Efficient Tax Planning is a Year-Round Job

While many of us are so focused this time of year on getting our tax returns done and over with until 2016, year-round tax planning is something that excites us number geeks!  Taxes are something we really can’t control, right?  Not exactly.  While we can’t change the tax rates set by our government, we can work collaboratively with you and your tax professional to make sure certain financial decisions throughout the year ensure that you are being as efficient as possible with your tax situation.  Let’s take a look at a few examples:

Example #1: Ford Stock

Say you have a stock position in Ford that you purchased when the “sky was falling” at $3/share.  Now it is worth much more and you have an unrealized gain of $20,000.  You might not want to part ways with the stock because it has done so well and you don’t want to pay tax on that nice $20,000 gain.  This might make your reconsider: If your taxable income falls within the 15% marginal tax bracket, chances are you would pay very little or possibly ZERO tax on the $20,000 gain.  You could lock in some nice profit on the stock and potentially improve the overall allocation of your portfolio. 

Example #2: Roth Conversion

Let’s take a look at another real life example we see very often.  What if your income this year drops significantly?  Whether it be a job loss, retirement, job change, etc. this is something we want you to keep us in the loop on for pro-active tax planning purposes.  In this situation, a Roth IRA conversion could make a lot of sense if your income this year will fall into a lower tax bracket that you will most likely never be in again.  Paying tax at a much lower rate than you normally would and moving Traditional IRA dollars into a Roth IRA for potential future tax-free growth could be a monumental planning opportunity.   

Sharing Your Tax Returns

These are just two examples of the many factors we are looking for in your financial plan to make sure your dollars are being taxed efficiently.  You can help us do this work by providing us with your tax return early in the year.  This gives us a much better chance to fully analyze your tax situation throughout the year to see if any tax planning strategies could make sense for you and your family.  Many of our clients have now signed a disclosure form allowing us to contact their CPA or tax professional directly to obtain copies of returns and to discuss tax-planning ideas.  This saves you, as the client, the hassle of making copies or e-mailing your return to us – we are all about making your life easier! 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

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 Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax advice. You should consult a tax professional for any tax matters. C15-004265

Tax Time Fraud Alert from the IRS

Rich or poor, old or young, criminals still want to steal from you.  Financial fraud and identity theft is a huge concern to most of us, particularly cyber fraud.  IRS Commissioner John Koskinen released a statement in late January warning citizens about tax time scammers.  PLEASE PAY ATTENTION TO THIS WARNING.

Over the Internet

The Scam: Internet scammers come out in droves around tax time, trying to trick you as a taxpayer. They may try to get you to send them your address, Social Security number, credit card number, bank account number or any other valuable piece of information that can help them steal your identity or your assets.  These tax scammers sent out so-called "phishing" emails that appear to be from the IRS and claim that the recipient either owes money or is due a refund.  The IRS will never send you an e-mail about a bill or refund and request your private information. 

What to Do: If you get an unsolicited email that seems to be from the IRS or a related agency, such as the Electronic Federal Tax Payment System (EFTPS), don't reply, don't open any attachments and don't click on any links.  Opening the attachments can allow scammers to steal your personal information or infect your computer.  Instead, report the e-mail to the IRS by sending it to phishing@irs.gov.  According to the IRS, they do not contact taxpayers electronically - whether by text, email or other social media - to request personal or financial information.

By Phone

The Scam: One of the all-time top tax scams is done by phone. These scammers call taxpayers and make claims about a refund or tax due and try to get taxpayers to provide private information.

What to Do: Do not provide private information over the phone – to anyone, including those who might claim to be calling from the IRS. If you receive a phone call or electronic communication from any source claiming to be the IRS or an associated agency, do not respond by providing confidential information.

Providing the wrong information to the wrong people can result in identity theft, monetary theft and years of headaches for you. Report any such communication to the IRS or contact your tax preparer or financial advisor for guidance. 

Sandra Adams, CFP®is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served. A15-003424

Capital Gains: Minimizing Your Tax Drag

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

As the bull market marches on, many investors find the capital losses they have carried over since 2008 are gone.  Likewise, many investment companies that have earned 5 years of steadily positive returns are finding themselves in the same situation. While these positive returns have had meaningful impact on achieving our financial goals, we are going to start feeling them in the checks we have to write to the government. 

According to a Morningstar and Lipper study, the average annual tax drag on returns for investors is .92% for owners of U.S. equities.  This means that if you average 10% a year returns in your equities, the amount you put in your pocket is 9.08% after you pay the government its share.  From 1996 to 2000, during the extreme run up of the tech bubble, the average tax drag per year was 2.53%1.  This can happen when there has been no bear market or correction for many years.  We would argue it is happening again now.

