On behalf of the Beacon Pointe family, we want to wish you the best during this holiday season, and thank you for your continued loyalty and support. It’s also the time of year when we all consider tax moves to improve our current or long-term tax situation. While you might already be looking at opportunities to harvest gains or losses in your portfolio, here are a few other portfolio-related strategies to consider and discuss with your accountant.
Converting Your Traditional IRA to a Roth IRA. If you believe your tax rate in retirement might be higher because of greater expected income in your retirement years or that taxes will continue to rise, you should consider converting your traditional IRA to a Roth IRA. A Roth IRA is attractive to those expecting higher taxes in retirement because unlike distributions from a Traditional IRA, qualified withdrawals from a Roth IRA are income tax free. There’s no free lunch of course, as you’ll have to pay income tax on the amount you convert. Nevertheless, the conversion typically makes sense if: (1) you have monies outside of your IRA to pay the income tax on conversion, (2) you believe you’ll be in a higher income tax bracket in your retirement years and (3) you have more than a decade before you’ll need to use the funds to allow for tax-free compounding or you plan on leaving your IRA to your heirs. A conversion might also be beneficial if converting allows you to avoid taking minimum distributions from your IRA that might otherwise push your income above the threshold triggering an additional 3.8% tax on net investment income [Modified Adjusted Gross Income (“MAGI”) above $200,000 ($250,000 married filing jointly)]. If you decide to convert to a Roth, note that you have the opportunity to change your mind, as you have until October 15th of next year to recharacterize the Roth IRA back to a Traditional IRA.
Making a Qualifying Charitable Distribution to Satisfy Your Required Minimum Distributions. If you’re over age 70 ½ and haven’t taken all your Required Minimum Distributions (“RMDs”) from your Traditional IRAs or other employer-sponsored plans, it’s time to take those distributions to avoid a 50% penalty on the amount you should have withdrawn before year-end. If you’re charitable, you might consider transferring your remaining RMD (up to $100,000) directly to a qualified charity to both satisfy your charitable goals and prevent your RMD from being included in your Modified Adjusted Gross Income (MAGI) or Adjusted Gross Income (AGI). Lowering your MAGI or AGI through a Qualifying Charitable Distribution might allow you to qualify for other income tax breaks you might not receive if you instead included your RMD in income and then made a deductible charitable contribution. Speak to your accountant though, as the distribution must be made directly from your IRA to a public charity, not a private foundation, donor advised fund or support organization.
Maximizing Your IRA and Retirement Plan Contributions. Tax-deferred growth results in faster growth of your retirement funds yet many people fail to fully fund their retirement plans. Be sure to fund your retirement account to the applicable limit: the IRA funding limits for 2013 are $5,500 ($6,500 if over age 50) and the elective deferral limits to 401(k), 403(b), 457 and SEP plans are $17,500 ($23,000 if over age 50). Deferring income might also allow your income to fall below certain thresholds which might be particularly important if you are a high income taxpayer facing increases to the top income and capital gains tax rates and limitations on personal exemptions and itemized deductions.
Annual Exclusion Gifting. While earlier this year Congress made permanent a generous exclusion that allows individuals to pass during life or death up to $5,000,000 (indexed for inflation) free of tax, if you think you might transfer wealth to loved ones in excess of this amount, you should consider taking advantage of tax-free gifts using the annual exclusion. The annual exclusion allows you to make tax-free transfers of $14,000 in cash or property (such as securities) to anyone without reducing your ability to shield future wealth transfers from tax using your gift and estate tax exclusion. If you have three children, you could gift $42,000, or you and your spouse could collectively give $84,000 to your children without whittling away at your $5,000,000 lifetime exclusion.
You can be creative in how you make annual exclusion gifts, including gifting to fund college or gifting to fund a loved one’s retirement. If you gift to fund a tax-advantaged Section 529 college savings plan for a child or grandchild, you can even retain ownership of the account and access the funds for your own non-educational use later if needed (subject to penalties) while still removing the account outside of your estate. If your child or grandchild is working and you would like to help them save for retirement, your annual gift of cash might fund a Roth IRA as your employed child/grandchild might fall under the income limitations that typically prevent you from contributing to a Roth IRA. Specifically, in 2013 an employed child/grandchild can use $5,500 of your gift to fund a Roth IRA, reduced by any other contributions to an IRA. Your child/grandchild must have earned at least $5,500 in 2013 and not more than $127,000 (single taxpayer) to be eligible for the contribution with a reduced contribution amount if he or she earned more than $112,000. You would want to make the cash gift this year, but your child/grandchild has until April 15th of 2014 to open and fund the Roth IRA.
Gift Appreciated Securities to Charity. If you are planning to donate to charity this year, consider making your donation with highly appreciated securities rather than cash. Not only are you allowed to take the income tax deduction for the full value of the securities, you also avoid the capital gains tax you would otherwise pay on the sale of those securities. Be sure to discuss any charitable gifts with your accountant though, as your itemized deduction for charitable gifts is reduced in years your AGI exceeds $200,000 ($250,000 married filing jointly). Consequently, it might make sense to make such contributions in lower income years. Please let us know if you would like to gift appreciated securities as it takes some time to facilitate the transfer.
As always, Beacon Pointe is available to help you address any portfolio related tax concerns. We will work directly with your managers and tax advisors regarding your specific situation. Do not hesitate to call us with any questions or to discuss steps you would like taken in your portfolio.
All the best for the remainder of 2013!
President and Chief Operating Officer
Disclaimer: This has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. Beacon Pointe does not endorse and is not responsible for the content, product, or services of other third party sites or references. Beacon Pointe does not offer legal or tax advice. Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.