3 Conversion Strategies That Can Minimize Taxes In Retirement

Page 2 of 3

3 Conversion Strategies That Can Minimize Taxes In Retirement

On February 27, 2017

When it comes to being prepared for retirement, the majority of Americans are not in good shape. A recent study found that “less than one-third of Americans are saving money in their 401(k)s and other workplace retirement accounts” (Bhattarai). Even if you are prepared for retirement, you may be shocked by the amount of taxes you owe once you start using your retirement funds. To learn how you can minimize your taxes during retirement take a look at the below strategies.

IRA Conversion

One of the simplest ways to reduce your tax burden during retirement is to convert your traditional IRA or 401(k) to a Roth IRA. When you make withdraws from a Roth IRA, you do not owe taxes on the amount you take out. Although it’s possible you may owe taxes when you convert to a Roth IRA, once you’re retired and make withdraws you’ll save money on taxes. Since you generally make less money during retirement, every bit of saved money helps. Most financial advisers recommend that you convert your IRA funds over the course of a number of years rather than all at once. This way you can keep an eye on your tax bracket and make sure you don’t enter a tax bracket that’s too high.

Home Equity Conversion

Using home equity as an income source during retirement is a strategy that doesn’t receive as much attention as some other retirement strategies. Yet it’s one of the best conversions to consider as you enter your golden years. Many retirees downsize during retirement and free up cash by selling their homes. By using a home equity conversion, though, you can stay in your current home and gain access to cash. One of the best strategies to consider is a reverse mortgage. To learn more about the benefits of reverse mortgages take a look at this blog I wrote last year.

Indexed Universal Life (IUL) Conversion

In the past, I have written about the financial benefits of IUL policies. In particular, IUL conversions offer numerous tax advantages that retirees should consider. While the policy gains money you do not owe any taxes. IUL policies also help protect you from the up and down nature of the market. The policy’s gains are linked with the market, but you don’t face any market risk since your money isn’t actually tied up in the stock market. To learn more about how an IUL policy can help you minimize taxes during retirement, I encourage you to read this article.

Learn More

Here are three more useful articles that I suggest you read to learn more about minimizing taxes during retirement:

Real Estate: Making Money Regardless of the Market’s Direction

By Michael Morrow

On February 24, 2017

In Financial Planner, Michael Morrow

One of the most difficult aspects of investing is dealing with market volatility. However, when it comes to limiting losses there is one asset that stands out above the rest: real estate. The U.S. Census Bureau reports that the price of real estate has increased in a consistent manner since 1940. While the subprime mortgage crisis limited its growth for a couple of years, it recovered relatively quickly and continues to increase in value. Keep reading to learn more about the basics of real estate investing and how you can continue to make money when the market is down.

Why Invest in Real Estate?

The best time to invest in real estate is the present. As stated above, real estate investments have attractive returns over time and some of the lowest volatility compared with other investments. Real estate is a great choice to add diversification to your portfolio. Research shows that during bear markets when stocks are down real estate usually goes up.

Research

One of the most important keys to finding success with real estate is doing your research. Before you purchase any real estate you need to understand which markets will give you the biggest return. If you plan to rent out your property to individual tenants, you should make sure you purchase property in an area that’s attractive to renters. The area around universities is usually the best location to purchase property since student tenants will be available each year.

Decide Your Approach

Do you want to be a landlord, or do you plan to flip properties? There are advantages and disadvantages to each approach, so, again, you will have to do your research. When it comes to flipping properties, you also have some decisions to make. Will you refurbish homes before selling them, or will you search for undervalued homes in growth markets and sell them without making any improvements.

Find a Mentor

If you have never invested in real estate before, you should connect with experienced investors to learn some of the pitfalls to avoid. There is likely a real estate investor club in your area, or you can reach out to individual investors and ask to buy them lunch or dinner. Target investors who are active in the area where you are interested in investing. They’ll be able to provide you with the best insight.

Get Started

The easiest way to get started is to read more about real estate investing. Visit this link to see a list of some of the top real estate books.

Michael Morrow: Reduce Income Tax Burden

Top Strategies To Reduce Income Tax Burden

By Michael Morrow

On January 25, 2017

In Financial Planner, Michael Morrow

The 2017 tax season has officially begun. Most tax experts recommend filing as early as possible. Yet before you file your taxes it’s a good idea to take some time to think about the different strategies that can help you reduce income taxes. While there are numerous legal strategies that taxpayers employ to lower their taxes, this post will only look at a brief selection just to give you an idea of what’s out there. These tax reduction strategies are presented for educational purposes only. When filing your taxes it’s always recommended that you consult with a tax expert.

