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Tag: Taxes

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.

9 Facts About Social Security

Social Security has been a fact of retirement life ever since it was established in 1935. We all think we know how it works, but how much do you really know? Here are nine things that might surprise you.

  1. The Social Security trust fund is huge. At $2.9 trillion at the end of 2018, it exceeds the gross domestic product (GDP) of every economy in the world except the ten largest: China, the European Union, the United States, India, Japan, Germany, Russia, Indonesia, Brazil, and The United Kingdom.1
  2. Most workers are eligible for Social Security benefits, but not all. For example, until 1984, federal government employees were part of the Civil Service Retirement System and were not covered by Social Security.2
  3. You don’t have to work long to be eligible. If you were born in 1929 or later, you need to work for 10 or more years to be eligible for benefits.3
  4. Benefits are based on an individual’s average earnings during a lifetime of work under the Social Security system. The calculation is based on the 35 highest years of earnings. If an individual has years of low earnings or no earnings, Social Security may count those years to bring the total years to 35.4
  5. There has not always been cost-of-living adjustments (COLA) in Social Security benefits. Before 1975, increasing benefits required an act of Congress; now increases happen automatically, based on the Consumer Price Index. There was a COLA increase of 2.9% in 2019, but there was only an increase of 2% in 2018.5
  6. Social Security is a major source of retirement income for 67% of current retirees.6
  7. Social Security benefits are subject to federal income taxes — but it was not always that way. In 1983, Amendments to the Social Security Act made benefits taxable, starting with the 1984 tax year.7
  8. Social Security recipients received a single lump-sum payment from 1937 until 1940. One-time payments were considered “payback” to those people who contributed to the program. Social Security administrators believed these people would not participate long enough to be vested for monthly benefits.8
  9. In January 1937, Earnest Ackerman became the first person in the U.S. to receive a Social Security benefit—a lump sum of 17 cents.9

To learn more about CapSouth and the services we provide, contact our office at 800.929.1001 or visit our website at www.capsouthwm.com

CapSouth Wealth Management – Dothan, AL, McDonough, GA, Charlotte, NC

1. Social Security Administration, 2018; CIA World Factbook, 2018
2-5, 7-9. Social Security Administration, 2019
6. Employee Benefit Research Institute, 2018

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.

9 Facts About Retirement

9 Facts about RETIREMENT

Retirement can have many meanings. For some, it will be a time to travel and spend time with family members. For others, it will be a time to start a new business or begin a charitable endeavor. Regardless of what approach you intend to take, here are nine things about retirement that might surprise you.

  1. Many consider the standard retirement age to be 65. One of the key influencers in arriving at that age was Germany, which initially set its retirement age at 70 then lowered it to age 65.1
  2. Every day between now and the end of the next decade, another 10,000 baby boomers is expected to turn 65. That’s roughly one person every 8 seconds.2
  3. In 2018, people aged 65 and older accounted for 15% of the population in the U.S. By 2060, they are expected to represent more than one in four Americans.3
  4. Ernest Ackerman was the first person to receive a Social Security benefit. In March 1937, the Cleveland streetcar motorman received a one-time, lump-sum payment of 17¢. Ackerman worked one day under Social Security. He earned $5 for the day and paid a nickel in payroll taxes. His lump-sum payout was equal to 3.5% of his wages.1
  5. Sixty-seven percent of retirees say they are confident about having enough money to live comfortably throughout their retirement years.4
  6. People aged 65 and older account for 34% of all prescription medication use and 30% of all over-the-counter medication use. Nearly nine of 10 adults aged 65 years and older say they have taken at least one prescription drug in the last 30 days.5,6
  7. Fifty-nine percent of retirees were dependent upon on Social Security as a major source of their income. The average monthly Social Security benefit at the beginning of 2019 was $1,461.1,4
  8. Centenarians – in 1980 there were 32,000 of them. Today there are more than 86,248 And 79% of them are women.7
  9. Seniors age 65 and over spend a lot of time watching TV, on average, over 4 hours a day.8

Conclusion

These stats and trends point to one conclusion: The 65-and-older age group is expected to become larger and have more influence in the future. Have you made arrangements for health care? Are you comfortable with your investment decisions? If you are unsure about your decisions, maybe it’s time to develop a solid strategy for the future.

To learn more about CapSouth and the services we provide, contact our office at 800.929.1001 or visit our website at www.capsouthwm.com

CapSouth Wealth Management – Dothan, AL, McDonough, Ga, Charlotte, NC

1. The United States Social Security Administration, 2019
2. Forbes, 2018
3. The United States Census Bureau, 2018
4. Employee Benefit Research Institute, 2019 Retirement Confidence Survey
5. Medscape, 2019
6. UptoDate.com, 2019
7. The United States Census Bureau, 2018
8. U.S. Bureau of Labor Statistics, 2018

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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