4 Tips for Managing Taxes

Perhaps the key at this stage of the game is not to avoid taxes but to take many small steps to manage them.  There are several key steps that we utilize in managing portfolios to also minimize taxes.

1. Asset Location:  Place your least-tax-efficient, highest returning investments in your IRA or 401(k).

2. Loss Harvesting: Continually monitor your taxable accounts for losses to harvest rather than only looking in the last quarter of the year. 

3. Maximize contributions to tax-deferred retirement accounts:  This directly lowers your taxable income when maximizing your contributions to 401(k) plans at work.

4. Harvest gains:  In the long run, taking gains during years your income is lower than normal can potentially reduce the amount of taxes paid to the government over a lifetime.

While paying attention to expenses always seems to top the headlines, taxes are just as big of a drag to long-term investor returns. Consult a tax advisor about your particular tax situation.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

1:Source: http://www.lipperweb.com/docs/aboutus/pressrelease/2002/DOC1118788693610.doc

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 Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax advice. C14-036848

Unrealized Capital Gains? Consider Gifting Stock Instead of Cash

One of the most tax-efficient ways to give a financial gift to your favorite charity is with long-term appreciated securities.  While gifts of cash are easy to make by simply writing a check, don’t overlook the potential benefits of gifting stock that has gone up in value.  By considering both options, you may be able to increase the tax benefit and make the most of your year-end tax planning and gifting goals. 

Here are four tips to consider:

1. If you own stock investments (held longer than 12 months) with unrealized capital gains, the best way to give may be with a portion of stock rather than an all cash donation.  By gifting stock, you receive a deduction for the market value and reduce future capital gains tax liability.  

2. If you own stock with short-term gains (owned for less than 12 months) the strategy is not optimal because your tax deduction will be limited to the amount you paid for the shares. 

3. If you think the gifted stock still has upside potential, you can use the cash you would have otherwise donated to replace the shares of stock you donated.  This will reset the stock cost basis to the current market value, reducing future capital gains tax liability.

4. If you are holding taxable investments that have lost ground, it may be preferable to sell the investment, claim a capital loss, take the charitable deduction and gift the cash.  In this scenario, the combined tax deductions may make this strategy a winner.

Making the Call between Gifting Cash or Appreciated Stock 

If you are looking to support organizations important to you and maximize your tax benefits, it is important to consult with your tax advisor and include your financial planner to make the most of your tax planning and lifetime gifting goals.  

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

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 Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-036845

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Many asset management firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Moreover, early indication is that some firms will be paying out capital gains higher than recent years. As you may be aware, when a manager sells some of their holdings internally and realizes a gain they are required to pass this gain on to its shareholders. More specifically, by law and design, asset management firms are required to pay out 95% of their realized dividends and capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. Remember this is only relevant for taxable accounts; capital gain distributions are irrelevant in IRA’s or 401k’s.

Capital gain distributions are a double edged sword.  The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. The bad news – the taxman wants to be paid.

What can we do to minimize the effect of capital gain distributions:

1. We exercise care when buying funds at the end of the year to avoid paying tax on gains you didn’t earn, and in some cases hold off on making purchases.

2. We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date.

3. Throughout the year we harvest tax losses, when available, to offset these end of the year gains. 

As always, there is a balance to be struck between income tax and prudent investment management.  Please feel free to contact us if you would like to discuss your personal situation.

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 [insert FA name] and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional. C14-040561

3 Reasons Municipal Bonds are Darlings of the Year

While bond returns have astounded investors so far this year, many are left scratching their heads wondering if interest rates are ever going to rise creating the “Bond Armageddon” that has been so highly anticipated.  On November 17th the Barclays US Aggregate Bond index total return has returned 5.13% year-to-date1.  While that is certainly an attractive return on something that was destined to be down this year, municipal bonds have astounded even more.  As of November 17th the Barclays Municipal total return index1 has experienced a cool 8.06% return.  Is it time then to give up on municipal bonds after this return that seems like it should be unreal?  The short answer is no.

Why not to give up on municipal bonds

The municipal bond market offers three unique traits that continue to make it attractive. 

1. Taxes:  Paying taxes are always a concern for investors, so the tax advantaged nature of municipal bonds continue to make them attractive, especially as tax rates increase for the wealthy.

