Proactive Planning Moves for an Evolving Tax Environment

Contributed by: Timothy Wyman, CFP®, JD

Contributed by: Lauren Adams, CFA®, CFP®

Just about every financial decision and transaction that we make has an income tax component or consequence. With federal marginal rates currently as high as 37%, state income tax rates as high as 13%, and additional surcharges for high-income earners, being efficient with income tax planning is paramount in accumulating or conserving wealth.  

Moreover, President Biden is planning the first major federal tax hike since 1993 that appears likely to be passed this year, at least in part. If passed, tax measures would likely take effect in 2022, with the potential for some measures to be applied retroactively even into 2021. 

At The Center, we have a long history and experience working with our clients and their tax preparers to drive down tax costs as much as possible. Our planning team may address the following for our clients’ benefit:

Marginal Tax Rate: The marginal tax rate is the tax rate paid on the next or last dollar of income. Current federal marginal rates go from 10% up to 37%. Your current, and expected future, marginal rate provides insight into decisions such as accelerating or delaying income as well as whether municipal bonds or taxable bonds are most efficient. Your marginal bracket also determines what long-term capital gains rate is applied. The current highest marginal bracket is 37% (and current proposed tax legislation could raise the upper rate to 39.6%).

Average or Effective Tax Rate: In addition to your marginal tax rate, the average rate helps us understand your overall tax picture. To determine your average rate, divide the total tax paid by your total income. For example, one might be in the 35% marginal tax bracket, but their average tax rate might be closer to 25%.

Itemized vs. Standard Deduction: Are you itemizing deductions, or does the standard deduction provide a greater benefit? With current limitations on itemized deductions, such as state & local income taxes and real estate taxes capped at $10k, many find that they no longer itemize deductions unless they “bunch.” For instance, bunching may involve grouping five years’ worth of charitable donations into one year. Many people do this by gifting to a vehicle like a Donor Advised Fund so the tax deduction may be recognized immediately, but the funds then get divvied out to charity more slowly over time. Essentially, bunching itemized deductions, such as charitable gifts, every other or few years typically provides the most efficient tax strategy.

Long Term Capital Gains: Under current law, long-term capital gains (securities held longer than 12 months) receive preferential tax rates vs. ordinary income tax rates. There are three brackets 0%, 15%, and 20%. Current proposed tax legislation could raise this rate to 25% for the highest income earners.

Carry Forward Losses: The goal of investing is to make money. One strategy to use when an individual investment loses value is to “harvest the loss.” Harvesting losses can be valuable as they offset capital gains dollar for dollar. If you have extra or additional losses, up to $3,000/year can also be used to offset ordinary income. Ideally, this harvesting of losses should be done on an ongoing basis rather than only at the end of a quarter or year.

Qualified Dividends: Qualified dividends are dividends taxed at a long-term capital gains rate instead of your ordinary income tax rate, which is generally higher. All things being equal, we would rather have dividend income that is considered qualified to achieve greater tax efficiency.  

Roth Conversion Opportunities: Sometimes paying tax today versus later is a tax-efficient strategy. If you feel that you will be in a higher bracket later, or even that your beneficiaries may be at a higher tax bracket, full or partial Roth conversions can be employed to recognize that income today at a lower rate. Roth money can be used to provide tax-free and RMD free retirement income. Having Roth dollars also provides opportunities to optimize your current marginal bracket as part of a comprehensive retirement income plan. 

IRMAA Surcharges: Our tax code contains provisions that may be described as “hidden taxes.” One such tax includes the Medicare income-related monthly adjustment amount (or IRMAA), which is an extra surcharge based on your total income (specifically Modified Adjusted Gross Income). Meaning, depending upon your income, you might pay a higher premium for Medicare (Part B and D). For example, in 2021, a joint couple pays $148.50/month when their income is less than $176k. Once you go a dollar over, the premium now becomes $220.20/month per person and is added to your Medicare premiums – a hidden tax. There are additional thresholds, and the current maximum premium for those with income over $750k is a total of $582/month each. Managing brackets by limiting or decreasing income, such as using Qualified Charitable Distributions from an IRA, can reduce your surcharge.

