Tax Planning | Portnoff Financial LLC- Blog

         An educated Advisor you can count on

West Coast Phone: 949-226-8342
East Coast Phone: 732-226-3113


Tax Planning

Update on repeal of Roth Conversion Recharacterization

On 12/22/17 I sent out an update regarding the changes in the new tax law that eliminate the ability to recharacterize (undo) a Roth conversion. The short version is that the bill eliminated the recharacterization provision starting in 2018 but it was unclear whether conversions that occurred in 2017 would still have the option to recharacterize up to what would have been the normal deadline of 10/15/2018. The bill was ambiguous at best with respect to this issue because it stated that there would be no more recharacterizations in 2018. This has been up for debate but now we have clarification from the IRS.

I read several opinions on this matter and the consensus seemed to be that there just wouldn’t be any recharacterizations in 2018. This didn't sit well with me in particular because the language used stated, "…conversion contribution establishing a Roth IRA during a taxable year can no longer be recharacterized…" and the effective date is "…for taxable years beginning after December 31, 2017." My interpretation was that it would apply to conversions starting in 2018 and thus a conversion from 2017 would retain the ability to be recharacterized up to the normal deadline of 10/15/2018. Anything other than this would simply be unreasonable because anyone who did a conversion in 2017 wouldn't have had enough time to do a recharacterization before the end of the year because the law was passed so late in the year. Well, the verdict is in and the IRS said that I was right!

Well the IRS didn't say specifically that "I" was right, rather my interpretation was right. On the IRS website under the FAQs for Roth IRA recharacterizations ( is the question "How does the effective date apply to a Roth IRA conversion made in 2018?" The answer is:

A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018.

So let me just take a moment to gloat a little bit for being right when all the experts seemed wrong….ok I'm done. So if you did a conversion in 2017 and were worried that you might need to recharacterize, you can rest easy now because you do in fact still have this option. It is important to note, that this does not affect 2018 Roth conversions, which will not be able to be recharacterized. From the same FAQ:

A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized. For details, see “Recharacterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

This is a great example of how things can and do change and often times aspects of changes may be up to interpretation. Usually, when this happens, we get a pronouncement or clarification from IRS, but that is not always the case. There have been and still are many things in the tax code and specifically in the IRA realm that are ambiguous. If you have any questions on how this may apply to you, give us a call

Login to post comments.

20th Anniversary of the Roth IRA

This January marks the 20th anniversary of the Roth IRA which became available to investors in 1998. A Roth IRA in an individual retirement account that accepts after-tax contributions and tax-free distributions (income) for retirement. To celebrate this Roth IRA anniversary, I'll be sending out a variety of Roth IRA info throughout the year. This 20th anniversary is a good reminder to take a look at the Roth IRA to see why it might be right for you.

Funds that accumulate in a Traditional IRA are not completely owned by the IRA owner because every retirement account has a partner, and can you guess who that partner is? That's right, Uncle Sam is the partner in your Traditional IRAs, SEP and SIMPLE IRAs, 401k, 403(b), etc., and he is waiting to take his cut. Imagine you have $1,000,000 in a Traditional IRA…looks great right? Unfortunately, most people will only end up getting about 2/3rds to ½ of their IRA with the other portion going to taxes. The advantage of the Roth IRA is that you fund it with after-tax dollars which will help you avoid a tax time bomb when retirement rolls around.

“I am a big proponent of Roth IRAs, as contributions today lead to tax-free money in retirement, when you need it most,” said Ed Slott, CPA, founder of Ed Slott and Company and a nationally-recognized IRA expert who was named “The Best Source for IRA Advice” by The Wall Street Journal. “Unfortunately, the rules surrounding these retirement accounts are as confusing as ever, so it is important to work with someone who specializes in them.”

In 2008 I became a member of Ed Slott’s Master Elite IRA Advisor Group℠, an exclusive membership group dedicated to the mastery of advanced retirement account and tax planning laws and strategies. Members of Ed Slott’s Elite IRA Advisor Group℠ attend semiannual live training events and have year-round access to Ed Slott and Company’s team of retirement experts for consultation on advanced planning topics.

