​Different circumstances call for different types of homeowners insurance coverage. There are eight options for homeowners insurance available and you want to ensure you have the appropriate coverage for your individual needs. Having the wrong coverage could leave you with catastrophic liabilities that could endanger your financial security or independence. 

This is the most basic form of homeowners insurance. HO-1 policies provide actual cash value coverage only on your home’s structure -- and does not cover damage to attached structures to your home or personal property and doesn’t cover homeowner liability. H0-1 only covers 10 named perils, which is an insurance term meaning events or circumstances that result in property damage. Therefore, if damage is caused by an event not listed in the 10 named perils, the insurance company will not cover the damage. This type of coverage is rarely offered or sought out in this day in age because of the lack of coverage.

HO-1 10 named perils:
​

1. Fire or lightning
2. Windstorm or hail
3. Explosion
4. Riot or civil commotion
5. Aircraft
6. Vehicles
7. Smoke
8. Vandalism and mischief
9. Theft
10. Volcanic eruptions

HO-2 coverage is a step up from HO-1 and is typically referred to as broad form of coverage. HO-2 covers your house with the replacement cost value and personal property with actual cash value. HO-2 is typically less expensive and has less comprehensive than HO-3 and HO-5 coverage. HO-2 provides coverage on a 16 named peril basis. The 16 named perils include the 10 named perils listed in HO-1 coverage plus an additional six perils.

​HO-2 6 additional perils:
​

1. Falling objects
2. Freezing of plumbing, HVAC, or appliances
3. Weight of snow or ice
4. Accidental overflow or discharge of water and steam
5. Damage from artificially generated electricity
6. Sudden or accidental cracking, bulging, or burning

HO-3 is referred to as “special form” coverage and is the most common homeowners insurance coverage for residences. HO-3 works on an open peril’s basis, meaning all risks are covered except risks listed as an exception to the open perils. HO-3 offers replacement cost value on your house and actual cash value on personal property.

Some HO-3 excluded perils:
​

• Neglect
• War
• Power failure
• Mold, fungus, or wet rot
• Flooding
• Earthquake
• Birds, vermin, rodents and pets
• Wear and tear
• Nuclear hazard
• Pollution

Earthquake and flood insurance coverage can usually be added separately. HO-3 policies typically allow the insured to upgrade their personal property coverage to replacement cost value instead of actual cash value for a higher premium.

HO-4 is only for people who rent their living dwelling. This coverage does not insure the rented unit itself. HO-4 covers the renter’s personal property on a 16 named perils basis. These are the same 16 perils listed in H0-2 coverage.  HO-3 also covers the renter’s liability and additional living expenses if they’re unable to reside in the residence after a covered event. The renter also has the option to select the amount of coverage on their personal property as well as upgrade to an open perils basis vs. the named 16 perils.

Also referred to as “comprehensive coverage” because this policy offers the highest amount of insurance coverage out all policies. HO-5 covers your dwelling, added structures, and personal property on an open perils basis. HO-5 policies do carry the excluded perils listed in HO-3 policies. This extensive coverage does come at cost as the HO-5 policy is the most expensive coverage and may not be needed by all homeowners.

Better known as “Unit Owners Form” , HO-6 coverage is tailored to condo and cooperative apartment owners. This is also referred to as “walls-in” or “studs-in” coverage because HO-6 policies cover only inside the walls of the insured’s unit. Typically, a homeowner's association will carry their own insurance coverage on the building that the unit is in. It is important to know what is and what is not covered by the homeowner's association insurance to ensure there are no gaps in your coverage. HO-6 policies also cover personal property, personal liability, and loss-of-use with coverage on a 16 named perils basis. Additionally, these policies cover unit or “walls-in” on a replacement cost value and personal property being covered by actual cash value. 

​HO-7 policies cover mobile homes, manufactured homes, sectional homes, and RVs. HO-7 offers an open perils basis on the structure of the home and a named perils basis on personal property. HO-7 carries the same traits as HO-3 policy but is intended for the use of mobile homes that would not qualify for another type of HO coverage.