Reduce Earned Income Taxes

In a recent post, I discussed the various tax credits related to home improvement projects. In particular, adding solar panels to your home can greatly reduce your tax burden. Business owners have a number of strategies that they should consider to reduce earned income taxes. Below are two strategies that are worth highlighting.

Micro-Captive Reinsurance Company – Businesses that earn less than $2,200,000 of profit can utilize this plan to significantly reduce their tax burden. Read this article to learn more.

Employee Stock Ownership Plan (ESOP) – ESOPs help reduce business owners’ tax burden by converting their business into a tax-exempt entity. While ESOPs have a number of tax benefits, they are also a great option for motivating employees. Visit this link to learn more about ESOPs.

Investment Taxes

Indexed universal life (IUL) plans have lower expenses than many other assets. They also don’t have any stock market risk and, historically, have a higher return than the stock market. There aren’t any IRS contribution or income limits associated with IUL plans like there are with Roth IRAs. To learn more about the benefits of IUL plans, read a previous post I wrote on the subject.

Estate Taxes

Estate taxes are especially damaging for high-net-worth families. There are three strategies that families should consider to reduce the burden of estate taxes: lifetime gift tax exemption, family limited partnerships, and irrevocable trusts.

Earlier this month Rande Spiegelman wrote an excellent article for Charles Schwab that explains lifetime gift tax exemption. You can read the article here.
A Family Limited Partnerships (FLP) is another strategy that’s used to transfer wealth between generations. A General Partner or Limited Partner manage the FLP’s assets. These partners can’t sell their interest, but they can transfer them to family members. Learn more about the details of FLPs at this link.
Once a grantor transfers funds to an irrevocable trust, he or she can no longer claim ownership of the assets. Grantors are able to dictate the rules or terms of the trust. This article has more details on irrevocable trusts.

Home Improvement Ideas to Reduce Your Taxes

By Michael Morrow

On January 25, 2017

In Financial Planner, Michael Morrow

If you’ve recently remodeled your home then there’s a chance you can save on your taxes. In some cases, it’s possible to deduct renovation costs. You may even be able to receive a tax credit for some renovations. If you haven’t renovated your home but you’ve been considering it, take a look at the below ideas.

Make Your Home More Energy-Friendly

Solar – Adding solar panels to your home isn’t just good for the environment. Thanks to Solar Investment Tax Credits (ITC), you may be able to lower your tax liability by a significant amount. According to the Solar Energy Industries Association (SEIA), “the Investment Tax Credit (ITC) is currently a 30 percent federal tax credit claimed against the tax liability of residential (Section 25D) and commercial and utility (Section 48) investors in solar energy property”(Issues & Policies). After you install solar panels on your home, you can apply the ITC credit to your income taxes. This benefit may be used for up to 20 years. At the moment the tax credit is 30%; however, in 2020 it will drop to 26%. By 2023 the credit will only be worth 10%, and it will permanently remain at that amount. Therefore, right now is the best time to install solar panels on your residence. Visit the SEIA’s website to learn more about solar tax credits.

Simple Additions – Installing a new door or new windows that are energy-efficient are two simple ways to save on your taxes. Make sure that the products you purchase come with the Energy Star label. Also, the improvements need to be made in a home you own—not a rental property.

Larger Upgrades – Electric heat pumps, electric water heaters, and air conditioning systems are three upgrades that can save you a significant amount of taxes. Updating your roof and adding insulation are two other projects that can save you a lot of taxes. If you’d like to learn more, take a look at this TurboTax article that provides more details on energy tax credits. Also, if you’re interested in installing a large system like a wind turbine or geothermal heat pump, look into the Residential Energy Efficient Property Credit. Just like the ITC, this credit is worth 30%.

Other Renovation Ideas

If you recently purchased your home and want to make renovations, you can take out a larger mortgage to help pay for the renovations. The IRS will let you deduct mortgage interest. It’s also possible to wait to do the renovations. Home improvement loans are tax-deductible as well. However, it’s best to pay for renovations without using any loan if possible. While you can save some money on your taxes when you use the appropriate loan, you’re also responsible for the loan’s interest.

Stock Market Rhythm

By Michael Morrow

On December 1, 2016

In Financial Planner, Michael Morrow, Wealth Management

“A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.” – Proverbs 27:12

Every investor understands that the stock market has a rhythm. However, the difficulty lies in being able to predict the market’s cycles. The shrewdest investors are able to accurately identify these cycles and act accordingly. Imagine being able to go back in time to 2008 or 2001. Imagine if you acquired the assets that made money during those downturns.