To figure out whether a Roth IRA or Roth conversion is right for you, it may be beneficial to work with a financial professional who receives specialized training in the ‘second half’ of the retirement game, the distribution phase. As a member of Ed Slott’s Master Elite IRA Advisor Group℠, I take pride in taking necessary steps to understand the intricacies of retirement accounts and the tax laws that impact them and knowing that I am up to speed on the latest retirement strategies so that I can confidently provide my clients with the help they need to plan for a successful retirement.

“Over the last 20 years, a lot has changed for Roth IRAs,” said Slott. “With ever-changing laws, including Congress’s recent decision to eliminate Roth recharacterizations, it is more important than ever for financial professionals to receive ongoing training."

ABOUT ED SLOTT AND COMPANY, LLC: Ed Slott and Company, LLC is the nation’s leading provider of technical IRA education for financial advisors, CPAs and attorneys. Ed Slott’s Elite IRA Advisor Group℠ is comprised of nearly 400 of the nation’s top financial professionals who are dedicated to the mastery of advanced retirement account and tax planning laws and strategies. Slott is a nationally-recognized IRA distribution expert, bestselling author and professional speaker. He has hosted several public television specials, including his latest, “Retire Safe & Secure! With Ed Slott.” Visit for more information.

Login to post comments.

New Tax Law Changes Roth IRA Conversion Strategy

Probable Repeal of Roth IRA Recharacterizations at Year-End

The Senate and House of Representatives have both passed versions of the new tax reform law that eliminates the availability of Roth IRA recharacterizations after December 31, 2017.


Benefits of Recharacterization

Recharacterization gives taxpayers a "do-over" opportunity. One use is when a Traditional IRA that is converted to a Roth IRA afterward declines in value – forcing the IRA owner to pay income tax on a converted amount that now exceeds the value of the IRA. Recharacterizing reverses the transaction to eliminate the excess tax.

Typically, we don't know exactly what our total taxable income will be until the end of the year. Because of this, a common strategy is to convert more than you think you will need to “fill the [tax] bracket” or up to whatever the target amount is. If that amount is overshot, we would do a partial recharacterization to bring your taxable income to exactly where it needs to be. Recharacterization can also be done if the taxpayer simply changes their mind and doesn't want to pay the tax.

According to Ed Slott, “It is like betting on the horse after the race is over!”

Until now, the law has allowed recharacterizations to be made as late as October 15 of the following year.


The New “Do It or Lose It” Date Could Change to December 31st

The Final version of the Senate and House bills eliminate this extra time to recharacterize a Roth conversion. Under both versions of the law, it seems that December 31, 2017, may be "the do it or lose it date" for recharacterizations of conversions made in 2017.

If this provision is interpreted in this way this would eliminate the strategy mentioned above for conversions done in 2017. This could pose a problem for those that planned to take advantage of recharacterizing after the New Year.

It seems to me however that there may be room for interpretation here. The following is the excerpt from the final bill regarding the removal of the Roth recharacterization provision:

The House bill repeals the special rule that allows IRA contributions to one type of IRA

(either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus,

for example, under the provision, a conversion contribution establishing a Roth IRA during a

taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby

unwinding the conversion).276

Effective date.−The provision is effective for taxable years beginning after December 31,


This still seems unclear to me whether it applies to conversions that were already done in 2017. It references the conversion “during the taxable year” that can no longer be recharacterized and the provision is effective for “taxable years beginning after December 31, 2017” which to me means that you can no longer recharacterize Roth conversions done in the taxable year after this date which is 12/31/2017. So then a conversion done in 2018 cannot be recharacterized which is very clear, however, a conversion done in 2017 occurs in the taxable year before the provision ends, so then wouldn’t it stand to reason that a 2017 conversion can still be recharacterized up to the deadline in 2018 as it normally would have in the past? Furthermore, it seems unreasonable that this bill could be signed into law just days before the end of year closes giving effectively no practical time to unwind any conversion before the end of the year to which it is supposedly to apply. For many custodians, we have already passed the cutoff date for guarantee that such transactions can be completed before year end which just doesn’t seem fair or reasonable. But then again when is congress fair or reasonable?