Net Investment Income (NII) Tax: Another so-called hidden tax applies to single taxpayers with MAGI above $200k and $250k for couples filing jointly. Investment income over these thresholds contains an additional 3.8% tax. So, while the stated maximum capital gains rate is 20%, the highest long-term capital gains rate is actually 23.8% with the surtax (before taking state taxes into account).

Phase-outs: At last count, there are over 50 tax credits that may be available to taxpayers. Unfortunately, they are subject to a variety of income phase-outs, so careful planning is required.

The Biden tax plan, if passed, contains additional income and estate tax provisions that we are closely monitoring including, but not limited to:

• New tax increases on households earning more than $400k, including upping the top tax rate to 39.6% and lowering the amount of income needed to reach that top bracket

• Increasing the top long-term capital gains rate from 20% to 25% 

• Restricting many tax and estate planning techniques, including backdoor Roth IRA conversions, the ability to convert pretax IRA dollars into Roth IRA dollars for high earners, and eliminating intentionally defective grantor trusts (a strategy used to move assets out of one’s taxable estate)

• While the Biden plan appears to exclude any “wealth tax” such as proposed by Senator Elizabeth Warren, there may be changes to estate tax provisions such as decreasing the Estate Exemption Equivalent from $11.77M per person to $5M

• Introducing and expanding additional child tax credits 

Lastly, we find that efficient tax planning considers not only your current year taxes, but a plan that considers several years or even several generations. Assuming an increase in individual (and corporate) tax rates, the stakes will be even higher and proper planning can help put more in your pocket.  

Stay tuned for an upcoming video message in November intended to keep you in the loop with proposed tax changes. Learn more about the American Families Tax Plan proposal HERE.

Timothy Wyman, CFP®, JD, Timothy Wyman, CFP®, JD, is the Managing Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Tim earned a place on Forbes’ Best-In-State Wealth Advisors List in Michigan¹ in 2021 for the fourth consecutive year. He was also named a 2020 Financial Times 400 Top Financial Advisor² for the third consecutive year.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals and also leads the client service, marketing, finance, and human resources departments.

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. 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.

How to Reduce the Risks of Dementia and Diminished Capacity to Your Retirement Plan

Contributed by: Sandra Adams, CFP®

Senility is what they used to call it and it only happened to the very elderly like our great grandparents.  Surely, not us. We are healthy, educated, and financially well off, so we don’t need to talk about senility or plan for it. THINK AGAIN!

Senility is now known as Alzheimer’s, a disease that accounts for 60-80% of dementia. The statistics are alarming! According to the Alzheimer’s Association, more than 1 in 9 people over age 65 have Alzheimer’s disease. The chances of an Alzheimer’s diagnosis doubles every five years after age 65 (beginning at approximately 5.3% at age 65 and going from there).   If the disease runs in your family, a head injury, hypertension, diabetes, stress, excess weight, depression, and many other conditions increase your risk of diagnosis.

Risks of Not Planning

I don’t need to tell you that losing your memory is a scary proposition. The fact that you could live for years (if you are otherwise healthy) without knowing who you are, where you are, who any of your loved ones are, and not recall your short nor most of your long-term past is frightening.  Even more disturbing is that you also forget how to care for yourself, and your body begins to forget how to function.  Family may be able to assist you at first, but as time goes on professional care is usually needed.  A few thousand per month for at-home caregivers is not out of the question.  As more care is required, the few thousand dollars per month can quickly become five thousand to ten or twelve thousand dollars a month, depending on the level of care needed and where you live. The impact on your financials, if you haven’t planned, can be detrimental.

In addition to the care risks, there are capacity risks.  Those who develop Alzheimer’s or related dementia go through a period (sometimes before their diagnosis or possibly early in their diagnosis) when their capacity is considered “diminished.”  They are not yet considered fully incapable of making their own decisions. In other words, the right to make decisions has not yet been taken from them, but their ability to make decisions is compromised.  In this stage of the game, we are generally watching for behavioral changes in clients:

• Missing Appointments

• Getting confused about instructions/having difficulty following instructions

• Making more frequent calls to the office to ask the same questions

• Trouble handling paperwork

• Difficulty recalling decisions or actions

• Changes to mood or personality

• Poor judgment

• Memory Loss (generally)

• Difficulty with basic financial concepts

Concerns that are more significant can be financial fraud and exploitation. Clients with diminished capacity are incredibly vulnerable to others who try to take advantage of their inability to understand what is or is not real. Unfortunately, 1 in 10 seniors over age 65 are victims of financial exploitation, according to the Government Accountability Office, with losses totaling over $3 billion annually. While most of this exploitation is at the hands of strangers, sometimes family, friends, and caregivers exploit the vulnerable.

