Non-Qualified Deferred Compensation Plans Explained

Contributed by: Kali Hassinger, CFP®, CDFA®

Contributed by: Angela Palacios, CFP®, AIF®

Deferred Compensation plans can be a powerful tool to control income tax burden in a corporate executive’s highest-earning years. However, there are many trip hazards to be aware of when starting to contribute.

What is a deferred compensation plan, and who is it appropriate for?

A Non-Qualified Deferred Compensation Plan (NQDC) is a benefit plan offered by some employers to their higher-earning or ranking employees. It is exactly what it sounds like, a plan to defer compensation today to a future date.

This is advantageous to an employee who:

• Is expecting to be in a high tax bracket now.

• Is already fully funding their retirement savings plan(s).

• Has a surplus in cash flow.

• May foresee a time when their taxable income will be reduced.

What has to be decided upon ahead of time?

The employee and employer agree upon a salary amount or bonus to set aside. They will also select a date in the future to pay the employee their earned income. Both parties agree to when the funds will be received in the future, and it isn’t taxable income until the employee actually receives it.

Most employers require you to select your payout schedule (i.e., lump sum or spread out over 15 years) when you choose to defer a portion of your income. This can be a daunting choice because you may not know exactly when you will retire, what tax rates will be, or where you will live (impacting state taxes paid on the income) at the time you retire. Often, the employer allows you time when you can change this (usually about a year before you retire), but sometimes there are rules around this change. It is important to talk to your plan administrator or HR department to understand this more fully.

One large company provides an excellent example of a complicated change policy for their corporate plan. In this instance, you may change the number of years you spread payments of your deferred income, but you must do this 12 months before you start taking the payments (12 months before retiring). Additionally, you can only extend the payment terms, which delays the start of your payments by five years! See what we mean by potentially complicated?

What are the benefits of participating in a deferred compensation plan?

• Deferring potential tax liability to a time when you may be in a lower tax bracket can provide tax savings.

• Balance can be invested in a diversified portfolio to potentially grow tax-deferred compensation over many years.

• It can provide a paycheck during a portion of your retirement.

• The company may choose to match your contributions for an added benefit.

• You may choose to retire in a state with lower or even no income taxes.

What are the potential drawbacks of participating in a deferred compensation plan?

• Usually, no access to the funds before agreed-upon terms.

• If you lose your job earlier than anticipated, you may be forced to take the total amount in a lump sum all at once, causing it to be possibly taxed in the highest tax bracket possible.

• It cannot be rolled into an IRA.

• Risk of forfeiture if the company goes bankrupt as the money isn’t explicitly set aside for the employee in most cases.

• You may not have an option to change the payout schedule before retiring, and you may get the money either faster or slower than desired in retirement.

It is helpful to have a financial plan during the years when you are eligible to contribute to one. Mapping out possible retirement dates and planning appropriate payout timelines will be important for years leading into retirement, as your options may be limited if you wait until closer to retirement to start planning. This is where a financial planning professional can help! Don’t hesitate to reach out for more information!

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

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.

How the Build Back Better Bill Could Affect You

Contributed by: Kali Hassinger, CFP®, CDFA®

While the House just passed along the $1.2 Trillion infrastructure bill to President Biden, the final version of the Build Back Better bill is still in question. The Center has been actively monitoring this bill and how it could affect our clients’ financial lives for the last several months. Throughout that time, the contents of the bill have significantly evolved. Initially, the proposed bill seemed to include many changes that would meaningfully impact tax and income planning for many clients. Then, it seemed as though all of the individual tax consequences were off the table. Now, some of those tax features are back with, perhaps, a middle ground. Some of the highlights are outlined below, but keep in mind that this version is still up for debate and revision until this bill becomes a law!

Changes to Retirement Account Rules

- Back-door Roth IRA contributions would no longer be available. This strategy used to fund a Roth IRA, even if your income phases an individual out of the ability to make a direct Roth IRA contribution. This would no longer be available with the Build Back Better bill, but it could only affect those considered “high-income,” or defined as income above $400,000. If this is included in the final bill, great clarity can be expected on who this will impact.

- Eliminating the ability to convert after-tax 401(k) and employer retirement plan contributions to a Roth IRA.

