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Two Different Personal IRA Investing Strategies?

Based on Tax Considerations?

 

 

 

 

 

By Dr. David Edward Marcinko MBA

LINK: https://medicalexecutivepost.com/schedule-a-consultation/

One personal investing strategy is to place more conservative investments (those with lower expected returns) in a tax-deferred traditional IRA, 401-k, 403-b or similar, and more aggressive (higher-earning) assets in a taxable brokerage account or Roth IRA.

WHY? Each account is thus working hard but in very different ways.

HOW? The conservative funds in the traditional IRA or retirement accounts would fill any needs for safety as they grow more slowly – and the higher tax rate won’t take out as big of a bite.

Meanwhile, the more aggressive funds in a taxable brokerage accounts would grow more quickly, but be taxed at a lower rate.

Assessment: Any thoughts?

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 

 

“Roll Out the Rollover”

More on Retirement Planning

By Rick Kahler CFP®

If your employer offers a 401(k) or other retirement plan, contributing to that plan is a foundation of your retirement savings. However, as you approach retirement age, you might consider moving some of your retirement funds out of your employer’s plan and into an IRA at a custodian like TD Ameritrade or Fidelity; etc.

Such a rollover is often done when you leave an employer, though many employers give you the option of keeping your retirement account with them. What isn’t popularly understood is that you also can do a rollover while you’re still employed, as long as you are over 59 ½.

Why Rollover?

One reason to consider leaving your employer’s plan is that most of them have higher overall fees than an IRA, especially if you choose from low-cost index mutual funds or exchange traded funds from a company like Vanguard or Dimensional Fund Advisors. It’s not uncommon to save up to 1% annually by making a rollover into these mutual funds.

However, the costs of an IRA are not always cheaper. If you have a Thrift Savings Plan (TSP) through the federal government, the total costs are .03% a year. This is far cheaper than the average equity fund that charges 1.3% or even Vanguard and DFA that charge .09% on some funds.

The disadvantage with a TSP, like most employer plans, is their very limited investment options. The TSP offers about six options. Most 401(k)s will offer several times that—still a pittance compared with the 13,000 available at most discount brokers.

Another reason for a rollover is what happens when you retire and need to withdraw funds from your account. You can withdraw money from an IRA at any time without penalty after age 59 ½, but withdrawing money from a past employer’s 401(k) plan will require jumping through a few more hoops.

One issue that surprises most people is that the required minimum distributions (RMD) rules are reversed for employer plans. A RMD is never required with a Roth IRA. However, a RMD must be taken from a Roth 401(k) when you turn 70 ½. For this reason I recommend you roll over a Roth 401(k) before you turn 70 ½. The flip side of this is that when you turn 70 ½ you do have to take RMDs from a traditional IRA, but you do not from a traditional 401(k). Only a committee could have made up these rules.

The new tax code has made charitable giving less tax advantageous. However, if you are over 70 ½, you can give to charity tax-free from your IRA via a qualified charitable distribution (QCD). Employer plans don’t allow QCDs.

Another advantage of IRAs is that you can consolidate a number of employer accounts into one IRA. You can also withdraw funds from an IRA at any age without penalty for college expenses, which you cannot do from an employer plan.

Yet, another big advantage to an IRA is the ability to do Roth conversions, which cannot be done with an employer’s plan. It’s especially important to do such conversions before turning 70 ½ when your RMDs and Social Security benefits (assuming you wait until 70) kick in and raise your taxable income and possibly your tax bracket. Taking advantage of lower tax brackets prior to age 70 to convert part of traditional IRAs to Roths can lower your RMDs, which lower your tax liability, and let some of your retirement funds grow tax free forever.

***


***

Assessment

Done properly, a rollover from an employer’s plan to an IRA is free of any tax consequences. However, it’s important to evaluate the advantages and disadvantages carefully before you act.