Proactive Solutions

Now that I have completely frightened you about dementia and diminished capacity, let’s take a step back and look at what we can and should be doing to plan and protect your plan proactively against these risks.

From a personal health perspective, the Alzheimer’s Association suggests:

• Combined physical and mental exercise

• Continuous Learning

• Social Engagement

• Get good sleep

• Eat a healthy diet (Mediterranean Diet recommended)

From a financial planning perspective, it makes sense to put together a proactive aging strategy as part of your retirement planning to address the potential risks of dementia/Alzheimer’s/diminished capacity on your comprehensive financial plan.  What should this aging strategy address?

•  Legal Documents

• Care

• Finances

• Legacy

Dementia and diminished capacity are scary.  We don’t want to think about a time when we might not remember our names, remember our loved ones, or even recognize our reflections in the mirror. Dementia and diminished capacity can wreak havoc on our families and our financial security if we don’t plan. Take steps today to put together an aging strategy so that you and your loved ones are prepared. Preparation is the best defense!  If you or anyone you know need assistance with this topic, please let us know.  We are always happy to help!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Biden’s “American Families Tax Plan” Proposal and How It Could Affect You

Contributed by: Josh Bitel, CFP®

Ever since President Joe Biden has taken office, there has been much talk about how the tax landscape may change. On September 13th, Democrats on the House Ways and Means Committee released their new tax proposals. While the outcome may differ from the proposals listed below, we always want to keep you informed on proposed changes. Highlights are summarized below.

 New Top Ordinary Income Tax and Capital Gains Rate

Perhaps the most talked about piece of the proposal is the return of the 39.6% income tax bracket. This rate was previously in place from 2013-2017 but reduced to 37% with the Tax Cuts And Jobs Act of 2017. However, this new proposal does not simply replace the 37% bracket with the 39.6%. Instead, it reduces the amount of income a taxpayer can have before being placed in that top bracket. Single taxpayers making over $400,000 or married couples making over $450,000 will be in the new top bracket under this proposal.

 Along with ordinary income tax brackets, top capital gains tax brackets may also change. The major difference between this change and the ordinary income tax change is that (if approved) this will go into effect immediately and impact all capital gains from that point forward. In contrast, the ordinary income tax brackets won’t change until 2022. See the chart below for proposed capital gains tax changes.

Proposed Capital Gains Tax Changes

Changes to Roth IRA Strategies

 This one may hurt more for advisors. If enacted, this part of the proposal prohibits converting after-tax dollars held in retirement accounts to Roth IRAs. In other words, the “backdoor Roth IRA” and the “Mega backdoor Roth IRA” would be left in the dust.

 Another proposed change would go a bit further. In 2032, Roth CONVERSIONS for high-income earners would be prohibited. Any single person earning over $400,000, or married couples earning over $450,000, would be impacted by this rule.

These are just a few of the many changes proposed by Democrats on the House Ways and Means Committee. Of course, the actual bill may look drastically different than the proposals listed in this blog. Planners here at The Center will be sure to stay on top of any changes and keep you informed as they come out.

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.

Finding Meaningful Ways to Spend When Your Financial Plan Allows

Contributed by: Sandra Adams, CFP®

Several months ago, I wrote about clients who had developed such great savings habits to retire that they were shocked they could spend more in retirement than they had been spending in pre-retirement (“Can You Change Your Spending Habits in Retirement”). Of course, by the time this happens, most clients realize that it is very difficult, if not impossible, to change their spending habits or their lifestyle in general. Ultimately, they have trouble spending the money they have available to them.

I continue to have discussions in financial planning reviews with these clients when their retirement spending continues to be well below what is possible for their long-term financial success. Often this generates meaningful conversations regarding what might be possible with the excess funds, for the clients to make their lives more enjoyable and valuable, and for their families and communities.

Here are just some of the ideas that have come out of these discussions:

• Annual gifting to children — in cash or specifically for the individual needs for the children and/or their families.