- New contribution limits for IRA and defined contribution retirement accounts based on the account balance.  

• Right now, the ability to make an IRA, Roth IRA, or employer retirement plan contribution is not associated with the size of the account. Under the Build Back Better bill, account holders with retirement account balances exceeding $10 million (as of the end of the prior year) would not be able to contribute. If contributions are made, or a contribution causes the account to breach that $10 million level, a 6% excise tax would be imposed. In order to assist in tracking this kind of requirement, employers would be required to report participants with account balances above $2.5 million.

- Increase in required minimum distributions for “high-income” taxpayers whose accounts surpass that $10 million limit.

• It seems as if 50% of the account balance above the $10 million thresholds would need to be withdrawn. So, if you have an $11 million IRA, you would be forced to take a $500,000 withdrawal as a required minimum distribution. Failure to complete the required minimum distribution would result in a 50% excise tax on any amount not taken.

State and Local Income Tax Deduction Cap

- The current State and Local Income tax deduction is limited to $10,000 per year. The Build Back Better bill would increase this limit to $80,000 per year.

Surcharge on High-Income Individuals, Trusts, and Estate

- For individuals, a 5% surcharge would be imposed on those with modified adjusted gross income in excess of $10 million, with an additional 3% surcharge on income above $25 million.

- For trusts and estates, the 5% surcharge would be imposed on modified adjusted gross income above $200,000, with an additional 3% surcharge on income above the $500,000 level.

The Build Back Better bill would also continue the expanded Child Tax Credit into 2022 and provide additional tax credits for those who purchase electric vehicles. Although these items are still up for debate and could change drastically before being implemented, we are staying on top of these revisions as they occur.

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

The information 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.

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.

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.

How To Manage Your Finances After A Divorce

Contributed by: Kali Hassinger, CFP®, CDFA®

Divorce isn’t easy.  Determining a settlement, attending court hearings, and dealing with competing attorneys can weigh heavily on all parties involved. In addition to the emotional impact, divorce is logistically complicated.  Paperwork needs to be filed, processed, submitted, and resubmitted.  Assets need to be split, income needs to be protected, and more paperwork needs to be submitted!  With all of these pieces in motion, it can be difficult to truly understand how your financial position will be impacted.  Now, more than ever, you need to be sure that your finances are on the right track.  Although every circumstance is unique, there are few steps that are helpful in most (if not all) situations.

Assess your current financial situation

Following a divorce, you’ll need to get a handle on your budget. You may be responsible for paying expenses that you were once able to share with your former spouse.  What are your current monthly expenses and income?  Regarding expenses, you’ll want to focus on dividing them into two categories: fixed and discretionary.  Fixed expenses include things like housing, food, transportation, taxes, debt payments, and insurance.  Discretionary expenses include things like entertainment and vacations.

Reevaluate your financial goals

Now that your divorce is finalized, you have the opportunity to reflect on your needs and wants separate from anyone else.  If kids are involved, of course their needs will be considered, but now is a time to reprioritize and focus on your needs, too.  Make a list of things you would like to achieve, and allow yourself to think both short and long-term.  Is saving enough to build a cash cushion important to you?  Is retirement savings a focus?  Are you interested in going back to school?  Is investing your settlement funds in a way that reflects your values important to you?

Review your insurance needs

Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement, however, there is often still a need to make future adjustments to coverage.  When it comes to health insurance, having adequate coverage is a priority.  You’ll also want to make sure that your disability or life insurance matches your current needs.  Property insurance should also be updated to reflect any property ownership changes resulting from divorce.

Review your beneficiary designations & estate plan

After a divorce, you’ll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts. This is also a good time to update or establish your estate plan.

Consider tax implications

Post-divorce your tax filing status will change.  Filing status is determined as of the last day of the year.  So even if your divorce is finalized on December 31st, for tax purposes, you would be considered divorced for that entire year. Be sure to update your payroll withholding as soon as possible.

You may also have new sources of income, deductions, and tax credits could be affected. 