​This type of coverage is for older or historic homes where the replacement cost of the home exceeds the market value. An example of an “older” home would be a home that is a historical landmark or a home that is not built up to today’s codes and would have to be replaced up to current codes. This type of policy covers your house and personal property on a 10 named perils basis and has standard liability coverage. The 10 named perils are the same offered in the HO-1 policy. HO-8 policies provide actual cash value reimbursements rather than replacement cost.   

Replacement Cost – The amount needed to repair your home or personal property at current market rates. Replacement cost will replace damaged property with a similar item. 

Actual Cash Value – The amount needed to repair your home or personal property but takes depreciation into consideration. Actual cash value will reimburse you for the value of the item minus depreciation due to age or use. 

Heads up to all US business owners, that includes you, real-estate LLC!

The Corporate Transparency Act (CTA) is a law that requires certain types of corporations, limited liability companies, and other similar entities created in or registered to do business in the United States to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) 12. The CTA was passed as part of the Anti-Money Laundering Act of 2020 and is set to take effect on January 1, 2024.

According to the Financial Crimes Enforcement Network (FinCEN), “Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the United States. Not only do such acts undermine U.S. national security, they also threaten U.S. economic prosperity: shell and front companies can shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while disadvantaging small U.S. businesses who are playing by the rules. This rule will strengthen the integrity of the U.S. financial system by making it harder for illicit actors to use shell companies to launder their money or hide assets.” FinCEN is a division of the Department of the Treasury.

A “reporting company” is any corporation, LLC, partnership or like entity that is created by filing a formation document with a secretary of state; or formed in a foreign country and registered to do business in the United States. There are only a few businesses that are exempt from these new reporting requirements, and they are businesses that already must disclose their ownership. The exemptions to the new rules are:

• Public companies
• Financial institutions (such as banks, credit unions, brokers, dealers, and exchange and clearing agencies)
• Investment companies
• Insurance companies operating within the United States
• Non-foreign-owned shell companies
• Public utility companies
• Accounting firms
• Pooled investment vehicles
• Nonprofit and political organizations
• Entities that employ more than 20 employees, filed federal tax returns demonstrating more than $5 million in gross receipts or sales, and have an operating presence within the United States.

If you are not an exempt entity, you should file the required forms. FinCEN estimates the cost of complying with the new requirements will be about $85 for most businesses. However, the penalties for non-compliance can be expensive; $500 per day up to a maximum of $10,000.

The information will be stored much the same as your income tax filings and will have much the same restrictions of access. Beneficial Ownership information will not be accepted prior to January 1, 2024. The FinCEN website will also post any form they may require prior to the effective date of the legislation.

​You can read the full release from FinCEN here

​The funds contributed to a 529 plan by the account owner always belong to the account owner and never expire. Leaving the funds in the 529 for a few years may be a good strategy because the beneficiary could change their mind and decide to attend college or a trade school after a break from school. 

​If the named beneficiary on the account decides not to use the funds for qualified education expenses, you can change the beneficiary to another family member or yourself. This can usually be done only once a year. The new beneficiary will be able to use the 529 assets just as the original beneficiary would have and there is no penalty for changing the beneficiary.
  
The definition of “family member” is quite extensive including kids, step kids, brother, sister, father, mother, cousins, and more.

There is even the option of naming yourself (the account owner) as the beneficiary. This could be useful if you still have some outstanding student loan debt that needs to be paid off or you yourself decided to attend an educational institution that qualifies as a qualified education expense. 529 plans allow you to use up to $10,000 to repay student loans.

Starting in 2024, the recently passed SECURE ACT 2.0 will allow 529 account owners to rollover up to $35,000 of 529 funds to a Roth IRA owned by the beneficiary over the beneficiary’s lifetime if the 529 account has been opened for 15 years.* 

There are certain guidelines that must be followed to execute this rollover:

• The 529 account must be open at least 15 years
• The Roth IRA must be opened in the beneficiary’s name (not the account owners name)
• Rollover amounts are subject to Roth IRA annual contribution limits ($6,500 for 2023) and subject to Roth IRA earned income requirements

 
This option gives the named beneficiary a head start on saving for retirement and a bucket of tax-free money growing over their lifetime. 

While simply withdrawing the funds from the account is an option at any time you should tread with caution because there may be tax implications.
 