In the past couple of months, the stock market has been at an all-time high. Yet every investor should ask themselves if they are ready for the next downturn. Keep reading to learn more about the stock market’s rhythm and some strategies that will help you when the market declines.

Stock Market Cycle

There are a number of cycles that affect the stock market. For instance, the presidential cycle and the “January effect” are two cycles that seem to affect stock market performance. Longer term cycles exist as well. Kondratiev cycles generally last sixty years. The Panic of 1873, the Great Depression, and the Great Recession are associated with the end of Kondratiev cycles.

Preparing for a Downturn

20 recessions occurred during the twentieth century—that’s an average of 1 recession every five years. The most recent US recession ended in 2009. Many economists have painted a bleak picture for 2017. Some of the most worrisome problems include “Europe’s weak banks, China’s distorted property market, [and] political uncertainty in the west” (Boskin). If you share economists’ fears and want to be prepared for the next downturn, there are three things you should think about:

Manage Your Fears – Don’t let your emotions force you to make mistakes. One reason investors don’t see higher returns on their investments is due to emotions. Don’t let emotions cloud your decision making. When the market enters a downturn you need to carefully consider which assets you should acquire and which ones you should avoid.

Diversify – How you divide your portfolio depends on a number of factors like how much risk you are comfortable with taking, your age, and your income level. However, in a downturn, it’s especially important to diversify. If you fail to diversify during a downturn, you could face serious consequences.

Invest What You’re Willing To Lose – Careful investment is the key to surviving a downturn. Therefore, don’t invest money that you’re not willing to lose. Before you can invest you need to make sure that your living expenses are taken care of. During a downturn, the market can be very destructive. While you still want to make money, you also don’t want to be swept up in the destruction.

Consult With A Financial Advisor – Speaking with a financial advisor is one of the best ways to prepare for a downturn. A knowledgeable financial advisor knows which assets are most likely to make money during downturns, and he or she can help you develop a strategy that is perfect for your situation. For more information visit Aspen Creek Wealth Strategies.

4 Benefits of a Reverse Mortgage

By Michael Morrow

On December 1, 2016

In Financial Planner, Michael Morrow, Wealth Management

An increasing number of baby boomers are beginning to retire. Some estimates claim that up to 10,000 individuals retire each day in the United States. If you are close to retiring, you should consider the benefits of reverse mortgages. Keep reading to learn what reverse mortgages are and how they can help improve your retirement.

Reverse Mortgages

A reverse mortgage gives homeowners the opportunity to borrow money on the value of their property. While the mortgage doesn’t have to be repaid until the property is sold or the homeowner dies, homeowners still pay property taxes and insurance. The amount of the loan is never greater than the home’s value—even if the value declines over time.

Spending and Your Portfolio

Many retirees withdraw from their investment portfolios after they retire. However, if you retire when the stock market is down then you have to deal with shrinking investments. Retirees may even find it necessary to sell investments early in order to cover living expenses. A reverse mortgage can help cover your living expenses so that you don’t have to sell your investments at the wrong time. Some reverse mortgages offer a standby line of credit. If the stock market is performing badly, you can use the credit until the market improves.

Delay Social Security Benefits

In general, retirees should try to delay their social security benefits for as long as they can. The earliest age that a person can claim benefits is 62. However, the benefits increase for each year that a retiree waits to collect the funds. The percentage increase depends on your date of birth, and after age 70 the increases stop. A reverse mortgage can help retirees delay their benefits for as long as possible.

Help Pay IRA Conversions

Retirees with traditional IRAs may want to roll over their accounts to Roth IRAs once they retire. A reverse mortgage can be used to pay the taxes associated with this type of conversion. Converting to a Roth IRA is an appealing option to some since it can help save taxes in the long run. However, when you withdraw funds from a traditional IRA, you will owe taxes on the amount you withdraw. This is where the funds from a reverse mortgage can help you out.

Preparing for the Worst

A reverse mortgage can help you deal with unexpected expenses related to health or assisting family members who face a financial hardship. Long-term care can be very expensive, and a reverse mortgage is a great option for covering the expenses.

Real Estate

By Michael Morrow

On October 24, 2016

In Financial Planner, Michael Morrow, Wealth Management

Real estate is a popular investment for many people. However, it’s important to recognize that investing as an owner is different than investing as a lender. Furthermore, the investment changes depending on whether you are a majority or minority owner. The type of investment that you make depends on your financial goals and investment mindset. This post looks at the liquidity, safety, expenses, rate of return, and tax efficiency of real estate investments.