Stay on top of your settlement action items

Splitting assets is no small task, and it is often time consuming.  The sooner you have accounts in your name only, the sooner you will feel a sense of organization and control.  Diligently following up on QDROs, transfers, and rollovers is important to make sure nothing is missed and the process is moving forward as quickly and efficiently as possible.  Working with a financial professional during this process can help to ensure that accounts are moved, invested, and utilized to best fit your needs.

When your current financial picture is clear, it becomes easier to envision your financial future.  Similarly, having a team of financial professionals on your side can create a feeling of security and support, even as you embrace your new found independence.

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

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

After-Tax 401(k) – An Often Forgotten Strategy

Contributed by: Josh Bitel, CFP®

Roughly half of 401(k) plans today allow participants to make after-tax contributions. These accounts can be a vehicle for both setting aside more assets that have the ability to grow on a tax-deferred basis and as a way to accumulate assets that may be more tax-advantaged when distributed in retirement.

As you discuss after-tax contributions with your financial advisor, you might consider the idea of setting aside a portion of your salary over and above your pre-tax contributions ($19,500 for people under age 50 and $26,000 for those over 50). By making after-tax contributions to your 401(k) plan now, you could build a source of assets for a potentially tax-efficient Roth conversion.

What to consider:

Does your plan allow for after-tax contributions?

Not all plans do. If an after-tax contribution option is available, details of the option should be included in the summary plan description (SPD) for your plan. If you don’t have a copy of your plan’s SPD, ask your human resources department for a copy or find it on your company’s benefits website. You can also talk to your financial advisor about other ways to obtain plan information, such as by requesting a copy of the complete plan document.

What does “after-tax” mean?

After-tax means you instruct your employer to take a portion of your pay — without lowering your taxable wages for federal income tax purposes — and deposit the amount to a separate after-tax account within your 401(k) plan. The money then has the ability to grow tax-deferred. This process differs from your pre-tax option in which your employer takes a portion of your pay and reduces your reported federal taxable wages by the number of your salary deferrals and deposits the funds to your pre-tax deferral account within the plan.

Are there restrictions?

Even if your plan has an after-tax contribution option, there are limits to the amount of your salary that you can set aside on an after-tax basis. Your after-tax contributions combined with your employee salary deferrals and employer contributions for the year 2021, in total, cannot exceed $58,000 (or $64,500 if you are age 50 or over and making catch-up contributions). Your after-tax contributions could be further limited by the plan document and/or meet certain nondiscrimination testing requirements.

Okay, but how does this help me build Roth assets?

When you are eligible to withdraw your 401(k) after-tax account — which could even be while you are still employed — you can rollover or “convert” it to a Roth IRA or a qualified Roth account in your plan, if available. The contributions you made after-tax may be able to be rolled into a Roth IRA each year, even while you are still employed!

If your plan allows for after-tax contributions and you think they may be right for you, it may be time to chat with your financial advisor.

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.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Benefits Of Working With An ‘Ensemble Practice’

Contributed by: Josh Bitel, CFP®

Financial planning practices come in all shapes and sizes, but perhaps the two most common arrangements are solo practices and ensemble practices. Solo practices are normally led by a single advisor who calls the shots, while ensemble practices are team-oriented firms, all working toward a common goal. The Center identifies with the latter.

An ensemble practice is structured with multiple advisors under the same roof. This allows for constant sharing of ideas, best practices, strategies, and even sharing of resources. The Center has a 2 hour meeting every Monday for just this purpose. Our planners at The Center, all with unique expertise, get together to eat lunch and share client cases, tough questions, interesting reading pieces, and maybe a few jokes here and there. This is all possible because we are all working collaboratively toward a shared vision, as outlined in the Vision 2030 document our entire team had a hand in creating.

The Center, as with many ensemble practices, leverages the power of teams. We have team members who are specialists in such areas as insurance, divorce planning, tax planning, retirement planning, and many more. So if an advisor is met with a tough client case involving long-term care, for example, he or she can seek out help from a team member with expertise in this area instantly.

An often overlooked advantage for clients choosing to work with an ensemble practice such as The Center is the foundation for internal succession planning. It is often said that as an advisor ages, so do their clients. This begs the questions who will take care of me when my advisor retires? And from the advisors end, who will take care of my legacy once I’ve moved on? With a practice like ours, there is an internal succession plan in place for many years before a planner decides to retire. Often, clients are transitioned to an advisor who has been working under the tutelage of the retiring advisor.