If not used for qualified educational expenses, any funds that are withdrawn will be subject to federal and state taxes and an additional 10% penalty on the earnings portion.
 
Non-qualified distributions will either be reported as ordinary income on the account owners or beneficiary’s tax return depending on how the distribution is requested. The distribution can be requested to be in the name of the account owner, the beneficiary, or the educational institution. Typically, the beneficiary will be in a lower tax bracket than the account owner, but this isn’t always the case.
 
If the distribution is in the name of the account owner, the account owner will report the distribution on their tax return. If the distribution is in the name of the beneficiary or the educational institution, the beneficiary will report the distribution on their tax return.
 
Be aware that there are some situations where the 10% penalty may be waived on the earning portion but are still subject to ordinary income taxes. The 10% penalty may be waived if the beneficiary dies or becomes disabled, earns a scholarship, attends a U.S. Military Academy, or receives educational assistance through an employer.
 
See our blog post How the South Carolina 529 Plan Works to understand 529 plans in more detail

 SHOULD I CONVERT TO A ROTH IRA?

Sounds like a simple yes or no question, doesn’t it? If only that were true.

The wonderful thing about Roth IRA accounts is they grow and compound into income tax-free dollars.  

The problem is you must pay taxes on the funds before they can be contributed to a Roth IRA account. That means money you contribute directly to a Roth IRA or a Roth 401(k) account does not provide a tax deduction in the year the contribution is made, and tax-deferred IRA assets you convert to a Roth IRA are taxable in the year of the conversion.

Calculating whether you end up with more tax-free money to spend later versus the money you save on income taxes today is more complex than a simple yes or no.
​
There are, however, some important points you should understand when choosing whether a Roth IRA conversion or Roth IRA contribution makes sense for you.
 
YOUR CURRENT & FUTURE MARGINAL INCOME TAX RATE
Not to be confused with your effective income tax rate, your marginal income tax rate is how much your last dollar of income is taxed. Current US income tax rates (2023) are 0%, 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

If your future expected marginal income tax rate is lower than your current marginal income tax rate, then you should be wary of making conversions to a Roth IRA -- it might be a better option to wait until your marginal income tax rate is lower to begin making conversions or taking taxable withdrawals.

This might be someone in their peak earning years who will pay a lower rate once they retire. Here, it would make sense to get the current income tax benefit of a deductible Traditional IRA or 401(k) contribution and revisit the conversion decision once you reach retirement.

Conversely, if your current marginal income tax rate is lower than what your future marginal income tax rate will be, Roth IRA contributions and Roth IRA conversions could make sense.

Maybe you’re a recent retiree with large tax-deferred IRA assets and additional pension income that can be supplemented with after-tax savings. Your current marginal tax rate could be very low, but in the future, you will be forced to supplement your income with tax-deferred assets. To lower the total lifetime taxes you must pay, executing Roth IRA conversions now might be the answer. It will provide a tax-free source of income later which gives you the opportunity to manage your marginal income tax brackets in the future.
 
YOUR AGE
Compound interest has been called the eighth wonder of the world. It is amazing how the last few years of long-term savings exponentially increase the dollar value of an account. A Roth IRA funded with just $6,000 today and compounding at 8% projects to reach a value over $41,000 in 25 years -- and over $60,000 in 30 years.

The younger you are, the more attractive Roth IRA and Roth 401(K) contributions and Roth IRA conversions become. If you have a 30-year time horizon it is hard to say no to 10X your money income tax-free in retirement.
 
DO YOU RECEIVE SOCIAL SECURITY BENEFITS?
Okay, you waited until you retired, and your income tax bracket has dropped. You still might not get an all clear on Roth IRA conversions. The amount of your social security benefits subject to income taxes vary by your other sources of income. Currently, (and for a long time now, because these amounts are not adjusted for inflation) 50% of your social security benefits are included in taxable income for joint filers with combined income between $32,000 and $44,000. Any combined income greater than $44,000 subjects 85% of your social security benefits to taxation. For single filers the 50% limit on combined income is $25,000 to $34,000 and then jumps to 85% above $34,000.

Because of these cliff limits, social security recipients could find themselves in the odd position of having a higher effective rate than marginal rate if they choose to convert money into Roth IRAs. This seldom makes good economic sense.
 
