How to Use a 529 Plan to Fund a Roth IRA

Contributed by: Josh Bitel, CFP®

Before the passing of SECURE ACT 2.0 in late 2022, folks with unused funds sitting in a 529 account had a few options for using leftover 529 funds. Generally speaking, the most common options were: 

1. Save the funds for future educational use (either for the current or future beneficiary) or

2. Withdraw the money and pay federal income taxes and a 10% penalty on any gains within the account.

While these options may be feasible for some folks, others are left scratching their heads when they see leftover funds in a 529 plan when their child finishes college. This can also be a concern if a student wins a scholarship, attends a military academy, or receives unexpected gifts to help pay for school. 

Fortunately, among the legislative changes brought forth by SECURE ACT 2.0 is a solution to help ease some of these concerns. Starting in 2024, 529 account holders are permitted to roll excess college savings plan funds into a beneficiary’s Roth IRA without incurring taxes or penalties. Sounds great, right? Well, as with most new laws, there is some important fine print to understand before going forward with such a transfer:

• The 529 plan must have been open for at least 15 years before you can execute a rollover to a Roth IRA.

• Rollovers are subject to the annual Roth IRA contribution limit. For 2024, this limit is $7,000. Additionally, if the beneficiary makes any IRA contributions in a given year, the eligible 529 to Roth IRA rollover amount is reduced by the size of that contribution. For instance, if the beneficiary contributes $3,000 to an IRA in 2024, the eligible rollover amount decreases to $4,000, based on the 2024 total IRA contribution limit set by the IRS.

• 529-to-Roth rollovers are subject to a lifetime limit of $35,000 per beneficiary. So, if you wanted to roll over the entire $35,000, you would have to do it over five years under the current 2024 contribution limits. (Although IRA contributions limits tend to rise in most years with inflation).

• 529 plan contributions made in the last five years cannot be transferred to a Roth IRA (including any earnings accrued on those contributions).

• The beneficiary of the 529 plan must match the owner of the Roth IRA. For example, if you have a 529 for your grandson Teddy, you can only roll over any excess funds to a Roth IRA in Teddy’s name. 

• Just as when making a normal contribution to a Roth IRA, the owner must have earned income at least equal to the amount of the rollover. For example, if Teddy has a part-time job earning $4,000 in 2024, you may only roll over $4,000 in 529 funds to the Roth for that year.

• There are no income limits restricting a 529-to-Roth rollover for either the beneficiary or 529 owner. For someone contributing directly to a Roth IRA (not using 529 funds) they are not permitted to do so if they earned $161,000 or more in taxable income as a single person in 2024. This rule does not apply to 529-to-Roth rollovers, so it is an excellent way for high earners to get money into a Roth.

As you can see, there is a lot to know before performing one of these rollovers, but for the right person, this can be a great retirement savings option. A more concise flowchart can be found here to help determine if you or your beneficiary is eligible for this transfer.

Overall, this new provision is a great way for savers to utilize excess 529 funds penalty and tax-free. However, there are still many questions that remain unanswered as it pertains to SECURE ACT 2.0. We are continuing to monitor and research as more details emerge. We will provide additional information as it is available, but if you have any questions about how this could affect you, please contact your Financial Planner. We are always happy to help!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Keep in mind that, unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Any opinions are those of Josh Bitel and Center for Financial Planning, Inc., and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or protect against a loss This material is general in nature and provided for informational purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds and protection from creditors. The tax implications can vary significantly from state to state.

Required Minimum Distributions (“RMDs”) – Everything You Need to Know

Contributed by: Nicholas Boguth, CFA®, CFP®

“What is a required minimum distribution?”

RMDs are the amount you are required to withdraw from your retirement accounts once you reach your required beginning date. Remember all those years you added money to your IRA and 401k and didn’t have to pay tax on those contributions? Well, the IRS wants those taxes EVENTUALLY – which is why we have RMDs. These required distributions ensure that you will spend down the assets in your lifetime, and the IRS will receive tax revenue on that income. 

“When do I have to take RMDs?”

When you turn 73. This age has changed multiple times in the past few years from 70.5 to 72 and is intended to change further to 75 in 2033, but for now, anyone turning 73 in the next nine years will have to begin taking RMDs. You must withdraw the RMD amount by December 31st of each year (one minor exception is being allowed to delay until April in your first RMD year). 