As with anything, you must weigh the pros and cons of working with an advisor under their practice’s arrangement. In the end, it is all about finding the right person to help you reach your goals and feel comfortable along the way. At The Center, we have found that working in a team-based environment toward a shared vision helps us serve our clients the best way we can.

American Rescue Plan Act of 2021 – What You Need to Know

Contributed by: Robert Ingram, CFP®

The American Rescue Plan Act of 2021 was signed into law by President Biden last Thursday.  This $1.9 trillion package, intended to provide relief and recovery from the impacts of the Covid-19 pandemic, contains a wide range of provisions.  These span from funding Covid-19 testing, contact tracing, and vaccination efforts, providing grants for school to improve their capabilities to operate amidst the pandemic, funding support to state and local governments to offset lost tax revenues, small business grants, to tax credit and other relief measures for individuals. 

Here are some of the notable provisions that may impact your finances this year and your overall financial plan.

Direct Payments (“Stimulus Checks”)

The American Rescue Plan Act, much like the CARES Act (enacted in March of 2020) and the Consolidated Appropriations Act (enacted last December 2020) before it, provides a refundable tax credit made as a direct payment to individual and families.  These 2021 Recovery Rebate payments have started to go to recipients.

How much could I receive?

• The full credit amount is $1,400 per eligible individual

• Eligible individuals include not only the taxpayers but also the taxpayers’ dependents

This is a key difference from the criteria determining the eligible number of individuals for the 2020 Recovery Rebates in the CARES Act and Consolidated Appropriations Act, which included only the taxpayers and the taxpayers’ children under age 17.

A married couple, for example, filing a joint return with a 21-year-old daughter in college, a 17-year-old son, and an 85-year-old mother living with them whom they claim as a dependent, could receive up to $1,400 x 5 = $7,000 for their 2021 Recovery Rebate.

Who is eligible?

Generally, U.S. citizens or U.S. Resident Aliens with a valid Social Security number, who are not dependents of another taxpayer, and who fall within certain income thresholds are eligible.

Your Adjusted Gross Income (AGI) determines your income eligibility, with the amount of tax credit phasing out to $0 over the following ranges by tax filing status.

• Married Filing Jointly: $150,000 to $160,000

• Head of Household: $112,500 to $120,000

• Single and all other filers: $75,000 to $80,000

For example, if you are married filing jointly and your AGI is an amount up to the initial threshold of $150,000, you would be eligible for the full credit.  If instead, your income falls between $150,000 and $160,000, your eligible credit is reduced proportionally as your income approaches the $160,000 ceiling.  If your income is at the $160,000 level or above, you are no longer eligible.

Determining Eligibility

There are a few different measuring points used to determine your income eligibility for receiving the rebate benefit. 

1. For the direct payments that are already starting to be disbursed now

The IRS uses available information, that is, your most recently filed tax return.  Since we are still within the tax-filing period for 2020, you may or may not have already filed your 2020 return.

If you had already filed your 2020 tax return, the IRS will use your 2020 tax return to determine your Adjusted Gross Income for eligibility.

If you have not filed your 2020 tax return, the IRS will use your 2019 tax return to determine your income eligibility.

Folks that would be eligible for the direct payment based on 2019 income but whose 2020 income might result in a reduced payment (or could make them ineligible) may benefit from not having filed their 2020 returns.

For those whose income was within the phase-out range or was above the eligibility phase-out based on the 2019 tax returns, there are other opportunities to benefit from these rebates (particularly if your income had fallen in 2020 due to the pandemic or other factors).

 2. The “Additional Determination Date”

Taxpayers who have not yet filed their 2020 returns but do file them before an Additional Payment Determination Date will have their rebate payment recalculated based on their 2020 AGI.  If the recalculated rebate payment is higher than the amount determined from the 2019 taxes, the IRS will send out another “stimulus check” to make up the difference.