QUALIFYING FOR AFFORDABLE CARE ACT (ACA) PREMIUM TAX CREDITS (PTCs)
For retirees who are too young to qualify for Medicare and lack health insurance coverage from their former employer, managing your income to qualify for ACA health insurance subsidies is very important.

We have worked with a number of newly retired clients to fund their early retirement years with after-tax savings and pension income, allowing them to receive substantial subsidies for their health insurance premiums called Premium Tax Credits (PTCs). Sometimes it’s necessary to convert some tax-deferred IRA funds into Roth IRA accounts to have enough taxable income to qualify for PTCs, yet not so much that they miss out on this valuable subsidy. On the other hand, Roth IRA conversions could be detrimental to receiving PTCs. Plan carefully here, PTCs can be worth thousands of dollars each year.
 
CONTROLLING REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
Large tax-deferred IRA balances (Rollover, SEP, SIMPLE, Traditional, etc.) can wreck your income tax plan. By projecting the required minimum distribution (RMD) requirements you could find that although you have retired and are in a manageable marginal income tax bracket today, the RMD rules could force you into much higher marginal tax brackets in the future. Your goal in managing taxes shouldn’t be to pay the lowest amount of taxes possible today -- but pay the lowest total dollars in income taxes over your lifetime.

By making strategic Roth IRA conversions early in retirement, you might be able to keep more of your IRA dollars tomorrow. Maybe you can maximize the 24% marginal rate now even if you could be in the 12% bracket, rather than paying taxes on your RMDs at 32% in the future.
 
 
DON’T FORGET IRMAA MEDICARE PREMIUM SURCHARGES
Many taxpayers are surprised to find out that the higher their income in the last year, the higher their Medicare Part B and D premiums are.

For those who receive Part B and Part D Medicare benefits, there are tiers related to your income that determine your monthly Medicare premiums. Medicare uses the Modified Adjusted Gross Income (MAGI) reported on your 1040 from the previous year to set your premiums for the following year.

For 2023, single filers with MAGI of $97,000 or less and joint filers with MAGI of $194,000 or less in 2021 pay the basic Medicare premium of $164.90 per month. If you exceeded those income levels in 2021 your monthly premium will be higher. You need to incorporate any anticipated Medicare premium increases into your calculations to determine any net savings you might expect from utilizing a Roth IRA conversion strategy.
 
CONSIDER YOUR HEIRS
Sadly, the SECURE Act makes inheriting tax-deferred IRA accounts fraught with problems. If leaving money to your heirs is a priority for you, converting tax-deferred IRA funds to Roth IRA funds might make sense. Your heirs will very likely inherit any IRA funds during their peak earnings years and will have to withdraw the funds over a 10-year period beginning in the year following your year of death. The net amount they receive will probably be greatly reduced by the income tax liability that comes with inheriting tax-deferred IRA funds.

For information on steps you can take to minimize the income tax leakage see our post “Solutions to the SECURE Act Stretch IRA Problem”. If leaving money to your heirs is important to you, that will make Roth IRA conversions more attractive to you.
 
BOTTOM LINE
​In the end, choosing whether to contribute to a Roth IRA or a tax-deferred IRA and choosing when and how much to convert to a Roth IRAs is a complicated decision. But the income tax savings can be significant. To be sure you are making good choices, you should seek out competent financial professionals.

Did you know that once-in-your-lifetime you can convert dollars, which would inevitably be taxed when distributed from your Traditional IRA, to your Health Savings Account (HSA) where they’ll grow and be distributed tax-free?

​Sounds great, right? Here’s how…
​
First, you must be HSA eligible and remain HSA eligible for at least 12 months. If you are unfamiliar with how HSAs work or need a refresher check out our previous blog post: How a Health Savings Account (HSA) Works.

You are allowed to transfer up to the HSA annual maximum contribution limit for that year. The amount of your HSA contribution will be reduced dollar-for-dollar in the year you make a transfer.
 2023 HSA Contribution Limits:

• $3,850 for individuals, with a $1,000 catch-up contribution if you're 55 or older
• $7,750 for family coverage, with a $1,000 catch-up contribution if you’re 55 or older

 
Executing a transfer for the family coverage maximum with the catch-up provision can become complex.