“What accounts do I have to take an RMD from?”

Most retirement accounts such as IRAs, SIMPLE IRAs, SEP IRAs, Inherited IRAs/RIRAs, and workplace plans such as 401k’s and 403b’s require RMDs. RMDs are NOT required from Roth IRAs during the account owner’s lifetime. 

“How much will my RMD be?”

The IRS provides tables that determine RMD amounts based on life expectancy. For anyone taking their first RMD this year at age 73, the current factor is 27.4. So, for example, if you have $500k in your IRA, then you will have to distribute $500k / 27.4 = $18,248. That number may be lower if your spouse is listed as the beneficiary and is more than ten years younger than you. 

“What if I don’t take my RMD?”

There is a 25% penalty on the RMD amount. 

“Can I withdraw more than the RMD amount?”

Yes.

“What if I’m still working?”

For most accounts, such as IRAs, you must still take your RMDs. If you have a 401k with your employer, you may be able to delay RMDs in that account until you retire. 

“Will my beneficiaries have to take RMDs after I am deceased?”

Yes. These rules have also changed recently, and like most things in the IRS, there are plenty of caveats and asterisks, but generally speaking, your beneficiary will have to deplete the account within ten years. Certain beneficiaries, such as your spouse, have more options for determining required distributions. 

Tax-deferred accounts like IRAs and 401ks are a significant part of most retirees’ financial plans, so many of us will have to navigate this topic. We’re proud to say that we’ve been helping clients navigate the maze of retirement accounts, RMDs, and beneficiaries for over thirty years, so we are here to help if you have any questions. 

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Is My Pension Taxable in Michigan?

Contributed by: Kali Hassinger, CFP®, CSRIC™

In 2023, a tax relief bill many are calling “Lowering MI Costs” was signed into law that will eventually phase out state tax on pensions (both public and private) and other retirement income for many Michigan residents! As with many laws, however, the timeline for implementation and how and when this law will affect everyone can be confusing. Ultimately, the amount that can be deducted depends on when you were born and is adjusted incrementally over the next few years. I’ve outlined below what you can expect based on the year you were born. 

First, it’s important to note that there is no change for those born in 1945 and before. The maximum allowed deduction can still be claimed each year. The bill will also allow those taxpayers collecting a pension for service as a public police or fire department employee (including corrections officers and state police) to claim the same full deduction as those born in 1945 and prior. For 2023, that amount is $61,518 for single filers and $123,036 for joint filers.

For those born after 1945, however, the amount that can be deducted varies based on the year you were taken. By 2026, everyone will be allowed to deduct the full amount, just as those born before 1945 do now. 

2023 

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or, under the new law, they can deduct up to 25% of the max 2023 deduction amount (Single Filers: $61,518 x .25 = $15,379.50; Joint Filers: $123,036 x .25 = $30,759).

• For those born between 1953 and 1958: Single filers can deduct up to 25% of the 2023 amount of $61,518 ($15,379.50), Joint Filers can deduct up to 25% of the 2023 amount of $123,036 (30,759). Under previous law, there was no deduction allowed. 

• For those born 1959 and after:  No deduction allowed.

2024  

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 50% of the 2024 maximum deduction amount.

• For those born between 1953 and 1962:  Can deduction up to 50% of the maximum deduction allowed in 2024.

• For those born in 1963 and after: No deduction allowed.

2025

• For those born between 1946 and 1952:  Taxpayers will get to choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 75% of the 2025 maximum deduction amount.

• For those born between 1953 and 1966:  Can deduct up to 75% of the maximum deduction allowed in 2025.

• For those born in 1967 and after: No deduction allowed.

2026 

• For all taxpayers: Full Deduction will be allowed for everyone!

The Bill noted that as it is currently, the deduction available for joint returns will be based on the older spouse’s date of birth. If you have any questions about your pension or how this law will impact you, we are here to help! 

Source: House Bill 4001 (2023): http://legislature.mi.gov/doc.aspx?2023-HB-4001

Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

24800 DENSO DRIVE, STE 300, SOUTHFIELD, MI 48033 | 248.948.7900

Raymond James does not provide tax advice. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. Please discuss these matters with the appropriate professional. This document is a summary only and not meant to represent all provisions within the Lowering MI Cost plan.