The full bill can be found by going to


The Unknown May Cost You

In my sole opinion, It is possible that this provision will be effective ONLY for Roth conversions done in 2018 and beyond. However, that is a risk and it may be some time before we receive any clarification

If you have done a Roth conversion in the year 2017, you need to address this with your financial adviser immediately to know whether you should reconsider doing a full or partial recharacterization before year-end assuming it is even possible. If you are confident that there is no reason you'd need or want to recharacterize then there is no action necessary


Contact us ASAP!

The end of the year is very busy. It is critical that you contact us as soon as possible so that we can ensure we have enough time to review your conversion thoroughly. Click here to contact the office nearest you.

Please also keep in mind that all requests to recharacterize a Roth conversion will need to be submitted to the IRA custodian enough in advance to ensure it is accepted and completed before the end of the year and effectively this time may already have passed.

No More Roth IRA Recharacterizations After 2017

Beginning in 2018, it is clear that all Roth conversions will be irrevocable so if you plan to do any Roth conversions, it will require more careful review and possible change in strategy

At Portnoff Financial, we thoroughly review and carefully evaluate your financial situation to make sure a Roth conversion makes sense for you and to be ready and able to pay the expected tax bill. With that being said, when it comes time to discuss future Roth conversions, know you are in good hands.

Login to post comments.

2015 IRA Contribution Reminder

It's not too late to make an IRA contribution for 2015. The deadline is the tax filing date which is Monday 4/18/2015 this year however generally it is not a good idea to wait until last minute.

Individual Retirement Accounts (IRA) are tax deferred, or in the case of a Roth IRA, tax-free savings/investment accounts. Tax deferral allows your money to grow faster without losing some of the growth annually to taxation. Having investments in an IRA also allow you greater investment flexibility to make changes without having to worry about generating any taxable capital gains transactions.

The IRA contribution limit for 2015 is $5,500 to any combination of IRAs and/or Roth IRAs as long as the total doesn't go above $5,500 unless you qualify for the catch-up contribution which is an additional $1,000 if you reached age 50 by year-end 2015.

Anyone is eligible to make an IRA contribution as long as you have earned income and you are under 70 1/2; whether you can take a deduction for a traditional IRA depends of a few factors described below. Eligibility to contribute to a Roth IRA depends on income which is also described below; there is no age limit to make Roth IRA contributions.


Phase-Out Range for IRA Deductibility: If you are considered an active participant in a company retirement plan, your deductibility for an IRA may be limited. If you are married filing jointly the phase-out for deductibility begins for adjusted gross income between $98,000- $118,000; above that there is no deduction. If you are a single or head of household filer the phase-out for deductibility begins for adjusted gross income between $61,000- $71,000; above that there is no deduction. If you are not covered by a company plan but your spouse is, the phase-out range for you is $183,000 - $193,000. If you file married-separate, your phase-out range is $0 - $10,000. If your income falls between the phase-out range, your ability to deduct your IRA contribution will be limited. There is a specific calculation to determine the amount you can deduct so if this applies to you, consult your tax advisor to determine how much you can deduct.

Even though you may not participate in the company plan, you may be considered an "active participant” so it is important to verify before attempting to take a deduction. If you and your spouse (if applicable) are not covered by a company plan, then there is no income limitation to take a deduction for an IRA contribution. SEP and SIMPLE IRAs are considered company plans for these purposes but are not included in the maximum contribution amount as they have their own limits.

Eligibility for Roth IRA Contribution: If you are married filing joint, the phase-out of eligibility to contribute to a Roth IRA is between $183,000 - $193,000 of adjusted gross income; above that you cannot make a Roth IRA contribution. For single or head of household filers, the phase-out for eligibility is $116,000- $131,000. If you file married-separate, your phase-out range is $0 - $10,000. As mentioned above, if your income falls between the phase-out range, then your ability to contribute to a Roth IRA is limited. If you are above, then you cannot contribute directly to a Roth IRA however you are still able to convert IRA funds to a Roth IRA which is discussed below.