A spouse can make their own catch-up contribution in addition to the family annual max contribution limit, but cannot make a catch-up contribution on their spouse’s behalf. This means that a spouse can make a max family contribution of $7,750 (2023) plus their own $1,000 catch-up contribution from an IRA transfer in a single year while their spouse would need to make their own $1,000 HSA catch-up contribution to their own HSA. The spouse’s $1,000 contribution should be made out-of-pocket so the spouse will be eligible to make the max IRA-to-HSA transfer in the future.  
​
For example, in the following calendar year, your spouse can categorize their HSA as a family HSA and use their own once-in-a-lifetime Qualified Funding Distribution to fund that account. You would be allowed to make your own $1,000 catch-up HSA contribution as well. This would allow your family to maximize the benefits of the IRA-to-HSA transfer opportunity. 

An IRA-to-HSA transfer must be executed as a trustee-to-trustee transfer. This means that the funds transferred must be sent directly from your IRA account to your HSA account. It would be prudent to contact your HSA provider about the transfer as they could help with insight into their institutional guidelines for executing the transfer. After contacting your HSA provider, you will need to contact your IRA custodian as they will initiate the transfer. Depending on the IRA custodian, there may be forms that need to be filled out. 

If you execute an IRA-to-HSA transfer and become ineligible for an HSA within a 12-month period from the date of the transfer, you could be subject to income taxes and a 10% penalty (prior to age 59 ½) on the amount transferred.
​
It is important to be cautious of enrolling in Medicare at age 65 when executing an IRA-to-HSA transfer. Once you enroll in Medicare you are no longer eligible for a Health Savings Account. This makes it important to execute an IRA-to-HSA transfer at least one year prior to enrolling in Medicare to remain eligible for the 12-month testing period and avoid any penalties.

Every year thousands of generous people leave a part of their final estate to worthy charities, leaving a legacy that will continue to help others after they have passed. Having taken care of their families, these Good Samaritans also help those less fortunate and in need of help and care.

But what if there were a way to be generous and receive a benefit while still living? There is—it’s an old estate planning tool called a Charitable Remainder Trust.

A Charitable Remainder Trust (CRT) is an irrevocable trust that pays the grantor or heirs an income for a specified period of time, with any remaining balance going to one or more qualified charities. A CRT can be funded with cash, stocks, bonds, real estate, private company interests, and non-traded stock. The trust retains a carry-over basis for all assets donated to the trust and the remainder cannot be less than 10% of net fair market value of the assets donated to trust. Additionally, the time period is limited to 20 years or the life of one or more of the non-charitable beneficiaries.

For their future generosity, the grantor receives a current tax-year charitable deduction that is based on the IRS section 7520 interest rate, among other factors. The interest rate used to calculate the remainder value is based on the rate in effect in the month the trust is funded. Generally, the higher the interest rate, the higher the charitable deduction created by a CRT. As interest rates have moved up, so has the IRS section 7520 interest rate, and thus has the remainder value calculation and the current year deduction.

There are a couple of variations of CRTs. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar income to the non-charitable beneficiary(ies). The dollar amount must be no less than 5% of the initial trust value and no more than 50% of the initial trust value. Generally, the present value of the annual income stream is determined and subtracted from the value of the property transferred to the trust to arrive at the value of the remainder interest. The factors for determining the present value of an income stream payable for the life of the noncharitable beneficiary are in Publication 1457, Table S, Single Life Factors and the  present value of an income stream payable for a term of years are in Publication 1457, Table B, Term Certain Factors. There are slight adjustments that must be made for payments that occur other than annually at the end of the year, but your CPA should have software that can do those calculations for you.