Important Information for Tax Season 2023

Contributed by: Andrew O’Laughlin

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2023 Form 1099 Mailing Schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages.

• February 15 – Mailing of original Form 1099s.

• February 28 – Begin mailing delayed and amended Form 1099s.

• March 15 – Final mailing of any remaining delayed original Form 1099s.

Additional Important Information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2024, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts.

• Processing of original issue discount and mortgage-backed bonds.

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options.

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation.

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008).

• Changes made by mutual fund companies related to foreign withholding.

• Tax-exempt payments subject to alternative minimum tax.

• Any portion of distributions derived from U.S. Treasury obligations.

What Can You Do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2023.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

You can find additional information here.

And Don’t Forget…

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Andrew O’Laughlin, CFP®, MBA; is a Senior Client Service Manager at Center for Financial Planning, Inc.® He has the CERTIFIED FINANCIAL PLANNER™ certification.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Retirement Plan Contribution and Eligibility Limits for 2024 (Additional Updates)

Contributed by: Kelsey Arvai, CFP®, MBA

The Internal Revenue Service (IRS) announced how much individuals can contribute to their retirement accounts and updated figures for income eligibility limits. See this blog from earlier in the month for adjustments to contribution limits and income eligibility limits that are notable as you set your savings targets for the New Year. Below, you’ll find additional updates worth keeping in mind as well.

Saver’s Credit Income Limit (Retirement Savings Contributions Credit):

For low and moderate-income workers, it is $76,500 for married couples filing jointly (up from $73,000), $57,375 for heads of household (up from $54,750), and $38,250 for singles and married individuals filing separately (up from $36,500).

Additional changes made under SECURE 2.0: 

• The limitation on premiums paid concerning a qualifying longevity annuity contract is $200,000. For 2024, this limitation remains $200,000.

• Added an adjustment to the deductible limit on charitable distributions. For 2024, this limitation is increased to $105,000 (up from $100,000).

• Added a deductible limit for a one-time election to treat a distribution from an individual retirement account made directly by the trustee to a split-interest entity. For 2024, this limitation is increased to $53,000 (up from $50,000).

As we begin 2024, keep these updated figures on your radar when reviewing your retirement savings opportunities and updating your financial plan. As always, if you have any questions, feel free to contact our team! 

Have a Happy and Healthy New Year! 

Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Any opinions are those of Kelsey Arvai, MBA, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Retirement Account Contribution and Eligibility Limits Increase in 2024

Contributed by: Robert Ingram, CFP®

The IRS recently announced next year's annual contribution limits for retirement plans and IRA accounts. Compared with the historically large increases to limits in 2023, 2024 brings relatively modest increases. However, the adjustments to contribution limits and income eligibility limits for some contributions are still notable as you set your savings targets for the New Year.  

Employer Retirement Plan Contribution Limits (401k, 403b, most 457 plans, and Thrift Saving)

• $23,000 annual employee elective deferral contribution limit (increases $500 from $22,500 in 2023)

• $7,500 extra "catch-up" contribution if age 50 and above (remains the same as in 2023)

• The total amount that can be contributed to a defined contribution plan, including all contribution types (e.g., employee deferrals, employer matching, and profit sharing), will be $69,000 or $76,500 if age 50 and above (increased from $66,000 or $73,500 for age 50+ in 2023)

Traditional, Roth, SIMPLE IRA Contribution Limits:

Traditional and Roth IRA

• $7,000 annual contribution limit (increases $500 from $6,500 in 2023)

• $1,000 "catch-up" contribution if age 50 and above (remains the same as in 2023)

Note: The annual limit applies to any combination of Traditional IRA and Roth IRA contributions. (i.e., you would not be able to contribute up to the maximum to a Traditional IRA and up to the maximum to a Roth IRA.)