Non-deductible IRAs: If you wish to make a deductible IRA contribution but make too much income to be eligible to take a deduction, consider a Roth IRA instead. If your income is above the threshold to make a Roth IRA contribution, you can still make a regular IRA contribution however that contribution will not be deductible. In such a case of a non-deductible IRA contribution, your money goes in after tax but still grows tax deferred and your contributions when withdrawn are not taxable however the interest/gains will be taxable upon withdrawal.

These non-deductible contributions create "basis” in your IRA which when withdrawn come out tax-free in a pro-rata distribution relative to the amount of pre-tax money in your IRA. For example, if you have $100,000 in your IRA, $10,000 of which is after-tax basis, your ratio would be 10%. If you then took a distribution/conversion of $25,000, $2,500 of that would be considered a return of your basis tax-free while the $7,500 would be taxable.

IRA to Roth Conversions: Since 2010 anyone regardless of income can convert an IRA to a Roth IRA. This means that you could make a non-deductible IRA contribution and convert it to a Roth thereby getting after-tax funds in a Roth IRA which is in essence the same as making a Roth IRA contribution. This strategy is referred to as the “Back Door Roth.” It only works if you do not have other IRA funds because if you do, the pro-rata rules described above would apply. It is unknown if this loophole will be closed by congress or if they will allow anyone regardless of income to make a Roth IRA contribution; only time will tell. For now it is still there and people who this applies to should consider taking advantage of this great tax planning opportunity.

Mega Backdoor Roth:  The “Mega Backdoor” Roth is similar to what is described above however it is related to employer plans. There are many rules and details to be aware of but the basic idea is this: if the employer plan allows for after-tax contributions, you can theoretically contribute after tax funds up to the maximum Defined Contribution plan limit which is $53,000 for 2015 and 2016 plus $6,000 catch up contribution if over 50. Then, if the plan allows, you can request a distribution of only the after-tax funds paid to you and then deposit to a Roth thereby completing a Roth conversion of after-tax funds which means getting a whole lot of money in a Roth IRA, far more than the statutory annual contribution limit which also is limited by income levels.

For example, suppose you are maxing out your 401k at $18,000 and your employer provides a $6,000 contribution for you. That means $24,000 has been contributed leaving an additional $29,000 that could be put in using after-tax funds ($35,000 if over 50). If you had the ability to, you could contribute that $29,000 from your paychecks and at some point then request a distribution of those after-tax funds and convert to your Roth IRA. That would mean getting $29,000 in a Roth IRA in one year! Well you might say, “I have bills to pay and can’t take that much out of my checks.” Well obviously if you don’t have the funds you can’t do this but suppose you do have $29,000 in a savings or taxable investment account. In that case you would increase your contributions to the plan and use your savings to pay the bills and essentially shifting those taxable savings/investments into tax-free Roth IRA accounts. That’s why this is called the “Mega” backdoor Roth. Certainly many details are left out but this is the basic idea. If you think this could apply to you be sure to give us a call to discuss.

2016 IRA Limits: For 2016, IRA contributions limits stay at $5,500 if under 50 with the additional $1,000 catch-up contribution if you reach age 50 by year end. The phase-outs for IRA deductibility and Roth IRA stayed mostly the same from 2015 with a few exceptions:

  • IRA deduction phase-out for active plan participants
    • Single $61,000-$71,000
    • Married filing jointly $98,000-$118,000
    • Married filing separately $0-$10,000
    • Spousal IRA $184,000-$194,000 (you are covered but your spouse is not)
  • Roth IRA phase-out
    • Single $117,000-$132,000
    • Married filing jointly $184,000-$194,000

If you have any questions about IRA contributions or wish to make an IRA contribution for 2015 give us a call.

Login to post comments.