The other CRT variation is a Charitable Remainder Unitrust (CRUT). In a unitrust, the percentage of the trust assets is fixed at between 5% and 50% of the initial trust balance, but the dollar amount of the distributions can fluctuate from year-to-year. Generally, the present value of the remainder interest (i.e., the charitable deduction) in a CRUT is determined by finding the present-value factor that corresponds to the trust’s adjusted payout rate. The present-value factor for a CRUT with an income interest payable for a term of years is in Table D, Term Certain Factors, of Publication 1458. The present-value factor for a CRUT with an income interest payable for the life of the noncharitable beneficiary is in Table U(1), Single Life Factors, of Publication 1458. If the income interest is payable for the lives of two individuals, use Table U(2), Last-to-Die Factors, in Publication 1458. You can use an online calculator to get a ballpark idea of the current tax deduction you could be entitled to, but your CPA will provide the final numbers for your income tax filing.
​
If you plan to leave any property to a charitable organization at your death, you should consider using a CRT now instead. It can reduce your income tax bill and provide additional funds for you to be even more charitable.

Using a see-through trust as a tax-deferred Traditional IRA beneficiary has steadily risen among estate planning attorneys. The benefits of using a trust as the IRA beneficiary includes:

• Avoids the problem of minor beneficiaries managing investments before their age of majority
• Protects a spend-thrift heir from self-harm upon the inheritance
• Protects a married child from having marital assets if the relationship is perceived as rocky

Usually, a single trust is named, and the beneficiaries' share of the assets are spelled out in the trust. One trust, one trustee, nice and simple.

Perhaps not.

Under the new SECURE Act rules for IRA beneficiaries, all IRA assets must be distributed within 10 years of the year following the date of death of the original IRA owner, with some exemptions for spouses, disabled and minor beneficiaries, and beneficiaries who are less than 10 years younger than the decedent. This dramatically shortens the time that a trust can protect heirs and introduces income tax planning problems for the beneficiaries.

Although there are steps a beneficiary can take to minimize the income tax bite of inheriting an IRA, having the IRA assets co-mingled with a single trust as the beneficiary will severely limit these options. Each individual beneficiary will have different tax planning opportunities and needs. Using a single trust to receive and distribute IRA assets will make income tax planning for the individual beneficiaries nearly impossible.

Here's a simple solution.

Ask your attorney to draw up your trust documents so that upon your death, a pass-through trust is established for each individual heir, and use the beneficiary designation form provided by your IRA custodian to enumerate the share each trust receives.
This way the money is not comingled, and the trustee can work with each end beneficiary to select the times and amount of the distributions that will minimize the income tax bite for that beneficiary. There are a lot of IRA beneficiary trusts out there. Many will need to be updated for the added complexities of the SECURE Act.

Bitcoin, Ethereum, Dogecoin-- you might have heard about these crypto currencies recently and wondered what's going on. We enlisted the help of Alex Strain of Bitwise Investments who arranged an interview with their Director of Research, David Lawant, to get a clearer picture of what is happening in the world of Crypto. If you don't know what Bitcoin is and want to learn, we have recorded the video conversation for you.

Many families have a need for life insurance. But more times than not, they do not act because they are afraid of the process.
​
Life insurance is a great tool for protecting heirs that depend on an income stream or to replace the economic value of a stay-at-home parent. But life insurance is not an investment, by any means. The fees associated with mortality and administrative costs are just too high to make life insurance a good investment choice for most circumstances.
 
It is very unusual for us to recommend anything other than term life insurance. Term life insurance is pure protection and is the most affordable type of life insurance available. You can purchase a death benefit that matches your need for final expenses, debt reduction, education funding and income replacement. You can tailor the term to the family's personal needs. Term life insurance can be purchased with guaranteed renewal and premiums that fit your unique circumstances. You can choose 5-year, 10-year, 20-year, and even 30-year policies. If you have preschool children, a 20-year term policy might provide the protection you need until the children are no longer dependents. If you have teenage children, a 10-year policy might do the job.
 
Because life insurance is an income replacement vehicle, it is important to know how much income needs to be replaced. If the goal is to replace $50,000 per year of income, we divide the income to be replaced by 4% or 5% to determine the lump sum needed to replace that income. For a young couple with children, we will often add the cost of funding higher education and a mortgage pay-off amount to take any worry about expenses off the table. Finally, we subtract any investment or retirement savings from this amount, as those assets can be used to provide for some income loss.
 
The goal of life insurance is to provide the needed protection at the lowest possible cost. Because there is a chance that insurance agents are conflicted when it comes to calculating need and policy types, it is usually better to work with a fee-only financial planner to determine your insurance needs before you speak with an agent. ​CLICK HERE to access our free Life Insurance Needs Worksheet.
 