• Assisting with grandchildren’s education.

• Taking a memorable trip(s) that the client has always dreamed of taking.

• Creating or contributing to a scholarship program at the client’s former school/university.

• Making a significant donation to a charity that has special meaning to the client.

• Investing in a hobby that has significant meaning/value to the client.

• Helping a family member that is struggling financially.

While spending more than what is necessary is still not easy for most of these clients, they begin to find that it makes more sense and is easier to do when the spending is meaningful for them, their families, or their community. And with the help of a financial advisor along the way to make sure that the spending is still in line with their plan, even if they do those things that are meaningful (and sometimes fun), they can move forward with confidence and find new ways to be creative with their spending.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Nick Boguth Achieves CFA Designation

Contributed by: Angela Palacios, CFP®, AIF®

This summer, Nick completed his journey to obtain his Chartered Financial Analyst (CFA®) designation.  Nick started as an intern with the Center in May 2014, eventually joining us full time after graduating from the University of Michigan (Go Blue!) with a degree in Economics and Statistics.  Almost immediately after starting full-time, he began the long road to achieving his CFA® designation over five years ago.

Nicholas Boguth, newly minted Chartered Financial Analyst

What is the CFA® Designation?

The curriculum builds a strong educational foundation of advanced investment analysis and real-world portfolio management skills.  Upon completion, the average designation holder has spent roughly 1,000 hours studying! 

There are three levels that Nick will have to pass and several other hurdles before he can utilize the designation:

• CFA level 1 – tests your basic knowledge and comprehension focused on investment tools and ethics.

• CFA level 2 – tests more complex analysis along with a focus on valuing assets

• CFA level 3 – requires a synthesis of all the concepts and analytical methods in various applications for effective portfolio management and wealth planning.

Along with passing the courses and the exams, Nick must have four years of work experience in investment decision-making, which he has earned with his role as Portfolio Administrator here at the Center.  He must also agree to follow a rigorous Code of Ethics and Standards of Professional Conduct and become a member of the CFA Institute. 

Is this Easy?

While Nick may have made it seem easy to the rest of us, it is far from easy.  It is a popular designation to seek out.  Each year nearly 200,000 people from all over the world register to take one of the exams offered only once per year!  The pass rate for each level is usually only around 40%.

As with everything else, the examinations were set back due to COVID.  Nick persevered through COVID delays, planning a wedding, newborn twins, and two home purchases and renovations. When I asked Nick his thoughts on the program, he said:

The entire process was incredibly rewarding. I learned more than I ever thought I would over the past few years. It was a challenging road to pass the final level, and I was absolutely thrilled to complete it, but it feels like just the beginning. I’m looking forward to putting this knowledge to good use here at The Center in a constant effort to provide clients with the best investment experience possible.

Nick’s education and passion for research already adds more depth to The Center’s Investment Department and Committee in helping us shape portfolios for clients!  Look for many more great things to come from Nick!  Way to go, Nick!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Inflation and Stock Returns

Contributed by: Nicholas Boguth

There is a lot of talk about inflation in the news lately, and whether or not the recent spike is “transitory” or if the recent rise in price levels will persist into the coming months, years, or even longer. The problem with forecasting inflation is that it cannot be accurately forecasted. It is a complex topic with ever-changing variables beyond the Fed and money supply including (but not limited to) consumer spending, saving rates, supply chains, government policy, demographics, technological advancements, and much more.

For some high-level context, I wanted to look at the relationship between inflation and stock returns over the past 30 years.

Below, you’ll see a scatter-plot of 1-year changes in CPI and the S&P500. What stands out to me is that an overwhelming majority of those dots are in the top right corner of the graph – positive inflation and positive stock returns. A lot of news headlines we see will put the word “fear” directly next to the word “inflation” because, well…that is what headline writers are paid to do. The reality is that if you look at the long term history of stock performance, you will see that it is positive a vast majority of the time regardless of what happened with inflation.

Source: Morningstar Direct. S&P 500 TR. Monthly return data.

 Investors need to prepare one way or another, and a great way to do that is to talk to your financial advisor and make sure that you are setting yourself up for success no matter what happens with inflation. Helping to maximize your probability of success is something we help all of our clients with, and it may look different for each investor depending on time horizon, risk tolerance, and investing/spending goals. Give us a call or shoot us an email if you have any questions on how to help maximize yours.