President Obama’s Retirement Account Provisions in Final Budget Proposal

As President’s Day approaches we take a look at President Obama’s final budget proposal which contains 15 provisions related to retirement accounts. All but one of the proposals are simply a repeat of those proposed last year none of which were enacted. The only new proposal would allow certain employers to pool resources to create multi-employer (defined contribution) retirement plans which would create economies of scale and encourage more small business to participate.

Below is a list of the proposals but if you would like to read a full explanation you can go to the (Ed) Slott Report at

#1 – Allow Unrelated Employers to Participate in a Single Multi-Employer Defined Contribution Plan

#2 - Eliminate the Special Tax Break for NUA

#3 - Limit Roth Conversions to Pre-Tax Dollars

#4 - “Harmonize” the RMD Rules for Roth IRAs with the RMD Rules for Other Retirement Accounts

#5 - Eliminate RMDs if Your Total Savings in Tax-Favored Retirement Accounts is $100,000 or Less

#6 - Create a 28% Maximum Tax Benefit for Contributions to Retirement Accounts

#7 - Establish a “Cap” on Retirement Savings Prohibiting Additional Contributions

#8 - Create a new “Hardship” Exception to the 10% Penalty for the Long-Term Unemployed

#9 - Mandatory 5-Year Rule for Non-Spouse Beneficiaries\

#10 - Allow Non-Spouse Beneficiaries to Complete 60-Day Rollovers for Inherited IRAs

#11 - Require Retirement Plans to Allow Participation of Long-Term Part-Time Workers

#12 - Require Form W-2 Reporting for Employer Contributions to Defined Contribution Retirement Plans

#13 - Mandatory Auto-Enrollment IRAs for Certain Small Businesses

#14 - Facilitate Annuity Portability

#15 - Eliminate Deductions for Dividends on Stock of Publicly-Traded Companies Held in ESOPs

These proposals are just that; proposals, many of which most likely will not be enacted however it does give us a sense of what lawmakers may be going after in the coming years.


Login to post comments.

Driving Your Taxes Ever Higher

Driving Your Taxes Ever Higher

I really don’t care for Flo. She is that all-too-cheerful lady that wants to sell you a particular brand of car insurance, one that she claims will save you lots of money. She would also like you to know that you have the option to plug a small device into your vehicle. This device monitors your every move for what is called usage-based insurance. If this device shows the company that you are a safe driver, then the insurance company will offer you a discount. Sounds like a good deal, right?

Unfortunately, Flo’s little device has other, less beneficial uses. A similar device, no longer optional, may one day help the government tax you based on how, when and where you drive your vehicle. Even George Orwell would have been shocked by this level of Big Brother-ness.

The Great Recession has led to many structural changes in our economy and how we behave. One of those changes has been in how we drive.

According to a recent study from the University of Michigan, Americans’ driving habits have changed dramatically in recent decades. The average driver travels 1,200 fewer miles per year than he did in 2005. We also use less gasoline per person than we have in nearly 30 years. The decline in miles driven and fuel consumption has meant a serious loss in revenue for local, state and federal governments.

The United States Highway Trust Fund was created in 1956 and is used for the construction and maintenance of the Interstate Highway System. The Trust Fund receives its money from the federal fuel tax. The tax on a gallon of fuel has been raised over the decades and is now over 18 cents per gallon of gasoline.

But the tax is not enough. The Congressional Budget Office estimates that the Trust Fund will be insolvent this year and will continue to be so for the foreseeable future. By 2023, the Trust Fund is expected to have a shortfall of nearly $100 billion.

The current mechanisms for funding transportation services are already failing. With Americans driving less miles and consuming less fuel the situation will only get worse. This means governments must find ways to gather more tax revenue from drivers.

The most straightforward solution is to increase the fuel tax. The problem with this idea is that the tax will be chasing ever-more fuel efficient vehicles that are being driven less. As a result, a tax hike is unlikely to meet funding needs. This is where the number crunchers will start getting creative.