Conclusion

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Proposed IRA Changes in the Obama Federal Budget

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Reviewing Potential IRA Changes 

Rick Kahler MS CFP

By Rick Kahler CFP® http://www.KahlerFinancial.com

The President has fired the first warning shot indicating that politicians are eying the tax advantages of the Roth IRA. For years I’ve strongly encouraged maximum funding of Roth IRAs & 401(k)s.

Physician-Clients have sometimes expressed concern that politicians would someday retroactively change the rules and strip the plans of their tax advantages. I’ve seen that concern as a possibility (for example, in 2008 Argentina confiscated the assets in IRAs and 401(k)s and replaced them with less than desirable Argentinian Government Bonds), but not much of a probability. 

With the introduction of the President’s 2016 budget, the probability of losing some Roth IRA tax benefits has increased.  

Each February the President submits a budget to Congress which is about far more than spending requests. It also contains scores of proposed changes to existing tax laws. One such proposal in the current budget would eliminate two tax advantages of the Roth IRA.  

The first change would require required minimum distributions (RMDs) for Roth IRAs as well as traditional IRAs.  

Currently, one of the benefits of a Roth IRA is not having to take RMDs. At age 70 1/2, owners of traditional IRAs are required withdraw a certain percentage annually, often around 4%. They must pay the tax due and, if they don’t need the funds for living expenses, must invest the remainder in a taxable account. The RMD denies them the option of leaving the money in the tax-deferred environment of the IRA and further compounding.  

Under the President’s proposal, owners of Roth IRAs will need to start withdrawing funds annually at age 70 1/2. While there won’t be any taxes due because contributions to Roths are post-tax, it will remove the funds from the tax-free environment, decreasing future returns by up to 40%. That’s a big deal. 

The second proposed change would eliminate tax-deferred inheritance of IRAs (sometimes called “stretch IRAs) for anyone except spouses. All other inherited IRAs would need to be dissolved and the funds distributed and taxed within five years after death. This will really impact Baby Boomers counting on their parents’ IRAs to assist them with their own retirement needs. 

Other budget proposals would also end Roth conversions to any after-tax IRAs, limiting them to IRAs where the contributions were before taxes. This would prohibit taxpayers with earnings above the traditional and Roth IRA threshold from making non-deductible contributions to a traditional IRA and then doing a Roth conversion. 

The final proposal would limit new IRA contributions for total retirement savings totaling over $3.4 million. This includes the aggregate total of IRAs, 401(k)s, and any other pension plan balances. Once the total reaches $3.4 million at the end of the tax year, no new contributions are possible. 

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163_1

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Capping IRA Growth?

To many Americans, especially the youth, this looks like a cap they will never see in their lifetime. Yet consider what $3.4 million will be worth in purchasing power 40 years from now, when today’s 30-year-olds will have to start RMDs. If inflation maintains its historical average of 3%, in 40 years $3.4 million will have the purchasing power of just over $1 million today. If someone wants to be assured they will never run out of money in retirement, $1 million only provides $30,000 a year of retirement income.

Capping IRA growth is another big deal.

Assessment 

These are a few of the tax changes proposed by the President’s budget. The chances for any to become law in 2016 are remote, given that Congress is currently controlled by Republicans. However, the proposals do signal the current thinking of lawmakers. In considering their retirement planning, taxpayers would be advised to pay attention to such signals.

Conclusion

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18 Financial Planning Tips For Physicians from a DR-CPA

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Dr. Gary Bode; CPA, MSA, CMP

By Dr. Gary L. Bode CPA MSA CMP [Hon] PA

http://garybodecpa.com/

http://www.CertifiedMedicalPlanner.org

1. Consider establishing an employee stock ownership plan (ESOP).

If you own a clinic or medical practice or business and need to diversify your investment portfolio, consider establishing an ESOP. ESOP’s are the most common form of employee ownership in the U.S. and are used by companies for several purposes, among them motivating and rewarding employees and being able to borrow money to acquire new assets in pretax dollars. In addition, a properly funded ESOP provides you with a mechanism for selling your shares with no current tax liability. Consult a specialist in this area to learn about additional benefits.