Liquidity

Liquidity might be a problem for minority owners since they can’t control when the property is sold or refinanced. For example, if you invest your money in a property and expect it to be sold quickly, but it doesn’t sell quickly, then you will have trouble accessing your money. Liquidity can be better for majority owners since they decide when to sell and access their cash. Lenders are similar to minority owners in terms of liquidity. A lender can’t force an owner to sell the property when he or she needs cash.

Safety

Minority owners have the least amount of safety since they have the least amount of control. They can lose money if the property is mismanaged. Since Majority owners have more control they have more safety than minority owners. On average real estate has proven to be a safe investment over time for majority owners. Compared to minority and majority ownership, real estate lending may be the safest investment. Lenders control the amount of risk they are willing to take based on the required down payment. When lenders want to assume less risk, they can increase the amount of the down payment that they require.

Expenses

Due to the expenses associated with real estate, it is generally considered a long-term asset. One exception may be when a property is purchased at a discount so that it can be flipped to make a profit despite the expenses. Minority and majority owners face more expenses than lenders. The former group has purchase expenses, management expenses, and disposition expenses which are associated with selling the property. Lenders don’t face these expenses. They just lend the money to the people buying real estate—the people who face all of the expenses.

Rate of Return

The rate of return tends to be high for both majority and minority owners. Over time both groups may even see double digit returns. In general, the rate of return that lenders see depends on the size of the property. Lending to someone who purchases a single family home is different than lending to someone who purchases a large commercial real estate project, and the rates of return can vary greatly.

Tax Efficiency

Real estate owners face a better tax situation than real estate lenders. Depreciation gives owners the ability to shift their tax burden to the future. When it’s time to pay the depreciation recapture tax, owners can usually pay the tax with the proceeds from selling the property. Still, the capital gains tax rate that owners pay is better than paying ordinary income tax rates. Lenders, though, have to pay ordinary income taxes on their gains, so their tax situation is not as favorable as owners.

Qualified Plans

By Michael Morrow

On October 21, 2016

In Financial Planner, Michael Morrow, Wealth Management

Qualified plans are any kind of employer-sponsored retirement plan or individual retirement plan. The most common employer-sponsored retirement plan is a 401(k). Both 401(k)s and IRAs are wrappers for different kinds of assets. Mutual funds tend to be the most common asset held in qualified plans. This post looks at five elements of qualified plans: liquidity, safety, expenses, rate of return, and tax efficiency.

Liquidity

As long as you remain with your employer, 401(k) plans are usually not liquid. However, in many cases, you can borrow up to $50,000 from your plan. Yet borrowing comes with strict repayment terms. On the other hand, IRAs are completely liquid. When you withdraw money, though, you will be taxed immediately, and if you’re under 59 ½ years old you’ll have to pay a 10% penalty.

Safety

The safety of qualified plans is not very high. With 401(k) plans, you don’t have unlimited access to any asset you want. The plan administrator decides which assets will be available to employees. IRA plans may be safer than 401(k) plans, but it depends on the type of assets that you choose.

Expenses

In general, 401(k) plans tend to be expensive. The plan administrator decides which funds will be available, and they’re not always the least expensive funds. You also have to pay administrative fees for 401(k) plans. Most people don’t know what the fees are because they’re typically hidden in the fine print. The expenses for IRAs tend to be lower—there aren’t any administrative fees if the plan is self-directed. However, the expenses of the assets themselves will still be present.

Rate of Return

The rate of return for 401(k) plans depends on the underlying assets that your employer makes available. Yet, since many employers provide employee matching the rate of return can be high. Employers who offer employee matching will usually match 2-6% of your funds. The average tends to be around 3%. There is no employee matching with an IRA plan, so the rate of return depends on the underlying assets in the account. Therefore, the rate can vary wildly from plan to plan.

Tax Efficiency

The tax efficiency depends on whether you have a Roth 401(k) or IRA or you have a regular 401(k) or IRA. When you withdraw money from regular plans, you pay ordinary income taxes. When you withdraw money from a Roth plan, though, you don’t have to pay taxes. With both plans, your money will grow tax-free. Many people find Roth plans attractive since they expect taxes to increase in the future. However, if you earn more than $200,000 you’re ineligible to participate in a Roth IRA. IUL plans are a popular alternative for investors who make more than $200,000.

