• Want to Reduce Required Minimum Distributions and Extend Your Retirement Benefits?

    11 May 2017
    414 Views
    Comments are off for this post
    dag

    Do you find that your required minimum distributions (RMDs) from qualified plans and IRAs are providing unneeded income and a high tax bill? Or, are you afraid that the government’s RMD requirements will leave too little in your retirement plan for your later years? If you answered yes to either of these, good news! You can now use a qualified longevity annuity contract (QLAC) to reduce your RMDs and extend the life of your retirement distributions.

    The government allows individuals to purchase QLACs with their retirement funds, thus reducing the value of those funds (subject to the RMD rules) and in turn reducing the funds’ annual RMDs.

    A QLAC is a deferred-income annuity that begins at an advanced age and that meets the stringent limitations included in the tax regulations. One benefit of a retirement-planning strategy involving QLACs is that they provide a form of longevity insurance, allowing taxpayers to use part of their retirement savings to buy an annuity that helps protect them from outliving their assets.

    The tax-planning benefits of QLACs are twofold:

    • Because the QLAC is purchased using funds from a qualified retirement plan or IRA, that plan’s year-end balance (value) is lowered. This causes the RMDs for future years to be less than they otherwise would be, as the RMD is determined by dividing the account balance (from 12/31 of the prior year) by an annuity factor that is based on the retiree’s age.

    Example: Jack is age 74, and the annuity table lists his remaining distribution period as 23.8 years. The balance of his IRA account on 12/31/2016 is $400,000. Thus, his RMD for 2017 would be $16,807 ($400,000 / 23.8). However, if Jack had purchased a $100,000 QLAC with his IRA funds during 2016, his balance would have been $300,000, and his 2017 RMD would be $12,605 ($300,000 / 23.8). By purchasing the $100,000 QLAC, Jack would have reduced his RMD for 2016 by $4,202 ($16,807 – $12,605). This reduction would continue for all future years. Later, the $100,000 QLAC would provide retirement benefits, likely beginning when Jack reaches age 85.

    (2) Tax on the annuity will be deferred until payments commence under the annuity contract.

    A deferred-income annuity must meet a number of requirements to be treated as a QLAC, including the following:

    Limitation on premiumsWhen buying a QLAC, a taxpayer can use up to the lesser of $125,000 or 25% of his or her total non-Roth IRA balances. The dollar limitation applies to the sum of the premiums paid on all QLAC contracts.

    When distributions must commence Distributions under a QLAC must commence by a specified annuity starting date, which is no later than the first day of the month after the taxpayer’s 85th birthday.

    For additional details about how QLACs might fit into your retirement strategy, please give Dagley & Co. a call.

     

     

     

     

     

     

     

     

     

     

     

     

    Image via public domain

    Continue Reading
  • Having a Low Taxable Income Year? Ways to Take Advantage of It

    17 November 2016
    513 Views
    Comments are off for this post
    dag

    Are you having a low taxable income year? Are you unemployed, had an accident that’s kept you from earning income, incurring a net operating loss (NOL) from a business, or suffering a casualty loss? These incidents will result in abnormally low taxable income for the year. But, these can actually give rise to some interesting tax planning strategies. See below for some key elements that govern tax rates and taxable income, and some actual strategies by Dagley & Co.

    Taxable Income – First, of all, to be simplistic, taxable income is your adjusted gross income (AGI) less the sum of your personal exemptions and the greater of the standard deduction for your filing status or your itemized deductions:

    AGI                        XXXX

    Exemptions              <XXXX>

    Deductions              <XXXX>

    Taxable Income        XXXX

    If the exemptions and deductions exceed the AGI, you can end up with a negative taxable income, which means to the extent it is negative you can actually add income or reduce deductions without incurring any tax.

    Graduated Individual Tax Rates – Ordinary individual tax rates are graduated. So as the taxable income increases, so do the tax rates. Thus, the lower your taxable income, the lower your tax rate will be. Individual ordinary tax rates range from 10% to as high 39.6%. The taxable income amounts for 10% to 25% tax rates are:

    Filing Status

    (2016)

    Single Married Filing Jointly Head of Household Married Filing Separate
    10% 9,275 18,550 13,250 9,275
    15% 37,650 75,300 50,400 37,650
    25% 91,150 151,900 130,150 75,950

    For instance, if you are single, your first $9,275 of taxable income is taxed at 10%. The next $28,375 ($37,650 – $9,275) is taxed at 15% and the next $53,500 ($91,150 – $37,650) is taxed at 25%.

    Here are some strategies you can employ for your tax benefit. However, these strategies may be interdependent on one another and your particular tax circumstances.

    Take IRA Distributions – Depending upon your projected taxable income, you might consider taking an IRA distribution to add income for the year. For instance, if the projected taxable income is negative, you can actually take a withdrawal of up to the negative amount without incurring any tax. Even if projected taxable income is not negative and your normal taxable income would put you in the 25% or higher bracket, you might want to take out just enough to be taxed at the 10% or even the 15% tax rates. Of course, those are retirement dollars; consider moving them into a regular financial account set aside for your retirement. Also be aware that distributions before age 59½ are subject to a 10% early withdrawal penalty.

    Defer Deductions – When you itemize your deductions, you may claim only the deductions you actually pay during the tax year (the calendar year for most folks). If your projected taxable income is going to be negative and you are planning on itemizing your deductions, you might consider putting off some of those year-end deductible payments until after the first of the year and preserving the deductions for next year. Such payments might include house of worship tithing, year-end charitable giving, tax payments (but not those incurring late payment penalties), estimated state income tax payments, medical expenses, etc.

    Convert Traditional IRA Funds into a Roth IRA – To the extent of the negative taxable income or even just the lower tax rates, you may wish to consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you with an opportunity to convert to a Roth IRA at a lower tax amount.

    Zero Capital Gains Rate – There is a zero long-term capital gains rate for those taxpayers whose regular tax brackets are 15% or less (see table above). This may allow you to sell some appreciated securities that you have owned for more than a year and pay no or very little tax on the gain.

    Business Expenses – The tax code has some very liberal provisions that allow a business to currently expense, rather than capitalize and slowly depreciate, the purchase cost of certain property. In a low-income year it may be appropriate to capitalize rather than expense these current year purchases and preserve the deprecation deduction for higher income years. This is especially true where there is a negative taxable income in the current year.

    If you have obtained your medical insurance through a government marketplace, employing any of the strategies mentioned could impact the amount of your allowable premium tax credit.

    Interested in discussing how these strategies might provide you tax benefit based upon your particular tax circumstances? Or, would like to schedule a tax planning appointment? Give Dagley & Co. a call today at (202) 417-6640.

     

     

     

     

    Image via public domain

     

    Continue Reading