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment.  Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. The foregoing information 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. Any opinions are those of Nick Boguth and not necessarily those of Raymond James.

Crain’s Cool Places to Work: Five Years Running

Contributed by: Center for Financial Planning, Inc.®

We are happy to announce The Center has been awarded Crain’s 2021 Cool Places to Work* in Michigan for the fifth consecutive year!  Crain’s Cool Places to Work was designed to identify, recognize and honor the best places of employment in Michigan. The 2021 Cool Places to Work in Michigan list is made up of 100 companies in three size categories: small (15-49 employees), medium (50-249), and large (250+). Companies underwent a two-part assessment. First, nominees were evaluated on their policies, practices, and demographics. Then, employees were asked to submit surveys. The combined scores determined the final rankings.

THE CENTER WAY

The Center team has spoken, and it is evident we are all proud of benefits like professional development, education reimbursement, workplace committees, and social events. Our fun culture is developed over ping-pong tournaments, chili cook-offs, and volunteer work.

After months of working remotely, The Center team gathers for a pandemic-safe, outdoor social event.

TEAMWORK…During a Pandemic

“We are especially proud of how we’re managing the curveball 2020 threw us. When COVID-19 hit, we transitioned to working remotely and formed a response committee tasked with making the office a safe place to return to,” said Lauren Adams, CFA, CFP®.

Managing office culture remotely comes with its challenges, but none were significant enough to break the incredible community our office has developed.  We’ve started a book club to keep engaged and even brought in a little competition with our bracket-style stock education game, Market Madness, and health and wellness contests throughout the pandemic.  The health and wellness contests helped keep the COVID 15lbs at bay.

Planners, Josh Bitel and Kali Hassinger, enjoy food truck treats.

Ultimately, The Center is a cool place to work because each team member contributes to a caring and positive workplace.

*This ranking is not based in anyway on the individual's abilities in regards to providing investment advice or management.  This ranking is not indicative of advisor’s future performance, is not an endorsement, and may not be representative of individual clients' experience.  Raymond James is not affiliated with (referenced organization/entity).

Planning Opportunities for LGBTQ+ Elders

Contributed by: Lauren Adams, CFA®, CFP®

For over 35 years, our independent wealth management firm Center for Financial Planning, Inc. has partnered with Raymond James Financial Services to achieve our mission of “Improving lives through financial planning done right.” In addition to providing our clients with custodial services for their investment accounts, Raymond James also offers a wide range of resources to The Center from everything from equity research reports to educational opportunities to stay on top of the ever-changing financial planning landscape.

One wonderful resource example is the Raymond James Pride Financial Advisors Network, a network of advisors serving the Lesbian, Gay, Bisexual, Transgender, and Queer (LGBTQ+) community that was founded in 2020, and its “Inaugural Business of Pride Symposium,” held in June 2021. At the Symposium, I had the opportunity to attend a session titled, “The LGBT+ Aging Crisis – Planning Opportunities for our LGBT+ Elders,” presented by Dan Steward, National Program Director for the Human Rights Campaign Aging Project, and Sherrill Wayland, Director of National Education Initiatives for SAGE.

In the presentation, Steward and Wayland discussed practical ways for financial planners to address and better serve members of the LGBTQ+ community:

• Recognize the distinct needs of this growing and diverse community: It is estimated that there are over 2.7 million older adults that self-identify as members of the LGBTQ+ community. Citing the work of leading researcher Professor Karen Fredriksen-Goldsen, the presenters explained that within this group, however, there is a wide range of generational experiences: from the oldest “Invisible Generation” that grew up when public discussion of LGBTQ+ issues was unheard of, to “The Silent Generation” that grew up when issues were being discussed but faced heavy discrimination, to the younger “Pride Generation” where many have been out for decades. Recognizing that there are nuances within the community, but also understanding the overarching themes of discrimination and resiliency, is an important component of developing the cultural competency required to best serve these clients.

