As tax time bears down on clients, advisors can help by passing along some tax-advantaged strategies impacted by the Tax Cuts and Jobs Act passed in December 2017.
The National Association for Fixed Annuities hosted Deborah A. Miner for a webinar Tuesday on these issues. Miner is a tax expert and executive with W&S Financial Group Distributors.
The lower tax rates set by the TCJA means income taxes are "on sale," Miner said, and clients and advisors who take proactive advantage could see their retirement nest eggs expand significantly.
The tax-cut bill lowered brackets and changed the income levels. For example, under the old rates, a single person making between $91,901-$191,650 in income made up the 28 percent tax bracket. Under the new law, that was changed to a 24-percent bracket for single filers with between $84,201-$160,725 in income for 2019.
The high-end earners saw big tax breaks. Couples reporting more than $470,700 in income previously paid the top 39.6 percent tax rate. The new law made it 37 percent applicable to those earning $600,000 and up.
Through The Backdoor
Here are three strategies Miner covered to help clients manage their tax bills:
Backdoor Roth IRA. Clients can make a nondeductible contribution to an IRA and then convert that to a Roth IRA.
“This is referred to as the backdoor Roth IRA strategy,” Miner explained, and there are no income limits on nondeductible contributions, although contributors must be under 70.5 years old.
“If the taxpayer doesn’t have any other money in a traditional IRA, this conversion will be tax-free," she added. "Unfortunately, most of our clients have something in a traditional IRA."
The pro-rata rule is the formula used to determine how much of a distribution is taxable when the account owner holds both after-tax and pre-tax dollars in their IRA(s).
“Some people refer to it as the cream in the coffee," Miner said. "Once you put that cream in the coffee, you can’t take it out. Every sip you take after that is going to be part tax and part pre-tax.”
Filling up the bracket. As an example, Miner cited a couple reporting $68,000 of income, which places them in the 12 percent tax bracket. That bracket has a maximum income limit in 2019 of $78,950.
“They could convert $10,000 from their traditional IRA and be assured they would only pay 12 percent on that additional income," Miner explained. "And if they did this over the course of, say, the next seven or eight years, while tax rates are lower, it would significantly lower the balance in their traditional IRAs."
And what does that accomplish?
"It would then reduce the amount of their future Required Minimum Distributions. Plus they would have a significant amount of money set aside in a Roth account that could grow tax-free for the rest of their lives.”
Qualified Charitable Distributions. A client can transfer up to $100,000 directly from their IRA to a charity. The distribution is not included in owner’s gross income, which means it will not increase their taxes on Social Security or other benefits.
But the distributions counts toward RMDs in year it is made.
“One of the things the (TCJA) did is it actually increased the charitable contribution limit for cash contributions to charities from 50 percent to 60 percent, but it also increased the standard deduction," Miner said.
Two things on QCDs: They must be made from a traditional or Roth IRA. Other employer plans not eligible for QCD treatment. Secondly, the distribution directly to a qualified charity must occur after the IRA owner turns 70.5 years old.
Miner concluded by reminding listeners to look out for their clients because the penalties for failing to take RMDs are quite stiff.
"The penalty for failing to take an RMD is 50 percent of the shortfall," she said. "That is, 50 percent of the amount that was required to be withdrawn and was not. So this is one of the highest penalties imposed by the IRS” that doesn’t involve fraud.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.
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