Luckily for them, and unluckily for us, our friend Flo’s usage-based insurance device can be converted to a usage-based tax calculator. Currently, most use-based vehicle taxes operate as a type of sales tax. With more data, governments will be able to tax our vehicle usage in a multitude of different ways that would get around decreasing vehicle usage and increasing fuel efficiency. Heavy commuters might feel the tax pinch on how many miles they drive, whether they drive in cities or what time of day they drive. On the other hand, those with short commutes will not be able to escape taxes on vehicle speed, condition of the roads used, driving in high-volume areas, driving during harsh weather, etc.

By taxing a variety of usage patterns that are independent of miles driven and fuel efficiency, governments can supplement revenue from the fuel tax. The only way to avoid these taxes will be to turn in your keys.

Our change in driving habits is emblematic of how our behavior has shifted since the economic downturn. Traditional funding pathways for government services are falling behind. This means that we can expect our government to look for more creative and intrusive ways of taking our wealth to fund their services.

Login to post comments.

IRA Update: March 2013

With the American Taxpayer Relief Act of 2012 that was passed in 2013, there are some new tax considerations to be aware of.

NUA planning with ATRA

NUA or Net Unrealized Appreciation has to do with employer stock within a 401k plan. NUA allows the plan participant to take the employer stock out of the plan in-kind and transfer to a taxable brokerage account while only realizing ordinary income on the original cost of the shares. The gains, or NUA is taxed at long-term capital gains (LTCG) rates but only when the shares are actually sold. See more details on NUA.

Previous to 2013, the difference between the top rate of 35% and the LTCG rate of 15% meant a 20% potential tax savings when using the NUA strategy. With the new top rate of 39.6% and 20% top capital gains rate; difference is 19.6% which is close however one must consider the 3.8% surtax on net investment income. The surtax would be applied on the income generated from the sale of shares after the distribution and thus the tax would be 23.8% which is 8.8% higher than in 2012. In other words the potential tax savings is reduced to 15.8% from 19.6%.

As an aside, almost no one will actually pay 20% capital gains because if your income is high enough to be in the 20% capital gain territory, you are probably also subject to the 3.8% surtax which is why you would pay 23.8%.

It is important to look at the potential tax savings but also important to consider that any future growth of distributed stock would no longer have the protective shell of tax deferral. Once the stock is sold, the capital gain would be realized. Any future income derived from the stock such as dividends would be taxable in the year received. Also the stretch IRA for beneficiaries would no longer be applicable to distributed NUA stock.

A key consideration: Is there significant appreciation on NUA stock and when will you need the NUA funds? If the gain on NUA is not significant, the benefit is less because it may cost a lot in having realized the ordinary income to get the NUA out at ordinary rates if there is a relatively small amount of NUA that would get the LTCG treatment. However if you are going to use the funds soon after distribution, the benefit is high because some of the money that would have been taxed at ordinary rates gets the long-term capital gains treatment instead. If holding for a long time before selling the shares, you have to evaluate whether it makes sense or not.

Roth Conversion Strategies

Roth conversion strategies need to be review and revised in light of the new tax rates. Taxpayers who are subject to the return of the 39.6% bracket obviously pay more tax and need to consider whether they want to convert at this rate. Since the Bush tax cuts for most taxpayers were made "permanent," those who converted into higher tax brackets in 2012 may want to revisit and determine if they should recharacterize and begin to reconvert over a longer period to keep their marginal tax rate lower.

Even with higher rates for high income, taxable assets are still subject to the 3.8% surtax and thus Roth conversion will help to reduce taxation on those types of funds if you were to use those funds to pay the tax on conversions. There certainly is no guarantee that congress won't come back and raise tax rates even more which is already being discussed and this should be factored into your decision to what income tax bracket you will convert to.


Planning with new estate tax threshold

With the estate tax being set at $5 million with portability and inflation adjustments means only the wealthiest will pay estate taxes, that is unless and until this level is brought back down. The Generation Skipping Tax (GST) exemption is set at $5.25 million instead of going back to $1 million. The estate tax rate went up to 40% from 35% but this is only on the amounts about the exemption.