2. Make sure there is a succession plan in place.

Have you provided for a succession plan for both management and ownership of your medical practice, clinic or business in the event of your death or incapacity? Many business owners or physician-executives wait too long to recognize the benefits of making a succession plan. These benefits include ensuring an orderly transition at the lowest possible tax cost. Waiting too long can be expensive from a financial perspective (covering gift and income taxes, life insurance premiums, appraiser fees, and legal and accounting fees) and a non-financial perspective (intra-family and intra-company squabbles).

3. Consider the limited liability company (LLC) and limited liability partnership (LLP) forms of ownership.

These entity forms should be considered for both tax and non-tax reasons.

4. Avoid nondeductible compensation.

Compensation can only be deducted if it is reasonable. Recent court-decisions have allowed physician executives or business owners to deduct compensation when (1) the corporation’s success was due to the shareholder-employee, (2) the bonus policy was consistent, and (3) the corporation did not provide unusual corporate prerequisites and fringe benefits.

5. Purchase corporate owned life insurance (COLI).

COLI can be a tax-effective tool for funding deferred executive compensation, funding clinic or company redemption of stock as part of a succession plan, and providing many employees with life insurance in a highly leveraged program. Consult your insurance and tax advisers when considering this technique.

6. Consider establishing a SIMPLE retirement plan.

If you have no more than 100 employees and no other qualified plan, you may set up a Savings Incentive Match Plan for Employees (SIMPLE) into which an employee may contribute up to $12,500 per year if you’re under 50 years old and $15,500 a year if you’re over 50 in 2015. As an employer, you are required to make matching contributions. Talk with a benefits specialist to fully understand the rules and advantages and disadvantages of these accounts.

 ***free_54915

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7. Establish a Keogh retirement plan before December 31st.

If you are self-employed and want to deduct contributions to a new Keogh retirement plan for this tax year, you must establish the plan by December 31st. You don’t actually have to put the money into your Keogh(s) until the due date of your tax return. Consult with a specialist in this area to ensure that you establish the Keogh or Keoghs that maximize your flexibility and your annual contributions.

8. Section 179 expensing.

Businesses and medical practices may be able to expense up to $25,000 in 2015 for equipment purchases of qualifying property placed in service during the filing year, instead of depreciating the expenditures over a longer time period. The limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year 2015 exceeds $200,000.

9. Don’t forget deductions for health insurance premiums.

If you are self-employed (or are a partner or a 2-percent S corporation shareholder-employee) you may deduct 100 percent of your medical insurance premiums for yourself and your family as an adjustment to gross income. The adjustment does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income from the business under which the plan was established. You may not deduct premiums paid during a calendar month in which you or your spouse is eligible for employer-paid health benefits.

10. Review whether compensation may be subject to self-employment taxes.

If you are a sole proprietor, an active partner in a partnership, or a manager in a limited liability company, the net earned income you receive from the entity may be subject to self-employment taxes.

11. Don’t overlook minimum distributions at age 70½ and rack up a 50 percent penalty.

Minimum distributions from qualified retirement plans and IRAs must begin by April 1 of the year after the year in which you reach age 70½. The amount of the minimum distribution is calculated based on your life expectancy or the joint and last survivor life expectancy of you and your designated beneficiary. If the amount distributed is less than the minimum required amount, an excise tax equal to 50 percent of the amount of the shortfall is imposed.

12. Don’t double up your first minimum distributions and pay unnecessary income and excise taxes.

Minimum distributions are generally required at age seventy and one-half, but you are allowed to delay the first distribution until April 1 of the year following the year you reach age seventy and one-half. In subsequent years, the required distribution must be made by the end of the calendar year. This creates the potential to double up in distributions in the year after you reach age 70½. This double-up may push you into higher tax rates than normal. In many cases, this pitfall can be avoided by simply taking the first distribution in the year in which you reach age 70½.

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buckets cash

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13. Don’t forget filing requirements for household employees.