SIMPLE IRA

• $16,000 annual contribution limit (increases $500 from $15,500 in 2023)

• $3,500 "catch-up" contribution if age 50 and above (remains the same as in 2023)

Traditional IRA Deductibility (income limits):

You may be able to deduct contributions to a Traditional IRA from your taxable income. Eligibility to do so depends on your tax filing status, whether you (or your spouse) is covered by an employer retirement plan, and your Modified Adjusted Gross Income (MAGI). The amount of a Traditional IRA contribution that is deductible is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For example,

Filing Single

• You are covered under an employer plan

• Partial deduction phase-out begins at $77,000 up to $87,000 (then above this no deduction) compared to 2023 (phase-out: $73,000 to $83,000)

Married filing jointly

• A spouse contributing to the IRA is covered under a plan

• Phase-out begins at $123,000 to $143,000 compared to 2032 (phase-out: $116,000 to $136,000) 
  

•  A spouse contributing is not covered by a plan, but the other spouse is covered under a plan

• Phase-out begins at $230,000 to $240,000 compared to 2022 (phase-out: $218,000 to $228,000) 

Roth IRA Contribution (income limits):

Similar to making tax-deductible contributions to a Traditional IRA, being eligible to contribute to a Roth IRA depends on your tax filing status and income. Your allowable contribution is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For 2024, the limits are as follows:

Filing Single

• Partial contribution phase-out begins at $146,000 to $161,000 compared to 2023 (phase-out: $138,000 to $153,000)

Married filing jointly

• Phase-out begins at $230,000 to $240,000 compared to 2023 (phase-out: $218,000 to $228,000)

If your MAGI is below the phase-out floor, you can contribute up to the maximum. Above the phase-out ceiling, you are ineligible for any partial contribution.

Eligibility for contributions to retirement accounts like Roth IRA accounts also requires you to have earned income. If you have no earned income or your total MAGI makes you ineligible for regular annual Roth IRA contributions, other strategies such as Roth IRA Conversions could make sense in some situations to move money into a Roth. Roth Conversions can have different income tax implications, so you should consult with your planner and tax advisor when considering these strategies.

Going into the New Year, keep these updated figures on your radar as you implement your retirement savings opportunities and update your financial plan. As always, if you have any questions surrounding these changes, don't hesitate to contact us!

Have a happy and healthy holiday season!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Any opinions are those of Bob Ingram, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Contributed by: Mallory Hunt

As you may be aware, when a mutual fund manager sells some of their holdings internally and realizes a gain, they are required to pass this gain on to their shareholders. More specifically, by law and design, registered investment companies are required to pay out 95% of their realized dividends and net capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. With that in mind, ‘tis the season!  

Many firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Whether or not a capital gains distribution is considered short-term or long-term does not depend on how long you, as the investor, have held the fund; instead, it depends on how long the management firm owned the securities that produced the gain. Investors who hold funds with capital gains distributions in taxable accounts must report them as taxable income even if the money is reinvested in additional fund shares. In tax-advantaged accounts such as IRAs or 401(k)s, capital gains distributions are irrelevant as investors are not required to pay taxes on them as long as no withdrawals are made.

It can be frustrating to know that you may even face a tax bill on a fund with a negative return for the year. There are several reasons why funds may sell holdings and generate capital gains, including but not limited to:

• Increased shareholder redemption activity during a down market. In order to fund these redemptions, funds may need to sell securities, which may, in turn, generate capital gains.

• To reinvest the proceeds in a more attractive opportunity. 

• Concerns about earnings growth (or if a stock has become fully valued in the manager’s opinion).

• Corporate mergers and acquisitions also may result in a taxable sale of shares in the company being acquired. 

Investors concerned about tax exposure may want to consider investing in more tax-efficient equity funds. Such funds tend to be managed to limit capital gain distributions, when possible, by keeping holdings turnover low and harvesting losses to offset realized gains.

Capital gains distributions are a double-edged sword. The good news? The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. Yay! The bad news is that the taxman wants to be paid. Boo! Do keep in mind that this is what you have us for, though. We are here to help manage around and alleviate the effect these capital gains distributions may have on you and your portfolio.

WHAT WE CAN DO TO MINIMIZE THE EFFECT OF CAPITAL GAINS DISTRIBUTIONS:

1. Be Conscientious

We exercise care when buying funds at the end of the year, which may mean holding off a couple of days or weeks to purchase a fund in your account in some cases. Why? We do this to avoid paying taxes on gains you didn’t earn. This also allows you to purchase shares at a lower NAV or Net Asset Value.

2. Harvest Losses

Throughout the year, we review accounts for potential loss harvesting opportunities (also known as Tax Loss Harvesting). Where available and when appropriate, we sell holdings we have identified with this potential to realize those losses and offset end of the year gain distributions from fund companies. *See our blog titled “Tax Loss Harvesting: The ‘Silver Lining’ in a Down Market” for more details on this strategy.