• Plan, Plan, Plan: I’ve seen firsthand how the benefits of pairing comprehensive financial planning with a thoughtfully constructed, well-diversified investment portfolio that fits the clients’ needs and objectives can be liberating and even life-changing for so many. Working with a financial planner early on can help members of the community develop good financial health and financial security that will position them well later in life. Thoughtful estate planning (including considering if wills, Durable Powers of Attorney for Healthcare and Financial Matters, and living trusts are right for the situation) become all the more critical given that members of the LGBTQ+ community still face legal discrimination in many areas. Proper insurance planning can help manage risks and protect assets, including the potential need for long-term care coverage, over a client’s lifetime.

• Be aware of the elevated risk of financial exploitation and barriers to seeking help: According to SAGE, a significant portion of the elder LGBTQ+ community does not wish to live alone, has shrinking support networks, and may be inclined to seek companionship online. These factors can conspire to put these clients at higher risk of financial exploitation (including online “sweetheart scams”) and elder abuse. At the same time, coming from a place of resilience and self-sufficiency after facing discrimination throughout their lives, LGBTQ+ elders may be reluctant to seek help. They may fear being outed if they need assistance, that they won’t be believed by authorities, the loss of financial support from the abusive person, or the prospect of living alone. Financial planners – who may be some of the most trusted people in the client’s life – must be aware of these concerns and be ready to help encourage reaching out to authorities or seeking assistance if needed.

• Know your resources: In the effort to assist, planners must know what resources are available and be cognizant of the added layer of being able to identify inclusive service providers. Steward and Wayland identified several resources that financial planners serving this community should be aware of:

  • The Long-Term Care Equality Index – The first national benchmarking system for residential long-term care communities. The index was launched in June 2021 and 184 communities participated. It was created by a partnership between the Human Rights Campaign Foundation and SAGE to promote equitable and inclusive care for LGBTQ+ older adults.

  • National Resource Center on LGBT Aging – This project is funded by the U.S. Administration for Community Living and serves as a resource center to improve the quality of services and support offered to LGBTQ+ older adults. It offers a host of resources ranging from caregiver support to Social Security, Medicare, and Medicaid guides to resource directories on the national and state level.

  • SAGE – SAGECare provides LGBTQ+ cultural competency training on aging issues to service providers. Their “Find a Provider” tool can be used to locate service providers that have participated in their cultural competency training programs.

 By keeping these considerations and resources in mind, financial professionals can ensure all clients –regardless of sexual orientation or gender identity – can benefit from the power of financial planning and act as true advocates for the aging LGBTQ+ community.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals and also leads the client service, marketing, finance, and human resources departments.

Death of the Stretch IRA

Contributed by: Nick Defenthaler, CFP®, RICP®

In December 2019, the SECURE Act was signed into law, it has had a material impact on current and future tax planning since its implementation in 2020. This new legislation carries several critical updates for investors, but the most meaningful change affects an individual’s plan to transfer or receive generational wealth. The elimination of the “Stretch IRA” for most non-spouse beneficiaries will change the most effective planning strategies wealth managers use to help beneficiaries who will be inheriting retirement accounts now and in the future.

The three major changes from the secure act are:

• The Required Minimum Distribution (RMD) age went from 70 ½ to 72.

• Those 70 and older can now make Traditional IRA contributions (must have earned income)

• A large scale Inherited IRA Overhaul, aimed at complicating tax withdrawal strategies from Inherited IRA accounts aka “the death of the Stretch IRA”

The most impactful change from this list is the Inherited IRA Overhaul, the contributing factor that will affect many financial and estate plans is:

• RMD’s for many inherited IRA’s are no longer required, but in most cases, the account must be liquidated within 10 years of the year of death of the primary account holder.

This change will affect all pre-tax retirement accounts, while after-tax accounts such as the Roth IRA distributions will house different tactical distribution strategies.

During the presentation we talk through some creative planning strategies that can be implemented to potentially save current and future taxes under these new legislative measures, such as: using Roth IRA conversions to reduce taxable IRA assets and increase tax-free dollars, Tax-Efficient Charitable Giving through Qualified Charitable Distributions (QCDs), and beneficiary distribution planning to nullify tax burden.

Finally, we use a pair of case studies to demonstrate how these strategies can reduce tax liability and maximize the achievement of client goals.

To better understand why a retiring couple who are beginning to plan their legacy, or an individual inheriting retirement accounts will need quality tax planning advice - now more than ever, will have their questions answered during this talk.