The Rescue Act sets this Additional Payment Determination Date as the earlier of

• 90 days after the 2020 tax year filing deadline (still April 15th as of this writing) or

• September 1st

Keep in mind that If you anticipate filing an extension for 2020 and the extended filing deadline is October 15, you would still need to file your return much sooner to have your potential rebate recalculated using 2020 income.

3. Filing your 2021 Tax Return

Remember that the Recovery Rebate is a 2021 tax credit, so even if the advanced direct payments of the credit are determined using the 2019/2020 tax returns for income eligibility, filing your tax return for 2021 is the 3rd way to be eligible for this benefit.

If your 2021 AGI is lower than the 2019/2019 AGIs used to determine the advanced payment, and it is low enough to result in an eligible credit or a larger credit than was already paid out, this difference is applied as a tax credit on your 2021 tax return.

Increased Child Tax Credit (CTC) for 2021

The American Rescue Plan Act also makes some temporary enhancements to the normal Child Tax Credit for 2021.

• The Child Tax Credit is raised to $3,000 from $2,000 for children over age 6 and to $3,600 for children under age 6

• Eligible children can be up to 17 years old rather than just under age 17.

• The enhanced CTC is also a fully refundable tax credit this year. (i.e. it can become a tax refund if the credit makes the tax liability negative)

• A provision also has the IRS paying out 50% of the estimated 2021 tax credit over equal installments starting in July 2021, all based on your most recently filed tax return.

*If, however, at the end of 2021 you were eligible for a smaller amount than was paid out to you, that difference is “clawed back” by adding it to your tax liability on your 2021 tax return.

Because tax credits reduce tax liability dollar for dollar, this credit overall can have a significant impact on a family’s tax situation, particularly for a family with young children.  As a hypothetical example, a married couple with 3 kids (ages 3, 5, and 8) filing jointly with $100,000 of income in 2021 (assuming all ordinary income) and taking the standard deduction ($25,100) would have tax liability of $8,590.  After subtracting the CTC for the kids ($3,600 + $3,600 + $3,000 = $10,200), the couple’s tax liability would be negative $1,610 ($8,590 - $10,200) meaning a refund of $1,610!

With these enhanced credits, the credit amounts do begin to phase-out at the following Adjusted Gross Income (AGI) levels:

Married Filing Jointly: $150,000

Head of Household: $112,500

Single and all other filers: $75,000

Being ineligible for the 2021 enhanced child tax credit does not exclude you from using the normal child tax credit of up to $2,000 per child. You can still qualify for that credit up to these higher-income phase-out thresholds:

Married Filing Jointly: $400,000

Single and all other filers: $200,000

Child and Dependent Care Tax Credit Increased for 2021

The Rescue Act also makes changes to the Child and Dependent Care Tax Credit for this year that essentially raises the maximum possible credit from $1,050 to $4,000 for a single qualifying dependent and from $2,100 to $8,000 for two or more dependents.

• First, the maximum amount of eligible expenses (such as daycare) used to calculate the tax credit increases from $3,000 to $8,000 for a single dependent and from $6,000 to $16,000 for multiple dependents.

• There is also a percentage number applied to the taxpayer’s eligible expenses to calculate the actual credit amount (this is known as the ‘Applicable Percentage). For 2021, the Applicable Percentage increases to 50% from the previous maximum of 35%.

• The income threshold for reducing that percentage is expanded to an AGI of $125,000 (regardless of tax filing status).

Before this change under the Rescue Act, the 35% applicable percentage reduced down to 20% at a much lower income range.  Starting at $15,000 the percentage decreased 1% point for every $2,000 that your AGI exceeded that threshold down to a minimum floor of 20% (actually reached at an AGI of $45,000).  This meant the credit amount was more limited for most taxpayers.

For 2021 the same reduction applies, but it does not start until an AGI of $125,000.  As a result, when AGI hits $185,000, the applicable percentage is capped at 20%.  The combination of these changes allows more people to be eligible for higher potential tax credits.

• One downside for higher-income earners of $400,000 or more is that the Rescue Act adds a phase-out from the 20% minimum Applicable Percentage.  Starting at a $400,000 AGI, the 20% Applicable Percentage is reduced 1% point for every $2,000 your income exceeds that threshold.  This effectively makes you ineligible for any credit amount once your AGI exceeds $440,000.

