Keeping you informed and equipped for the financial road ahead

How to be Tax Efficient with Your Investments

Tax efficient investing involves strategies to help reduce the impact of taxes. Investments have three tax flavors: taxable, tax-deferred and tax-exempt. Taxable requires gains to be paid as they are earned each year. These include investments like CDs and money market funds. Tax-deferred gains remain sheltered from taxes until withdrawn for retirement at age 59 ½ like 401(k)s or IRAs. Tax-exempt interest is not taxable either by federal or state taxes.

To determine the tax effect of your investments, you must know which tax bracket you’re in and if capital gains rules apply. The highest investment income minus the lowest taxes due is your investment goal. So focus on placing fully taxable investments in tax-deferred accounts.

Don’t make the common mistake of putting investments that have tax benefits into an IRA. You will lose those tax benefits since all distributions from traditional IRAs are 100% taxable.

Is Tax Planning missing in your Retirement Planning?

Too many retirees believe that they don’t have to do any planning in retirement.

They spent years saving for their retirement and now they think they can coast. WRONG!

There are hidden tax traps waiting for the unsuspecting. For instance, If you want $75,000 per year in retirement, is that before or after taxes? If it’s after taxes, that could mean withdrawing $90,000 per year before tax.

Will your portfolio last for 35 years if you withdraw $90,000 each year adjusted for inflation? After 15 years, to keep your purchasing power of $90,000 at 3% inflation you would need to withdraw $140,217!

Impact of Inflation in Retirement

The medical profession refers to high blood pressure as the silent killer. In investing, the silent killer is INFLATION.

The minimum return on any retirement investment must be at least equal to inflation. Here’s why. Suppose your retirement goal is to withdraw $90,000 per year from your IRA. To maintain your purchasing power you must adjust your withdrawal amount for the inflation factor.

That means that to get $90,000 per year at an inflation rate of 3%, your withdrawal amount in year 15 would be $140,217.

Have You Protected Your Financial Accounts From Hackers?

A question we frequently ask our clients is whether they’re protecting their financial accounts from hackers.

We recommend starting with secure password practices.

Once a hacker steals just one password, they can potentially steal your entire identity, mainly because most people use the same password for multiple online accounts.

Creating different passwords for your accounts is one way to keep them out of the hands of hackers.

Strong passwords are also important; a combination of upper and lower case letters, numbers and symbols makes your passwords more secure.

Make sure to review your credit card statements for unauthorized activity and take advantage of any card usage alerts offered.

And monitor your credit report for suspicious activity through the three major reporting agencies: Equifax, Experian and TransUnion.

How to Avoid a Retirement Plan Rollover Mistake

If you’re changing jobs or retiring, it’s important to know the rules regarding moving funds from your employer sponsored retirement plan.

The wrong move could cost you in income taxes and early withdrawal penalties.

There are two basic ways to move retirement plan assets from one retirement plan into another with no tax consequence.

With a direct rollover your financial institution or plan directly transfers the payment to another plan or IRA; no taxes are withheld and your account continues to grow tax-deferred.

With an indirect rollover, a check is made payable to you. You have 60 days to deposit it into a Rollover IRA – but indirect rollovers are subject to 20% withholding.

For example, if you had $10,000 eligible to rollover, your employer would withhold $2000 and you’d get a check for $8,000. You’ll get the $2000 that was withheld back when you file a tax return, either as a refund or a credit toward any tax owed.

However, in 60 days you still have to deposit the entire $10,000 in a rollover account – the $8,000 from your employer plus $2000 from your own resources. Any amount you don’t rollover is considered income, and subject to taxes when you file your return. You could also face a 10% early withdrawal penalty, depending on your age.

What Can You Do With an Inherited IRA?

If you’ve become the beneficiary of an IRA or other retirement account, it’s important to know your options.

You can take the money out in one lump sum. This requires opening an account called an Inherited IRA in your name for correct IRS reporting.

That lump sum may be taxable depending on whether the original contributions were pre or post-tax .

Or you can open an Inherited IRA and leave it alone to grow tax-deferred. You can’t make any additional contributions and must take Required Minimum Distributions based on when the deceased would have turned 70 ½. With this option, you can name your own beneficiary to pass it on.

If your spouse left you the account, you’re allowed to roll those assets into your own retirement account and follow your account’s distribution rules.

You could also disclaim the account, or not accept it. The assets can then pass on to alternate beneficiaries.

If you disclaim, it must be done before taking possession of the account, and within nine months of the original owner’s death.

Required Minimum Distributions & Your Taxes

Required Minimum Distributions can have a huge effect on your taxes.

Have you completed a future RMD analysis on your Traditional IRAs? 

You must take your RMD’s after age 72 and a half, whether you need the income or not.

Assuming an average RMD draw of 4%, a 5 million dollar pre-tax IRA creates $200,000 in ordinary, annual income.

This is taxed at your personal federal income tax rate.

Tax planning with Roth Conversions today can mitigate unwanted taxable events later in life and for surviving beneficiaries. 

Now is the time for a long-term RMD analysis.

Give us a call for a free RMD illustration for your situation.

With Olde Raleigh Financial Group, personal financial advice is an ongoing conversation. Let’s start one.

Olde Raleigh Financial (919) 861-8212