3. Be Strategic

We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date to avoid receiving a company’s dividend payment. Dividends are treated as income by the IRS.

As always, there is a balance to be struck between income tax and prudent investment management, and we are always here to help distinguish.

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Elements of a Roth Conversion

Contributed by: Kelsey Arvai, CFP®, MBA

We’ve just entered Autumn, and the new year is around the corner, making this the ideal time to consider a Roth Individual retirement account (IRA) conversion to save on future taxes. A Roth Conversion is a financial maneuver that allows you to convert funds from a Traditional Individual Retirement Account (IRA) or pre-tax funds into a Roth IRA or future tax-free funds. There are several important considerations and potential tax implications.

Stated another way, a Roth Conversion involves taking some or all the funds from your Traditional IRA and moving them into a Roth IRA.

Tax Impact: Before doing a Roth Conversion, it’s crucial to understand the tax implications. The amount you convert will be added to your taxable income for the year the conversion occurs. In other words, you’ll need to pay income taxes on the converted amount in the year of the conversion. It’s important to consider what tax bracket you are in. You could pay a large upfront federal and state tax bill depending on the conversion size.

Additionally, when your adjusted gross income is boosted, you might pay higher Medicare Part B and Part D premiums or lose eligibility for other tax breaks, depending on your situation.

Future Tax Benefits: The primary benefit of a Roth Conversion is that once the money is in the Roth IRA, future qualified withdrawals (including earnings) are tax-free. Tax-free withdrawals are especially advantageous if you expect your tax rate in retirement to be higher. Typically, a partial or full Roth Conversion is more attractive in lower-earning years because there could be a smaller upfront tax liability. It may be beneficial for you to lock in lower rates now before they sunset in 2026 (the highest federal income tax bracket rate may move from 37% to 39.6% unless there are changes from Congress).

Timing: It’s important to consider your financial situation and whether you have the cash on hand to pay the taxes. If you choose to pay taxes from the converted fund, you may erode the long-term benefits of the conversion. A longer investing timeline is preferred because there’s more time for tax-free growth to offset the upfront cost of the conversion. Remember the five-year rule, which requires investors to wait five years before withdrawing converted balances without incurring a 10% penalty, with the timeline starting on January 1st of the year of the conversion. Without proper planning, you could deplete your savings or trigger an IRS penalty, so working with your Financial Advisor and Tax Advisor is essential. Contact us if you have questions or want to check if this strategy is a good fit!

Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Opinions expressed in the attached article are those of Kelsey Arvai, MBA, CFP®, and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

Don’t Fall Victim to the Widow’s Penalty!

Contributed by: Nick Defenthaler, CFP®, RICP®

Several years ago, after starting a new relationship with a newly widowed client, I received a confused phone call from her. She had received communication from Medicare that her Part B & D premiums would be significantly increasing for the year. To make matters worse, she also noticed when filing her most recent tax return that she was now in a much higher tax bracket. What happened? Now that her husband was deceased, she was receiving less in Social Security and taking fewer withdrawals from her retirement accounts. Her total income had decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she was a victim of what’s known as the “widow’s penalty.”

Less Income and More Taxes – What Gives?

Simply put, the widow’s penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse’s death.

When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. Additionally, they will lose any other income tied only to the deceased spouse, such as employment income, single-life annuity payments, or pensions with reduced or no survivor benefits. Depending on how much income was tied to the deceased spouse, the surviving spouse’s fixed income could see a sizeable decrease.

At the same time, the surviving spouse starts receiving less income, and they find themselves subject to higher taxes.

With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married filing jointly in the year following their spouse’s death. In 2023, that means they will hit the 22% bracket at only $44,725 in income. Married filers do not reach the 22% bracket until they have more than $95,375 in income. Unfortunately, even if income remains the same, widowed tax filers will inevitably pay higher tax rates on this same income level. 

Tax brackets are not the only place surviving spouses are penalized. Like the client in my story above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Specifically, single filers with a modified adjusted gross income of more than $97,000 are required to pay a surcharge on their Medicare premiums, whereas there is no surcharge until a couple who is married filing jointly reaches $194,000 of income. This means that a couple could have an income of $120,000 and not be subjected to the Medicare IRMAA surcharge, but if the surviving spouse has an income of $100,000, their premium will increase by almost $1,000 per year. In this same example, the widow would now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying $3,600 more in federal tax!