Mutual Funds

By Michael Morrow

On September 26, 2016

In Financial Planner, Michael Morrow

Mutual funds are a popular asset that many investors hold. Investopedia defines a mutual fund as “an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets” (Investopedia). This post will take a close look at mutual funds and examine their liquidity, safety, expenses, rate of return, and tax efficiency.

Liquidity

When it comes to liquidity, mutual funds usually get a good rating. If you want to access the money in the fund, you can do so without any penalties or extra taxes. However, the degree of liquidity depends on the type of funds you own. There are three different classes of mutual funds, and each class has different fees associated with it. To learn more about each class, have a look at this article.

Safety

If mutual funds received a rating for safety, the rating would not be very high. The success and failure of mutual funds depend on the performance of the market. When the market is up, so is the mutual fund. But when the market is down, so is the mutual fund. If safety is your biggest concern when it comes to your assets, then you should seriously consider how comfortable you are facing the risks of the market.

Expenses

With mutual funds, there are two fees that immediately stand out: the fund management fee, or administrative fee, and the fee associated with using a financial advisor. Management fees can vary from low to high. However, Morningstar reports that the average management fee for a mutual fund is 1.25%. A 1.25% management fee is actually similar to the management fees of other assets out there. Many people need the assistance of a financial advisor to help them manage the fund, and that adds another 1 or 2 percent to the expenses.

Rate Of Return

Since mutual funds are tied to the market, their rate of return can vary significantly. Mutual funds have the potential to grow over time, but, as I detailed in a previous post on stocks, many investors fall prey to their emotions. They either get worried and sell too soon or chase top rated mutual funds with the hope of making more money.

DALBAR is an organization that analyzes the behavior of investors. Each year the organization releases a report that details the performance of the market in relation to individual investors. Over the last 30 years, the S&P has averaged 10.35%, but the typical investor has only averaged 3.66%. And while the bond market has averaged 6.73%, the typical bond investor has only averaged 0.59%. People actually tend to do worse with bond funds than with stocks.

Tax Efficiency

Since you’re taxed when the fund manager sells individual assets, you can end up paying a lot of taxes on a mutual fund. Each year you’ll receive a 1099 form for the fund. If any assets were sold in less than a year, they’ll be considered ordinary income, and you’ll have to pay the expensive taxes associated with that. On the other hand, assets held for more than a year will be taxed as capital gains. If you use a mutual fund manager like the majority of people, you have no control over when the manager buys or sells assets. One strategy to avoid excessive taxes is to invest in an index fund that has low turnover rates rather than an actively managed fund.

Certificate Of Deposit (CD)

By Michael Morrow

On September 26, 2016

In Financial Planner, Michael Morrow

Certificate Of Deposit (CD)CD stands for certificate of deposit. Almost every commercial bank offers CDs. While CDs are known for being a safe place to store your money, they are also known for having very low returns. Below are some important details about CDs that will help you decide if they are right for your portfolio.

Liquidity

While banks intend that you keep your money in a CD until it matures, you are actually able to withdraw your money early. However, if you do withdraw your money before the maturity date you will incur an early withdrawal penalty. The amount of the penalty is usually one month of interest. At the moment that would equal 1%, but this rate can change.

Safety

Like I mentioned above, CDs are one of the safest assets you can hold. If you purchase CDs from a bank that is FDIC insured and has a good reputation, then there is no reason to worry about your money. Keep in mind, though, the FDIC typically only insures $250,000 per depositor. If you want to purchase more than $250,000 worth of CDs—and be certain they are FDIC insured—you can purchase them from different banks.

Expenses

This section will be brief because there aren’t any expenses associated with CDs.

Rate of Return

The rate of return for CDs is very low. While the rate changes depending on the length of the agreement with the bank, it is currently around 1%.

Tax Efficiency

When it comes to taxes, CDs are one of the worst assets to own. To purchase a CD you must use after-tax dollars. Then when the CD grows it is taxed at the highest rate—as ordinary income.

Strategy

Some investors prefer to purchase indexed CDs. An indexed CD is “a savings certificate entitling the bearer to receive an interest rate that is indexed to inflation. The indexed certificate of deposit (indexed CD) yields a rate of return that is linked to a stock market index” (Investopedia). Indexed CDs may be a good choice for investors who remain wary of the stock market as a result of the Great Recession. With indexed CDs, your principal is protected even if the market doesn’t perform well. However, there are different liquidity rules for indexed CDs. Take a look at this article for more information.

Michael Morrow | Financial Planner

Wealth Management Blog

Page 2 of 3