Dear CPAs and Attorneys,

LaunchButton_CheckThisOutBe a hero this tax season! Taxpayers depend on their CPAs and attorneys to offer advice when they need it. Below are some “under the radar” ideas for tax reduction, retirement, and estate planning. If you come across a client who might benefit from anything listed below, include a very short handwritten suggestion with their return, send them an email, or make a short phone call. Even if they don’t act on it right away, it shows you are actively looking for ways to help them and will strengthen your relationships. Its the best five minutes you will ever invest in client retention.

ROTH IRA – The Super tool – In addition to commonly known benefits, the following can make sense for some clients. 

  • Distributions from ROTH IRAs are excluded from MAGI (Modified Adjusted Gross Income) calculation for computing tax on  Social Security benefits or new Medicare surtax.
  • No RMDs for self or heirs, distributions are tax free for self and heirs (some restrictions).
  • Owner can contribute and earnings grow tax free (capital gains, dividends, & interest) as long as he/she is receiving earned income (W2 or 1099) regardless of age.
  • Traditional IRAs can be converted to ROTHs a little every year so as not to increase marginal tax rate.  Best to use funds outside account to pay taxes. Best used when business or farm losses already have client in lower tax bracket and qualified plan distributions in retirement would substantially increase marginal tax rate. Not always a good strategy, but future ROTH distributions are tax free and excluded from MAGI for social security taxation.
  • Young taxpayers are likely to be in higher tax bracket in retirement than they are now.

Full or partial 401k rollovers – Many clients aren’t aware of the benefits of rolling 401k plans from previous employers to an IRA.

  • Lower costs
  • Better investment options – Exchange Traded Funds, Real Estate Investment Trusts, individual stocks, bonds
  • Access to self-directed IRA which allows additional investment options and may shelter earnings on – real estate, tax liens, mortgage notes, precious metals, foreign currency, and much more.
  • Eligibility to convert to ROTH
  • Eligibility for early distributions before normal retirement age without penalty using SEPP (substantially equal periodic payments) 72t rules.
  • Funds rolled into current 401k from previous employer plans are generally eligible for rollover to new traditional or self-directed IRA.
  • Some 401k plans allow partial rollover (employee contributions) to IRA after age 55.

 Tax advantaged public securities in non-qualified accounts.

  • Exchange Traded Master Limited Partnerships, Limited Liability Companies – Around 150 of these companies are traded on various exchanges. Generally 20% of distributions are taxable in the year received, 80% is deferred and characterized as return of capital reducing cost basis per share. Distributions are generally 100% taxable when cost basis is reduced to zero.  Distributions characterized as return of capital are excluded from MAGI calculation for social security purposes.  Heirs get step-up in cost basis when owner dies. Step-up means the cost basis is reset to current market price on the date of owner’s death, effectively resulting in no capital gain if liquidated.
  • Municipal bonds – Diversified portfolio of selected short to intermediate term hi-yield (4%-5% coupon), or low cost muni ETF (Exchange Traded Fund) can counter overall portfolio volatility and generate tax free income. Income in excess of MAGI limit may be taxable. Muni generated tax-free income is not excluded from MAGI calculation for SS purposes.

Some types of annuities offer distributions that are partially characterized as return of capital which is excluded from MAGI calculation for SS purposes.

A chainsaw is a very effective tool in the hands of a professional woodsmen, but can be dangerous for a novice.  The tools above are those I use every day to serve my clients. CPAs and attorneys are in a particularly advantageous position to add tremendous value to client relationships by helping to reduce their pain and anxiety during tax season. Mention in your note that you know someone who can help if they want to learn more.

Have a great day!

Michael K. Harris, SR., IAR, CEO
River Wealth Management, LLC
225 North Memorial Drive,
Prattville, AL  36067
Office – 334 513-7200
Cell – 334 224-0751