Proactive Planning

Short of remarrying, there is no way to avoid the widow’s penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.

For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse’s lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.

Several years ago, I was working with a couple (we’ll call them John and Mary), and after several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John’s passing. Several months after her husband’s passing, I met with Mary and suggested we convert over $100,000 from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes along with the significant medical deduction that was only present the year John passed, Mary only paid an average tax rate of 10% on the $100,000 we converted. As we stand here today, Mary is now filing single and finds herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates are set to expire at the end of 2025!)

The widow’s penalty should be on every married couple’s radar. While it’s possible that while both spouses are living, their tax rate will always remain the same, as we’ve highlighted above, unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning could help to dramatically reduce the impact this penalty could have on your plan.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained in this blog has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Tax Loss Harvesting: The “Silver Lining” in a Down Market

Contributed by: Mallory Hunt

"The difference between the tax man and the taxidermist is the taxidermist leaves the skin." Mark Twain

Three to five years ago, we would be singing a different tune, talking about capital gains and how to minimize your tax drag during the bull market. These days, we may be looking at capital losses (like those likely carried over by many investors after 2022) from this tumultuous market. Given the recent market downturn, tax loss harvesting is more popular than ever. While investors can benefit from harvesting losses at any time, down markets may offer even greater opportunities to do so. Investors who hold securities in taxable accounts (i.e., not your retirement accounts) can harvest losses that may benefit them in a couple of different ways depending on their specific situation. So let's look at the ins and outs of the unsung hero and how to use it to your advantage.

What is Tax Loss Harvesting and How Does it Work?

Tax loss harvesting is an investment strategy that can turn a portion of your investment losses into tax offsets. The strategy is implemented by strategically selling stocks or funds at a loss to offset gains you have realized or plan to realize throughout the year from selling other investments. The result? You only need to pay taxes on your net profit or the amount you have gained minus the amount you have lost. In turn, this reduces your tax bill. When and if capital losses are greater than capital gains, investors can deduct up to $3,000 from their taxable income. This applies even if there are no investment gains to minimize for the year, and harvested losses can also be used to offset the taxes paid on ordinary income. If net losses for a particular year exceed $3,000, the balance of those losses can be carried forward and deducted on future tax returns. 

With the proceeds of the investments sold, similar (but not identical) holdings are usually purchased to help ensure your asset allocation and risk profile stay unchanged while you continue to participate in the market. These newly purchased investments are typically held for a short period of time (no less than 30 days) and are then, more often than not, sold to repurchase those holdings that we sold at a loss initially. Do take heed of the wash-sale rule to ensure the proper execution of the strategy. This rule prohibits investors from selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale. The IRS provides a substantially identical definition and, unfortunately, has not been very clear on what is determined to fall into that category, leaving a lot of gray area. If the same investment is purchased before the wash sale period has expired, you can no longer write off the loss. However, the opportunity is not lost as the loss will be added back to the cost basis of the position, and the opportunity to harvest the loss at a later date is still an option.

Additional Considerations

Keep in mind that your capital gains taxes on any profits are based on how long you have held an asset. Long-term holdings held for one year or more will be taxed at long-term capital gains tax rates (0%, 15%, or 20%, depending on your taxable income and filing status), which generally tend to be lower than short-term capital gains tax rates. Short-term assets held for less than one year will be taxed at the same rate as your ordinary income (10%-37%). Investors in higher tax brackets will see the most significant benefits from tax loss harvesting as they will save more by minimizing taxable gains.

If you want to harvest losses, transactions must be completed by the end of the year you wish to realize the losses. For example, if you want to harvest losses from 2021, transactions would have needed to be completed by December 31, 2021.

In the end, tax loss harvesting is one way for investors to keep more of their investment earnings. According to researchers at MIT & Chapman University, tax loss harvesting was calculated to yield, on average, an additional 1.08% annual return each year from 1926 to 2018*. Overall, this is a time-tested strategy and potentially helpful tool, particularly during down markets. Consider speaking to your Financial Planner about how they implement this strategy, and always consult a tax advisor about your particular tax situation.

*Source: https://alo.mit.edu/wp-content/uploads/2020/07/An-Empirical-Evaluation-of-Tax-Loss-Harvesting-Alpha.pdf

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.