Employers of household employees must withhold and pay social security taxes annually if they paid a domestic employee more than $1,900 a year in 2015 (same as 2014). Federal employment taxes for household employees are reported on your individual income tax return (Form 1040, Schedule H). To avoid underpayment of estimated tax penalties, employers will be required to pay these taxes for domestic employees by increasing their own wage withholding or quarterly estimated tax payments. Although the federal filing is now required annually, many states still have quarterly filing requirements.

14. Consider funding a nondeductible regular or Roth IRA.

Although nondeductible IRAs are not as advantageous as deductible IRAs, you still receive the benefits of tax-deferred income. Note, the income thresholds to qualify for making deductible IRA contributions, even if you or your spouse is an active participant in a employer plan, are increasing.

The $100,000 income test for converting a traditional IRA to a ROTH IRA was permanently eliminated in 2010, allowing anyone to complete the conversion.

You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10 percent additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.

Caution: You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. However, the amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10 percent additional tax on early distributions.

15. Calculate your tax liability as if filing jointly and separately.

In certain situations, filing separately may save money for a married couple. If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, filing separately may lower your total taxes. Filing separately may also lower the phase out of itemized deductions and personal exemptions, which are based on adjusted gross income. When choosing your filing status, you should also factor in the state tax implications.

16. Avoid the hobby loss rules.

If you choose self-employment over a second job to earn additional income, avoid the hobby loss rules if you incur a loss. The IRS looks at a number of tests, not just the elements of personal pleasure or recreation involved in the activity.

17. Review your will and plan ahead for post-mortem tax strategies.

A number of tax planning strategies can be implemented soon after death. Some of these, such as disclaimers, must be implemented within a certain period of time after death. A number of special elections are also available on a decedent’s final individual income tax return. Also, review your will as the estate tax laws are influx and your will may have been written with differing limits in effect. In 2015, estates of $5,430,000 (up from $5,340,000 in 2014) are exempt from the estate tax with a 40 percent maximum tax rate (made permanent starting in tax year 2013).

18. Check to see if you qualify for the Child Tax Credit.

A $1,000 tax credit is available for each dependent child (including stepchildren and eligible foster children) under the age of 17 at the end of the taxable year. The child credit generally is available only to the extent of a taxpayer’s regular income tax liability. However, for a taxpayer with three or more children, this limitation is increased by the excess of Social Security taxes paid over the sum of other nonrefundable credits and any earned income tax credit allowed to the taxpayer. For 2015 (as in previous years), the income threshold is $3,000.

For more information concerning these financial planning ideas, please call or email us.

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ABOUT  DR. GARY L. BODE MSA CPA CMP [Hon]

Dr. Gary L. Bode was Chief Executive Officer of Comprehensive Practice Accounting, Inc., a firm specializing in providing tax solutions to medical professionals. Originally, he was a board certified podiatrist and managing partner of a multi-office medical practice for a decade before earning his Master of Science degree in Accounting from the University of North Carolina. He then served as Chief Financial Officer [CFO] for a private mental healthcare facility. Today, Dr. Bode is a nationally known Certified Public Accountant, financial author, educator, and speaker. Areas of expertise include producing customized managerial accounting reports, practice appraisals and valuations, restructurings, and innovative financial accounting as well as proactive tax positioning and tax return preparation for healthcare facilities. He has been quoted in Newsweek.

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Conclusion

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The Superior Retirement Account – Will that be Traditional or Roth?

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Weighing the Costs

Lon Jeffries[By Lon Jefferies MBA CFP®]

As an informed investor and reader of this ME-P, you’re likely familiar with the difference between a traditional IRA/401(k) and a Roth IRA/401(k).

While the traditional account enables you to postpone taxes on both the income invested and its growth until the funds are withdrawn, a Roth account does not provide an initial tax benefit but investment growth is tax free. So which is better?

Let’s answer the question with some simple math. Suppose an investor in the 25 percent federal tax bracket invests $1,000 of pre-tax income, obtains an 8 percent annual return over the next 10 years, and is still in the 25 percent tax bracket in the future. Would this investor profit more investing in a traditional or a Roth account?