Wealthy IRA owners may want to consider naming grandchildren as beneficiaries of IRAs to take advantage of the $5.25 million GST exemption and the stretch for the younger generation. Trusts may be necessary for grandchildren so watch the wording and the type of trust used so as to not affect the stretch and force small amounts of income to trust and estate tax rates which hit the highest bracket very quickly.

If the estate is potentially large enough, strategies to reduce the estate size such as gifting, Roth conversions, and life insurance via ILITs (Irrevocable Life Insurance Trust) should be considered. You must also consider even though there is a large federal exemption amount, some states still have their own estate tax with different thresholds such as NJ which sits at a $675,000 exemption amount.

Gifts can be given to family members who may be in lower tax brackets to help them convert their own IRAs to Roth IRAs. This can also mean gifts to parents who are in lower tax brackets. Helping a parent or even a grandparent convert their IRA to Roth means that Required Minimum Distributions cease and when you inherit, you can get a tax free stretch, or if you don't need it, have the younger generation named as beneficiaries so that they get lifetime tax free distributions.

Misc Tax Planning

  • Itemized deductions begin to phase-out at $300,000 for Married filing joint ($250,000 for single filers) up to $422,500 ($372,500 for single filers).
  • AMT exemption amount has been permanently indexed to inflation. For 2013 the amount is $80,800 ($51,900 for single filers).
  • Qualified Charitable Distributions temporarily extended for 2013.
  • In-plan Roth conversion rules have expanded.
  • Top trust tax rates starts at $11,950 which means that distributions from inherited IRAs to discretionary trusts that can retain those distributions hit the 39.6% tax rate very quickly.
  • Salary deferrals for 401k, 403b, etc, can reduce the MAGI for the 3.8% surtax however cannot reduce income for purposes of the 0.9% Medicare surtax.


As always, please consult with a qualified tax professional and financial advisor to determine if these strategies are right for you.
Login to post comments.

American Taxpayer Relief Act of 2013

Summary of key (IRA) points:

Three new income thresholds that high income taxpayers need to plan for and four different ways income is calculated to compare against the new thresholds.

  • New (return of old) 39.6% tax bracket for joint filers with taxable income over $450,000 ($400,000 for single filers) and a top long-term capital gains and dividend tax rate of 20% which actually becomes 23.8% because such a taxpayer would be subject to the 3.8% surtax on net investment income.
  • Phase-out of itemized deductions up to 80% and personal exemptions for taxpayers whose AGI (Adjusted Gross Income) exceeds $300,000 ($250,000 for single filers)
  • 3.8% surtax on net investment income for those whose MAGI (Modified Adjusted Gross Income) exceeds $250,000 ($200,000 for single filers). At the same levels, earned income in excess of these thresholds will incur an additional 0.9% surtax.

Qualified Charitable Distributions return for 2012 and 2013

New in-plan Roth 401k conversion rules

  • Since 2010 a 401k participant who had a Roth 401k available could do an in-plan Roth 401k conversion IF they were eligible to take a distribution which typically means reaching the age of 59 ½. The ARTA modified this rule to allow participants that are not eligible to take a distribution to do an in-plan Roth conversion.
  • Ability to do an in-plan Roth conversion requires that the plan offers a Roth 401k and while plans are beginning to adopt the Roth 401k in greater numbers, they are not commonplace just yet.
  • If the plan offers a Roth 401k, in order to convert, the plan must also allow for in-plan conversion and there is no requirement that a plan offer this feature.
  • If the option is available, a plan participant must still analyze their tax status to determine if it makes sense to do the conversion, determine whether a Roth IRA conversion is better, wait, or not do it at all.
  • It is critical to keep in mind one of the MAJOR differences between a Roth IRA conversion and a Roth 401k conversion is the ability to recharacterize. When you convert an IRA to Roth, you have until October 15th of the following year to change your mind and reverse the transaction however in a Roth 401k conversion, there is no mechanism for recharacterization so once you execute the transaction, there is no turning back.