2. Supply is limited:  The chart below demonstrates how the number of municipal bonds available to purchase is getting smaller.  The light teal bar below zero shows the amount of bonds each month that have been redeemed (called away or matured giving the investor their principal back).  The purple bar above shows the number of new bonds being issued each month.  The blue line shows the net number of issues or redemptions (number of new issues subtracting the number of redemptions).  In most months over 2012 and 2013, the number is negative meaning the number of bonds out there for investors to purchase is getting smaller.  A limited supply with demand that stays steady or increases can create positive returns for bondholders.

Source: Columbia Management

3. Yields: When comparing two bonds of similar quality (bond rating) and the municipal bond is yielding about the same or more and the interest is tax free2, which bond would you choose?  Many investors have made that very same decision.

Three main things to consider before investing in municipal bonds:

• May provide a lower yield than comparable investments

• Are likely not suitable for investors who do not stand to benefit from the tax advantages

• Are subject to certain risks, including interest rate, credit, legislative, reinvestment and valuation risks

As with any investment, the decision to own municipal bonds is not one to be taken lightly.  As always don’t hesitate to ask us to see if they make sense for your portfolio. 

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

1: Source: Morningstar Direct. Barclays US Aggregate Bond Index represents investment grade bonds being traded in United States. Barclays Municipal total return index represents the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

2: Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

The market value of municipal bonds may fluctuate and, if sold prior to maturity, the price you receive may be more or less than the original purchase price or maturity value. There is an inverse relationship between interest rate movements and fixed income prices. 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 Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-036843

An Easy Guide to Year-End Tax Planning

With the end of the year fast approaching, tax planning is top of mind for many clients.  At The Center, we are proactive throughout the entire year when it comes to evaluating a client’s current and projected tax situation, but now is typically the time most people really start thinking about it.  We like to share this simple checklistthat we feel is very user friendly and a good guide to evaluating your tax situation for the year.  Let’s be honest, does anyone feel like they don’t pay ENOUGH tax?  Most clients want to lower their tax bill and be as efficient with their dollars as possible. 

Questions to Consider

Here are some questions we ask clients that could ultimately help save money at tax time:

• Are you currently maximizing your company retirement account (401k, 403b, Simple IRA, SEP-IRA, etc.)?

  • These plans allow for the largest contributions and are deductible against income

    • In our eyes, this is often the most favorable way to reduce taxes because it also goes towards funding your retirement goals! 

    • How are you making charitable donations?  Are you writing checks or gifting appreciated securities?

      • Gifting appreciated securities to charity allows you to avoid paying capital gains but still receive a charitable deduction – a pretty good deal if you ask me!

        • Donor Advised Funds are a great way to facilitate this transfer and are becoming increasingly popular lately because of the ease of use and flexibility they provide for those who are charitably inclined – take a look at Matt Trujillo’s recent blog on this great tool.

        • Should I be contributing to an IRA?  If so, should I put money in a Traditional or Roth?

          • These are fantastic tools to help fund medical and dependent care costs in a tax-efficient manner

            • HSAs can only be used, however, if you are covered under a high-deductible health plan and FSAs are “use it or lose it” plans, meaning money contributed into the account is lost if it’s not used throughout the year – take a look at the blog I wrote earlier this year that goes into greater detail on the advantages and disadvantages of HSAs and FSAs

This is a busy time of year for everyone.  Between holiday shopping, traveling, spending time with family, and completing year-end tasks at work, taxes can get lost in the shuffle.  We encourage you to check out the link we’ve provided that will hopefully give you some guidance with your personal tax situation.  Although we are not CPAs, tax planning is something we feel is extremely important.  We would love to hear from you if you have any questions or ideas you’d like to discuss with us!

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Raymond James financial advisors, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. C14-037860

IMO - In My Opinion: A take on mortgages, Roths, pensions & more

My wife, Jen, and I have been speed watching The Good Wife thanks to Netflix. In The Good Wife, one of the judges (apparently the legal system makes for good TV) constantly requires the lawyers in her courtroom to end their arguments with, “In my opinion.”  The attorneys look bewildered each time as if to say…well of course it’s only my opinion, just like every other statement I make, and everyone knows that except for you, apparently.  A recent consultation reminded me of the “in my opinion” skit (“IMO” for short). 

Professionals Offer Differing Opinions

In our field of professional financial planning (not to be confused with the majority of firms and advisors in the financial SALES industry) there are many rules of thumb, but very few technical standards of care that you might find in the medical or legal field.

