will be based upon the age at which you begin taking benefits.

Monthly Benefit Amounts
Based on the Age that Benefits Begin¹

Age	Benefit Amount
62 63 64 65 66 and 4 months 67 68 69 70	$953 $1,018 $1,097 $1,184 $1,300 $1,369 $1,473 $1,577 $1,681

*This example assumes a benefit amount of $1,300 at the full retirement age of 66 and 4 months.

At first blush, the decision may seem a bit clear-cut: Simply calculate the lifetime value of the early benefit amount versus the lifetime value of the higher benefit, based on some assumed life expectancy.

The calculus is a bit more complicated than that because of the more favorable tax treatment of Social Security income versus IRA withdrawals, spousal benefit coordination opportunities, the consideration of the surviving spouse, and Social Security’s lifetime income guarantee that exists under current law.²

Here are three ideas to think about when making your decision:

Do You Need the Money?
Retiring before full retirement age may be a personal choice or one that is thrust upon you because of circumstances, such as declining health or job loss. If you need the income that Social Security is scheduled to provide, however reduced, then taking benefits early may be the only choice for you.
Consider the Needs of Your Spouse
If your spouse expects to depend on your Social Security income, the survivor benefits he or she receives after your death may be reduced substantially if you begin taking benefits early. It’s important to remember that, based on current life expectancy tables, women are likely to live longer than men.
Are You Healthy?
The primary risk in retirement is running out of money. The odds of living a long life in retirement calls for waiting until you reach full retirement age, so that you receive a full benefit for as long as you live. However, if your current health is poor, then starting earlier may make sense for you.

There are several elements you should evaluate before you start claiming Social Security. By determining your priorities and other income opportunities, you may be able to better decide at what age benefits make the most sense.

Social Security Administration, 2018
Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

To learn more about CapSouth Wealth Management and the services we provide, visit out website at www.capsouthwm.com

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 2020 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.

6 Key Areas of a Financial Strategy

October 20, 2020
IRA, Taxes

When training to become a financial professional, much of the course work centers on the six critical areas of creating a financial strategy. Some recognize October as Financial Planning Month, so it’s an excellent time to review those six personal finance areas of a financial strategy.¹

Cash Management:
This an important part of a financial strategy and is a broad topic that can address many issues. One area is creating an emergency fund, which is money that’s set aside for unplanned expenses. Cash management also can include looking at your “sources and uses” of money. Financial Planning Month focuses mainly on cash management and spending habits.¹
Investment Approaches:
Concerns about investment approaches are among the key reasons people start a relationship with a financial professional. When reviewing investment approaches, it’s critical to consider a person’s goals, time horizon, and risk tolerance.
Retirement Preparation:
This is another crucial reason why a person approaches a financial professional. The chief concern for 49 percent of Americans is running out of money in retirement. The retirement preparation process reviews your current situation and helps you better understand your choices.²
Protection Strategies:
This area looks at how well you are prepared for life’s potential financial risks such as premature death or permanent disability. Protection strategies also can include health-care considerations. By the way, did you know that 44 percent of Americans cite “declining health” as their second biggest retirement concern?²
Tax Management:
Do you feel comfortable with current tax laws? Are you confident about your approach to tax management? Tax rules are constantly changing, and there is no guarantee that the tax landscape will remain the same in years ahead. Financial professionals often work with tax, legal, or accounting professionals when creating an overall tax management strategy.
Estate Strategies:
How well you prepare today may help determine how your assets are distributed after you’re gone. Much like tax rules, estate rules are continually changing, and today’s landscape may change in a few years. Financial professionals often work with legal professionals when creating an estate approach. It can be a challenge to feel confident in all six key areas of creating a financial strategy. If you think you may need help, contact CapSouth Wealth Management at 800.929.1001 or visit our website at www.capsouthwm.com or https://capsouthwm.com/services/financial-estate-planning/ We’d welcome the chance to review your approach.

^{1. NationalDayCalendar.com, October 2020} ^{2. AARP.com, May 21, 2019}

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

October 12, 2020
IRA, Taxes

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:

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.
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.
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:

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.
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.
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.
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.
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.

Tag: Taxes

6 Key Areas of a Financial Strategy

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

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