Login to post comments.

The Sequestration has Arrived!

So the dreaded "sequester” has gone into effect and we are already dealing with the consequences. If you will remember, the infamous Fiscal Cliff that was in the news last year was a combination of tax hikes and deep across-the-board spending cuts.

Well, the tax issues have been mostly ironed out. Americans will be paying more in taxes, and no one is particularly happy about it. But at least the uncertainty is out of the way, and we know what we’re facing. As the old expression goes – better the devil you know to the devil you don’t know.

Now it’s time for the second half of the Cliff, the deep spending cuts collectively called "sequestration.”

Judging by the Dow’s recent record-breaking highs, investors don’t appear to be all that worried about the cuts. For all the angst and handwringing we’ve seen over the past year and a half, they seem to have reached the conclusion that it’s not a big deal.

So what is the story? Is it a big deal?

To start, most Americans agree that the government spends too much money, a lot of which gets wasted. But slicing $1.2 trillion out of the budget sounds like a big cut. That is, until you look at the details. Only $85 billion is scheduled to take effect this year - in a budget of more than $3.5 trillion – the rest is spread out over the next 10 years. We’re talking about spending cuts of less than 2.5%, and that assumes Congress and the administration don’t weasel out of it. That’s still a real possibility.

If the cuts happen as planned, they will probably take about half a percent off of GDP growth this year. And the effects could be worse if they impact business confidence and hiring.

Still, it’s hard to get worked up about spending cuts. Even if the sequester is messy and indiscriminate, it’s better than no cuts at all.

The real issue is not the current sequestration cuts, which don’t matter in the long run, but entitlements. Social Security and Medicare are already in deficit, now, when the vast majority of Baby Boomers are still in the workforce and still paying into the system. But what happens after 2020, when those Boomers born from 1955-1961, the highest birth years, start to reach retirement age?

If you think we have a deficit problem now, take a moment to think about what’s coming.

Actually, I can tell you what’s coming - higher taxes along with lower Social Security and Medicare benefits, particularly if you are considered a "high income” retiree. And believe me, what counts as "high income” is probably much lower than you think.

The bottom line is that we cannot depend on government programs to take care of us in our old age. And this means putting the pieces of a retirement plan together today, while there is still time.

Login to post comments.

Important IRA Rulings for 2012

In Charles Grant Beech et ux. v. Commissioner, T.C. Summ. Op. 2012-74; No. 1948-11S, 7/26/12, a non-spouse beneficiary, the decedents daughter botched an inherited IRA by not doing a trustee-to-trustee transfer and the whole inherited IRA was taxable all in one year. Remember, a non-spouse beneficiary CANNOT do a (60 day) Rollover; funds must only be moved via direct (trustee-to-trustee) transfer.

In Herring v. Campbell, Administrator of Marathon Oil Company Thrift Plan, U. S. Court of Appeals for the Fifth Circuit, 8/7/12, a $300,000 pension was not inherited by the intended beneficiaries. The decedent, John Hunter named his spouse, Joyce and the primary beneficiary of his pension plan but did not name any contingent beneficiaries. Joyce predeceased John and he never updated his beneficiary form. The plan administrator followed the rules of the plan and eventually the funds were distributed to Mr. Hunter's living siblings, not his "beloved stepsons" who inherited his estate through the Will. Unfortunately for the stepsons, a Will does not cover retirement plans, the beneficiary form does.

In Seeling, U.S. Bankruptcy Court, District of Massachusetts, Western Division, Case No. 11-30957, 5/24/12, the taxpayer received a favorable ruling protecting her inherited IRA from bankruptcy. In Clark, 2012, DC WI, 109 AFTR 2d 2012-733, 1/5/12, another bankruptcy involving an inherited IRA, the bankruptcy court ruled in favor of the creditors initially however a district court later overturned the ruling in favor of the debtor. More and more of these inherited IRA bankruptcy cases seem to be coming up and it appears a precedence is being set in many states in favor of debtors.

Login to post comments.