Applicable timestamps for specific segments are listed below for convenience:  

1:17 – Center for Financial Planning Team Introduction

2:52 – About the Host (Nick Defenthaler)

3:40 – The Secure Act Overview

7:20 – Death of “The Stretch” IRA

11:32 – Today’s Inherited IRA Rules

15:49 – Tax Environment as a Result of TCJA

18:26 – Getting Creative - Roth IRA Conversions

24:40 – Getting Creative – Tax Efficient Charitable Giving

29:12 – Getting Creative – Beneficiary Designations

31:12 – Case Study – Retiree Couple & Legacy Planning

39:38 – Case Study – Beneficiary of an Inherited IRA

49:19 – Creating a Tax Plan

Any opinions are those of Nick Defenthaler CFP®, RICP® and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. IRA tax deductibility and contribution eligibility may be restricted if your income exceeds certain limits, please consult with a financial professional for more information. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Tips for Managing Restricted Stock Units

Contributed by: Robert Ingram, CFP®

Does your employer offer company stock as part of your compensation package? There are many forms of equity compensation ranging from different types of stock awards to employee stock options (ESO) and employee stock purchase plans (ESPP). Over the last several years, Restricted Stocks Units (RSU) have become one of the most popular alternatives offered by companies. 

 Unlike pure stock awards that grant shares of stock or stock options that provide an employee the right to purchase shares at a predetermined price for a specific period of time, grants of RSUs are not actual shares of stock (yet). An RSU is essentially a promise made by the employer company to deliver to the employee shares of stock or cash payment for the value of stock shares following a vesting schedule. The vesting schedule is often based on a required length of employment, such as a three-year or four-year period, or other company performance goals. The number of units generally corresponds to shares of stock, but the units have no value until the employee receives the corresponding stock shares (or equivalent payment) when they vest.  

 How do RSUs Work? 

Let’s say your employer company grants you 1,000 Restricted Stock Units this year with a grant date of September 1st, and a 4-year vesting schedule under which 25% of the units vest each year as shares of the company’s stock. The following September 1st after the original grant date (one year later) as long as you had continued your employment, the first 25% of your 1,000 RSUs vests as actual company stock shares. Assuming the market value of the stock at the time of vesting is $50 per share, you would have 250 shares of stock worth $12,500. 

 Once the shares have vested and been delivered, you now have ownership rights such as voting rights and rights to dividend payments. You can also choose to hold or to sell the shares from that point. In each subsequent year going forward, the next 25% of your RSUs would vest until the 4th year when the remaining 250 of the 1,000 units vest. 

 One of the first important planning considerations for Restricted Stock Units is their taxation. How are RSUs taxed and how might that impact your tax situation?

 There are three triggering events with RSUs to understand.

 When You Receive RSU Grants

In most cases, at the time you receive your RSU grants, there are no tax implications. Because there is no transfer of actual property by the company until vesting in the form of shares or cash payment, the IRS does not consider the value of the stock represented by RSUs as income compensation when the grant occurs. This means the RSU grants themselves are not taxed.

 When RSUs Vest 

 Once the restricted units vest and the employer delivers the shares of stock or equivalent cash payment, the fair market value of the vested shares or cash payment as of that date (minus any amount the employee had to pay for the RSUs) is considered income and is taxed as ordinary income. Typically, companies grant RSUs without the employee paying a portion, so the full value of the vested shares would be reported as income.  

 In our example above with the 1,000 RSU grants, 250 RSUs vested with the fair market value of $50 per share for a total value of $12,500. This $12,500 would be considered compensation and would be reportable as ordinary income for that tax year. This would apply to the remaining RSUs in the years that they vest. Because this amount is treated as ordinary income, the applicable tax rate under the federal income tax brackets would apply (as well as applicable state income taxes).  

 To cover the tax withholding for this reported income at vesting, most companies allow you a few options. These may include:

• Having the number of shares withheld to cover the equivalent dollar amount

• Selling shares to provide the proceeds for the withholding amount

• Providing a cash payment into the plan to cover the withholding

When You Sell Shares 

 At the time RSUs vest, the market value of those shares is reported as ordinary income. That per-share value then becomes the new cost basis for that group of shares. If you immediately sell the vested shares as of the vesting date, there would be no additional tax. The value of the shares has already been taxed as ordinary income, and the sale price of the shares would equal the cost basis of the shares (no additional gain or loss).