Other Provisions of Note:

Federal unemployment support

Certain unemployment compensation benefits have been extended, including

• The federal unemployment insurance (UI) supplement is set at $300 per week through Sept. 6.k.

• The Pandemic Unemployment Assistance program providing benefits to individuals such as those self-employed is extended to September 6th

The Rescue Act also makes the first $10,200 in federal unemployment insurance assistance nontaxable for incomes under $150,000.  This would be $20,400 for two spouses.

*A key point is the $150,000 AGI threshold includes the unemployment benefits received)

Health Insurance Support

• Provides COBRA subsidies in 2021 for individuals that were involuntarily terminated.  Individuals can maintain their coverage at $0 cost from April through September.

• Expands the Premium Assistance Tax Credits for health insurance plans purchased through the state exchanges.

Small Business Support

Additionally, there is $15 billion in new funding for Economic Injury Disaster Loans (EIDL) as grants. The bill designates $7 billion for the Paycheck Protection Program (PPP) to nonprofits and news services. An additional $1 billion funds a grant program for independent live venues, theaters and cultural institutions. EIDL grants are exempt from inclusion in recipients’ gross income for tax purposes.

As you may have noticed, many of these provisions in the new legislation are nuanced and how they apply to your specific situation depends on several factors.  Continue to have conversations with your financial planner, and as always please reach out if you have questions.

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.

A Better Way To Pass Down Wealth To The Next Generation

Contributed by: Kali Hassinger, CFP®, CDFA®

You may have heard the saying, “Shirtsleeves to shirtsleeves in three generations.”  In a family, it refers to the phenomenon of a generation building wealth, passing it down to the second generation, but going broke by the third. Whether you are passing down investment assets or a family business, many parents have the hope that their money will enrich the lives of their children, grandchildren, and future generations for years to come. However, successful transitions do not just happen when assets are distributed.  Like most challenges in life, transitions require planning, communication, and coordination.

When planning for generational wealth transfers, opening the lines of communication is often the first and most difficult hurdle to overcome. Parents may be reluctant to share information on wealth and money for many different reasons. Our society as a whole often treats money as a taboo subject that is rarely discussed in personal terms. Other concerns could be stifling an heir’s initiative or the threat of a child’s future divorce. Simply avoiding these conversations, however, can lead to unintended confusion, irresponsibility, or resentment.

Family meetings devoted to discussing wealth can help heirs better understand their parents’ plan and any possible role they may play in the future. Family meetings also give participants the opportunity to express their views, accept responsibility, or acknowledge where they may need additional help in the future. There are many ways these meetings can be conducted, but they all center on the same objectives of trust, communication, and understanding.

A meeting with the family’s advisors, financial planner, attorney, and CPA should take place at some point as well. This will help the family to gain both comfort with the advisors and a greater understanding of the level of assets in question. With the passing of the SECURE Act eliminating the stretch IRA in many situations, retirement assets that are transitioning to the next generation may require more detailed tax strategies. The Estate tax limit has also fluctuated drastically throughout the last few decades, and that will most likely be the case going forward.  It’s important that those who will ultimately gain control of assets understand why plans were put into place and how they will function going forward. While no amount of planning can ultimately guarantee success, when the lines of communication are open between owners, heirs, and advisors, a family is able to develop the best strategy for all involved.

Successful family meetings are intended to engage family members, not be a set of rules handed from one generation to the next. Healthy communication builds trust, and trust builds understanding. We often encourage clients to involve children in their Annual Review meetings when they're comfortable. If full disclosure of all information seems too invasive initially, have a conversation with your planner prior to the meeting. We are happy to tailor the meeting as necessary and can review only the portions of your plan that you are comfortable sharing!

Important Information for Tax Season 2020

Contributed by: Lauren Adams, CFA®, CFP®

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

2020 Form 1099 mailing schedule

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

• February 15 – Mailing of original Form 1099s

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

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

Additional important information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2021, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

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

• Processing of original issue discount and mortgage-backed bonds

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

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

Amended Form 1099s

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

• Income reallocation

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

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

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

What can you do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2020.

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

You can find additional information here.

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

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

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.

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