To discuss your personal life insurance needs and other facets of financial planning, schedule a meeting with Oak Street Advisors today.
​

What if you could transfer assets from your taxable individual or joint accounts into tax-advantaged retirement plans, Traditional IRAs, and Roth IRAs—all while saving taxes now and in the future?

We help clients do just that.

Over the past few years, we’ve had several clients with large taxable investment accounts that received major tax reductions while realizing ongoing investment tax-savings through savvy cash flow management and use of employer retirement plans and other tax-advantaged accounts.

To execute this strategy, we build a tax and cash flow planning strategy that maximizes current year tax savings and takes advantage of tax-deferred and/or tax-free growth—all while keeping the same current spending plan in place. This is done by increasing (often maximizing) employer or self-employed retirement plan contributions for the household and making maximum IRA contributions in the same tax year. Further, for clients with access to after-tax accounts within their employer retirement plans, we move assets that would normally be invested in a taxable account, and eventually taxed at some point in the future, to their Roth IRAs well above the normal $6,000 or $7,000 annual contribution limits based on their age.

To illustrate this planning technique, let’s use a married couple in the 22% Federal tax bracket who both have 401k plans through their employers and $500,000 in taxable investments in their joint account as an example.
Both are age 52—allowing them to contribute $26,000 to their 401ks annually with age-based catch-up contribution limits, but they are only contributing $16,000 each because of monthly cash flow needs.

Additionally, one of the spouses has an after-tax account in their employer 401k and is not a Highly Compensated Employee.

If the couple were to both increase their monthly contributions, they would soon run into debt as their spending would outpace their earnings.

When building their plan, we’d recommend they increase their 401k contributions to their maximum limits of $26,000 each. This increase of $20,000 in 401k contributions project to produce an annual Federal tax savings of $4,400 while also allowing the assets to grow tax-deferred. Tax-deferred accounts can then be managed in future years, often during retirement, to potentially be received at the 12% or another lower tax bracket. For investors with large Roth balances, they may be able to receive some of these assets in the 0% tax bracket.

With the addition of $20,000 total from their paychecks, their monthly spending deficit is now $1,667. We recommend simply replacing this income with assets from their taxable joint investment account. This strategy essentially transfers assets from their taxable account into their tax-deferred accounts.

In addition, the spouse with the after-tax account in their 401k can add another $32,000 (assuming no employer matching contributions for simplicity) into their Roth IRA by converting the after-tax accounts to their Roth IRA immediately, with no tax consequences. This spouse would need to have no tax-deferred IRA assets (SEP, SIMPLE, Traditional, Rollover, etc.) or would be subject to IRA pro-rata aggregation rules which make a portion, or all of the conversion taxable at current normal tax rates.

In the event they do have tax-deferred IRA assets, we recommend rolling those assets into their current employer’s 401k plan, which eliminates the taxation from IRA aggregation rules mentioned above. We then recommend replacing the reduced income from those extra after-tax contributions with taxable assets in their joint account.
Lastly, we recommend they make Traditional, Roth or backdoor Roth contributions up to the annual maximum IRS limits to get even more of the taxable assets into tax-advantaged accounts.

In the end, this couple in our example have taken $66,000 of assets that would eventually be taxed, even if at favorable long-term capital gains rates, and transferred those assets to tax-sheltered or tax-free accounts which will be used in future tax planning to control their tax bracket via qualified distribution, qualified charitable distribution, and Roth conversion strategies.

Lastly, there is the possibility of using the large Roth IRA balance prior to taking Social Security to realize long-term capital gains inside their joint taxable account at 0% and/or IRA distributions at the 0% or 12% Federal tax rate during early retirement years—saving another projected 10% in taxes on the same assets.

This tax and cash flow strategy can produce thousands, if not tens- or hundreds-of-thousands, in lifetime tax savings for your family. If tax rates rise in the future from their current historically low levels, this strategy will pay off even more. 

If you’re in a similar situation, setup a no-cost initial planning consultation with Oak Street Advisors today to discuss creating a financial plan that will incorporate this strategy and many others in order to optimize your finances and minimize your current and future taxes.