 If however, you choose to hold the shares and sell them in the future, any difference between the sale price and the cost basis would be a capital gain or capital loss depending on whether the sale price was greater than or less than the cost basis.  

 Once again using our example of the 1,000 RSU grants, let’s assume the fair market value of 250 shares at vesting was $50 per share and that you held those shares for over one year. If you then sold the 250 shares for $75 per share, you would have a capital gain of $25 per share ($75 - $50) for a total of $6,250. Since you held the shares for more than one year from the vesting date, this $6,250 would be taxed as a long-term capital gain and subject to the long-term capital gains tax rate of either 0%, 15%, or 20% (as of 2021) depending on your total taxable income. 

 If you were to sell shares within one year of their vesting date, any capital gain would be a short-term capital gain taxed as ordinary income. Since the federal tax brackets apply to ordinary income, you may pay a higher tax rate on the short-term capital gain than you would on a long-term gain even at the highest long-term capital gains rate of 20% (depending on where your income falls within the tax brackets).

 Planning for Additional Income

Because Restricted Stock Units can add to your taxable income (as the units vest and potentially when you sell shares), there are some strategies you may consider to help offset the extra taxable income in those years. For individuals and couples in higher tax brackets, this can be an especially important planning item.  

Some examples could include:

• Maximizing your pre-tax contributions to your 401k, 403(b), or other retirement accounts. If you or your spouse are not yet contributing to the full annual maximum, this can be a great opportunity. ($19,500 in 2021 plus an extra $6,500 “catch up” for age 50 and above). In some cases, if cash flow is tight, it could even make sense to sell a portion of vested RSUs to replace the income going to the extra contributions.

• Contributions to a Health Savings Account (HSA) are pre-tax/tax-deductible, so each dollar contributed reduces your taxable income. If you have a qualifying high deductible health plan, consider funding an HSA up to the annual maximum ($3,600 for individuals/$,7,200 for family coverage, plus an extra $1,000 “catch up for age 55 and above)

 Deferred Compensation plans (if available) could be an option. Many executive compensation packages offer types of deferred compensation plans. By participating, you generally defer a portion of your income into a plan with the promise that the plan will pay the balance to you in the future. The amount you defer each year does not count towards your income that year. These funds can grow through different investment options, and you select how and when the balance in the plan pays out to you, based on the individual plan rules. While this can be an effective way to reduce current income and build another savings asset, there are many factors to consider before participating. 

• Plans can be complex, often less flexible than other savings vehicles, and dependent on the financial strength and commitment of the employer.

• Harvesting capital losses in a regular, taxable investment account can also be a good tax management strategy. By selling investment holdings that have a loss, those capital losses offset realized capital gains. In addition, if there are any remaining excess losses after offsetting gains, you can then offset up to $3,000 of ordinary income per year. Any excess losses above the $3,000 can be carried over to the following tax year.

 When Should I Sell RSUs?

 The factors in the decision to sell or to hold RSUs that have vested as shares (in addition to tax considerations) should be similar to factors you would consider for other individual stocks or investment securities. A question to ask yourself is whether you would choose to invest your own money in the company stock or some other investment. You should consider the fundamentals of the business. Is it a growing business with good prospects within its industry? Is it in a strong financial position; or is it burdened by excessive debt? Consider the valuation of the company. Is the stock price high or low compared to the company’s earnings and cash flow?

Consider what percentage of your investments and net worth the company stock represents. Having too high a concentration of your wealth in a single security poses the risk of significant loss if the stock price falls. Not only are you taking on overall market risk, but you also have the risk of the single company. While each situation is unique, we generally recommend that your percentage of company stock not exceed 10% of your investment assets.

You should also consider your financial needs both short-term and long-term. 

Do you have cash expenses you need to fund in the next year or two and do you already have resources set aside? 

If you’re counting on proceeds from your RSUs, it could make sense to sell shares and protect the cash needed rather than risk selling shares when the value may be lower.  

 As you can see, equity compensation and specifically RSUs can affect different parts of your financial plan and can involve so many variables. That’s why it’s critical that you work with your financial and tax advisors when making these more complex planning decisions. 

So please don’t hesitate to reach out if we can be a resource.

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.

Disclosure: 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.