As the chart below illustrates, the investor in this scenario would end up with the exact same amount in either a traditional or a Roth account.

So does the decision to invest in a traditional or Roth retirement account not matter? Not so fast.

Constant Tax Rate
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,619

Lower Tax Bracket in Future

Let’s assume our investor will have a reduced income when she retires in 10 years, causing her to be in the 15 percent tax bracket in the future. Perhaps the worker is in her prime earning years and will have less income during retirement. In this scenario, due to the up-front 25 percent tax bill, investing the funds in a Roth would lead to the same after-tax value of $1,619. But investing the funds in a traditional account would allow the full $1,000 to experience growth for 10 years, with a reduced future tax bill of 15 percent, leaving $1,835 of after-tax value in the account. This investor would benefit from delaying taxes into the future when she would be in a lower tax bracket.

Lower Tax Rate in the Future
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (15%) $324 $0
After-Tax Value in 10 Years

$1,835

$1,619

Higher Tax Bracket in Future

On the other hand, if the investor was in the 15 percent tax bracket this year but expected to be in the 25 percent bracket during retirement (potentially a young employee expecting his earnings to rise), paying taxes now at 15 percent would allow $850 to be invested, which after 10 years of 8 percent growth would be worth $1,835 tax free.

Higher Tax Rate in the Future
Traditional Roth
Initial Tax Bill (15%) $0 $150
Invested Amount (after-tax) $1,000 $850
Future Investment Value $2,159 $1,835
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,835

Roth Advantages

What if you expect to pay a comparable tax rate both now and in the future? A Roth account offers several advantages in this scenario.

First, as taxes have already been paid on a Roth account, the government doesn’t require investors to take required minimum distributions (RMDs) from these accounts, whereas RMDs are required from traditional retirement accounts beginning at age 70½. Without RMDs, Roth accounts can grow tax free for the investor’s entire lifespan.

Additionally, upon death, Roth accounts pass to an investor’s heirs without any tax liability, while those who inherit a traditional retirement account must pay taxes on the assets.

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IRA

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Second, money withdrawn from a traditional retirement account before the investor is 59½ may be subject to a 10 percent penalty. Yet contributed funds to a Roth account (but not the growth on the contributed funds) can be withdrawn at any time without penalty. While withdrawing funds before retirement isn’t advisable, the added liquidity of the Roth account can prove useful in emergencies.

Finally, even if your income is expected to remain constant, investing in a Roth account allows you to lock in your taxes at today’s rate as opposed to taking the risk that national tax rates might be raised in the future.

If you’re unsure how your future tax bracket will compare to your current rate, diversify. Nothing prevents you from having both a traditional and a Roth retirement account. This not only allows you to hedge your bets, but puts you in a position during retirement to take distributions from your tax-deferred account in low-income years and from the tax-free account in years when you are in a high tax bracket.

Assessment

http://www.utahbusiness.com/articles/view/weighing_the_costs/?pg=1

Conclusion

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Update on Pension Plans for 2013

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The IRS Announces Major Changes

By Children’s Home Society of Florida Foundation

In IR 2012 77 (18 Oct 2012), the IRS announced multiple pension adjustments for 2013:

1. Elective Deferral – An individual with a 401(k) or 403(b) plan may defer income up to $17,500.

2. Catch-Up Contributions – Individuals age 50 and older may contribute an additional amount of $5,500 to a 401(k) or 403(b).

3. IRA Phase-Out – Contributions to a traditional IRA are phased out for individuals with a workplace retirement plan and modified adjusted gross incomes from $59,000 to $69,000. For married couples where the contributing spouse is covered by a workplace retirement plan, the phase-out range is $95,000 to $115,000. If the married couple IRA owner is not covered by a workplace plan, the phase-out range is $178,000 to $188,000.

4. Roth IRA Contributions – Taxpayers who are married may make Roth IRA contributions with a phase-out AGI of $178,000 to $188,000. Singles and heads of household have a phase-out range of $112,000 to $127,000.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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