As a Certified Financial Planner® practitioner, there are some guiding principles and general statements that CFP® practitioners are expected to display in their professional activities, but they are hardly a technical standard of care. The CFP Board states that “Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles.” Those legitimate differences of opinion are what I’m talking about.

Differenceofopinion-adisagreementorargumentaboutsomethingimportant

Reasonable minds can and will differ just as in everyday life it is not uncommon to hear reasonable folks say, “Let’s agree to disagree.”  Professional differences of opinion do not render the other professional a crook or even wrong if they are acting from a place of integrity – IMO.  Moreover, it is perfectly appropriate to express a difference of opinion with another financial professional when done in a professional and non disparaging manner – IMO.

Back to my recent consultation – as I listened to the recommendations of another professional, I realized I had several different opinions on what was best for this particular situation and needed to share:

ROTH Conversions: As my colleagues here at The Center can attest, I hold a pretty strong opinion that most people have gotten the Roth Conversion issue “incorrect”.  I believe that many folks have accelerated income taxes at a higher rate than they will pay in the future.  Most workers have a higher income, which usually translates into a higher marginal tax bracket, during their working years than they do in retirement.  But wait; there is no Required Minimum Distribution from a ROTH. True, but this is still only relevant as to what bracket the money comes out.  Don’t get me wrong, this is not an absolutist opinion, there are plenty of correct situations where ROTH’s makes sense (IMO) – look for an upcoming post about converting after tax 401k contributions to a ROTH as an example. There are other limited situations where a ROTH makes sense, IMO.  For example, if you are a high net worth person and reasonably expect that you will always be in the highest marginal bracket, then converting and paying at 35% vs the new 39.6% marginal rate seems to make sense. 

Mortgage vs no mortgage:  A firm attempting to become a national financial planning firm recently counseled a young retiree looking to relocate to another state to, “Get the biggest mortgage possible.” Call us old school – but we think that most retirees are best served entering their retirement years debt free. And this client has substantial taxable funds to complete the purchase.  Our suggestion was to actually RENT initially.  Once they are comfortable and they have found a location that suits them for at least the next 5 years, we think they should consider a cash purchase. Rates are low, which does make obtaining a mortgage more attractive, however in retirement (at age 50) the rate is going to be much higher than any suggested distribution rate (1-3%?).

Pension Lump Sum: Our recommendation is for the client to take a monthly pension at age 55 in the form of a 100% survivor benefit even though her husband is older. The other advisor suggested that even assuming a low return, investing the lump sum will produce more money.  The client suggests that age 94 mortality was very reasonable given her family history.  Under these assumptions, the “low return” needed from the investment portfolio turned out to be 6%; hardly a “low” return IMO. Assuming only a 1% annual difference in return (5%) the lump sum lasts only to age 86.  One of the advantages to taking the lump sum is flexibility or access to a lump sum if needed.  Fortunately, the client’s other assets are substantial. Other more confident professionals might find the hurdle rate low; not me.

401k Rollover:  We both recommended a 401k rollover to an IRA managed by our respective firms.  The client left the employ of a major corporation with what I would categorize as containing a competitive 401k, in terms of investment options and expenses.  My sense is that the client will be better served by rolling the account to either professional.  Successful investment management is more about behavior than selecting the best allocation or underlying securities to complete the allocation – IMO.

Asset Allocation: The other professional recommended a 70% equity and 30% fixed income allocation versus our 60/40 allocation.  My thinking is at this time of their life, less risk is a bit more important.  I do, however, appreciate that because they are so young (hedging against inflation), and their expected withdrawal rate is under 3%, that a higher equity allocation may be reasonable. The other adviser apparently pointed out that their allocation was “optimized” (directly on the efficient frontier) because their mid cap exposure was higher than our recommendation in addition to our international equity allocation being 12% vs their 10% recommendation.  Due to current valuations, we have reduced our allocation to mid and small cap equities from a neutral weighting of 10% down to 8.5% and our international (large developed) is at our target weighting of 12%.  The other professional suggests 14% and 10% respectively.  Only time will tell which portfolio was more successful.  I do feel pretty strongly that in the end our client’s behavior will be more determinative of their investment success versus the subtle differences in portfolio recommendation – IMO.

Annuities:  Do you remember when some advisors called anyone recommending an annuity a crook?  Fast forward a few years and some of the profession’s highly regarded practitioners recommend annuities in many situations.  I still believe that they are way oversold, but that doesn’t mean there are not appropriate situations - IMO.

Everyone has an opinion and I give my clients mine. So, what’s your opinion?

Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.  ~Marcus Aurelius

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of   securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.

C14-033719

A ROTH IRA Strategy for High Income Earners

Do you have a 401k Plan from your current employer?  Does it allow you to make after tax contributions (these are different than pretax contributions and Roth 401k contributions)?  If the answer to both is “yes”, a recent IRS notice may present a welcome opportunity.  IRS Notice 2014-54 has provided guidance (positive guidance) allowing the splitting of after tax 401k contributions to a ROTH IRA. Although I believe that ROTH IRAs are used in many less than ideal situations, this is one strategy that can make sense for higher income earners; tax diversification and getting money into a ROTH without a big upfront tax cost. 

After answering “yes” to the first two questions, the next question is, “Are you making maximum contributions on a pretax basis?”  That is, if you are under 50 years old, are you contributing $17,500 and if you are over 50 (the new 30) $23,000? If you are making the maximum contribution, then a second look at after tax contributions should be considered.  Whew – that’s three hoops to jump through – but the benefits might just be worth it.

Putting Notice 2014-54 to Work

For example, Teddy, age 50 has a 401k plan and contributes $23,000 (includes the catch up contribution) and his employer matches $5,000 for a total of $28,000.  Teddy’s plan also allows for after tax contributions and he may contribute $29,000 more up to an IRS limit of $57,000. 

The new IRS Notice makes it clear and simplifies the process allowing this after tax amount at retirement to be rolled into a ROTH IRA.

The bottom line:  It is more attractive to make after tax contributions to your 401k with the flexibility of converting the basis to a ROTH at retirement or separation of employment without the tax hit of an ordinary Roth conversion.

As usual, the nuances are plentiful and your specific circumstances will determine whether this strategy is best for you.  To that end, we are here to help evaluate the opportunity with you.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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 Center for Financial Planning, Inc. and not necessarily those of Raymond James.

The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-033701

Is the Saver’s Credit one of the IRS’ best-kept secrets?

Saving money is tough.  There are so many ways in life to spend money and you can easily find excuses for not contributing to a 401k or an IRA.  But what if someone gave you money at the end of the year as a “reward” for doing the smart thing and saving for retirement?  Would that entice you to begin saving?  Enter what’s known as the “Saver’s Credit” to help you do just that!

What is the Saver’s Credit?

The Retirement Savings Contributions Credit (aka the Saver’s Credit) was enacted in 2001 as part of President Bush’s tax cuts, however, many folks are simply not aware it exists.  The Saver’s Credit applies to contributions made to qualified retirement plans (401k, 403b, 457) or to a Roth IRA or Traditional IRA.  To qualify for the credit, adjusted gross income (AGI) must be below $60,000 for married couples or $30,000 for single filers.  The maximum credit available is $1,000 and is a non-refundable credit. For more details check out the IRS website.

A Tax Credit vs. A Tax Deduction

A tax credit is typically more beneficial than a tax deduction, especially for those with income within the required parameters.  For example, if you’re in the 15% tax bracket and received a $1,000 tax deduction, the true tax reduction would be about $150 ($1,000 x 15%).  A tax credit, on the other hand, is a dollar for dollar reduction of tax liability.  For example, if you received the $1,000 maximum “Saver’s Credit” and your total tax liability on the year was $3,000; you would only owe $2,000 in tax. 

How do I claim the Saver’s Credit?

If you fit the AGI parameters, you need to complete form 8800.  Make sure your tax professional or tax software program is generating this form for you to make sure you are taking advantage of the credit.  Many tax software programs that offer free services are for very simple returns (1040EZ), so always be sure that the type of return you are purchasing will, in fact, allow you to take the deductions and credits that are applicable to your situation.

Who can take advantage of this tax credit?

Personally, I see this as a great opportunity for recent college graduates who are entering the work force and have “retirement savings” as number 24 on their “top 25 ways to use my paycheck”.  Many are starting off earning an income that falls within the range to take advantage of the credit and are just simply not aware that this incentive exists to save for retirement.  This is also a great opportunity for parents or grandparents to consider gifting to the young adult so they can take advantage of the credit if they simply cannot afford to make any type of retirement contribution currently.  One stipulation the parent or grandparent may put on the gift is that any added tax refund from the credit needs to be re-deposited into a retirement account.  It’s a great way to begin good savings habits that will hopefully last a lifetime!

Need more information on how to put this tax credit to work for you? Please contact me and we’ll take a look at your personal case to see if the Saver’s Credit is an option.

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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 Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Consult a tax professional for any tax matters. C14-023683