December, 2019 | Live a Life By Design

How To Avoid Common IRA Mistakes

Posted on December 27, 2019December 27, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Most retirees have heard the word “IRA” and may not fully understand this retirement savings plan. An IRA, or Individual Retirement Account, is merely a type of account that allows for the owner to grow, tax-deferred, the underlying investments within the account. I often hear people say that “I have an IRA for each year to diversify my investments.” It is often misunderstood that the IRA owner can own one IRA and maintain many different investments within the account. This article will help you avoid some of the common mistakes made by IRA owners.

Mistake Number 1: Avoid ineligible rollovers.

Under the current federal tax code, owners of IRA may rollover the IRA once-per-year. The confusion, and resulting taxable event, occurs when the owner interprets, incorrectly, the “once-per-year” requirement. This descriptor of time means literally one year from the date of the last rollover, not the calendar year. For example, if you performed a rollover on March 1, 2018, and performed another rollover on February 28, 2019, you would be subject to a penalty.

Mistake Number 2: Missing the 60-day deadline.

A gentleman came to our office recently with a concern about his IRA. After much discussion, we provided him several alternatives to resolve his issue. His concern was due to advice he received from a friend that he could withdraw money from his IRA to purchase a piece of property and then seek financing from his bank to return the withdrawn funds. However, the friend, not a licensed financial adviser, failed to mention the strict timeline for such transactions. The Internal Revenue Code allows 60 days to accomplish the rollover to prevent taxation of the event. In this instance, the man was informed by his bank the process of underwriting the loan would take longer than 60 days. To illustrate the tax cost of this transaction, the man had withdrawn $200,000. The penalty of 10% assessed to the distribution, the man was under 59½ years of age, and the income taxes due now cost the man approximately $80,000! We quickly worked with his local bank to structure a lending arrangement that would allow him to return the withdrawn funds to his IRA within the 60-day mandatory deadline. We solved the problem but the stress it created was unbearable for the gentleman.

There is no IRS relief for missing the 60-day rollover deadline unless you file for a Private Letter Ruling with the IRS which will cost thousands in filing fees and you may not receive relief if your facts do not warrant such. The simple mitigation strategy is to not use your IRA as a lending source. Congress meant for these accounts to be long-term in nature and for retirement purposes.

Mistake Number 3: Failing to Meet a Hardship Exception.

One of the greatest contentions of angst to individuals is when hardship is being experienced by the family and funds in the IRA can’t be utilized for the particular relief needed. Unless the IRA owner experienced a natural disaster that is described in the Internal Revenue Code, the hardship distribution received from the IRA will be taxable and subject to a possible penalty for early withdrawal if the owner is less than 59½ years of age.

The confusion that causes this mistake to occur is that employer plans generally provide for a hardship distribution. IRAs do not. By statutory language, few exceptions to the penalty application to the distribution apply. Two of the primary exceptions we have seen are higher education expenses for a dependent and a first-time home purchase by the IRA owner.

This area of the U.S. tax laws is very complex. It is vital you seek appropriate guidance before potentially committing the mistake. If you are concerned about your investments and/or your IRA account, you may qualify for a Complimentary Stress-Test. Seek out a Certified Financial Planner™ practitioner and CPA to give you the confidence you are in compliance and meeting your retirement objectives.

For additional, free information about investing and tax planning, go to compasscapitalmgt.com where you will find a wealth of information to help you navigate life!

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Last-Minute Retirement Planning Ideas

Posted on December 20, 2019December 20, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

When you look at the calendar and realize another year has passed, it is time for a few more strategies to enhance your retirement account. Some of these actions may seem simplistic in nature but investing is not as difficult as many people would like you to believe. Investing in a diversified portfolio and rebalancing periodically is about as simple as any process can be for protecting your future.

Before you leave the office for the holiday season, consider reviewing your current portfolio within your employer-provided plan. 2019 has been a year of significant market growth in the United States. Record highs have been reached this year and this is a good result for most equity investors. With such growth in a diversified portfolio it is likely that your risk level within the portfolio has increased, too.

To maintain the acceptable level of risk you originally desired at the onset of your portfolio development, it is critical to sustain the original allocation. This is accomplished by rebalancing your portfolio based on one of two methods: 1) time; or 2) asset class. This example is purely for educational purposes. When the portfolio was originally established, you may have chosen a 50/50 equity to fixed income allocation. Considering the markets have been very positive on your portfolio and your allocation has expanded to 60% equities. Based on the current allocation, you are now experiencing a greater level of risk than you desire.

By performing the task of rebalancing (i.e., selling your equities and buying more fixed income) you are keeping your level of risk in line with your original target. This strategy is the basis for most theories of portfolio design and risk acceptance. However, you must possess a degree of discipline that does not become greedy when times are good and fearful when the economy is contracting. As an anecdote, we often inform our clients that they must “be fearful when others are greedy and greedy when others are fearful.” The stock markets are auction-based markets. Someone must be selling something for someone to buy it. This belief applies to new issues when a company desires to “go public”. The issuer of the stock is asking for a certain price (i.e., Initial Public Offering Price our IPO) and the public may desire to buy at that price.

Another yearend strategy we recommend is a review of the individual assets classes within an allocation. For example, small cap stocks performed excellently in 2017 and declined in performance in 2018. However, in 2019, the asset class is, once again, performing well. I am not saying that you should own small cap mutual funds. As an illustration, you should review each of the different assets classes and determine the inherent risk within your portfolio.

To help our clients control the amount of risk within their portfolios, we developed a system that “stress tests” their holdings and overall allocation. By analyzing the risk of the portfolio, the investor can be more comfortable knowing their portfolio is not invested at levels of risk that cause them worry. Also, we believe diversification must be achieved in market sectors and geographically to control the risk component.

If you are confused by some of the language in this article, don’t let it keep you from moving forward to protect your future security. You may wish for someone to “stress test” your holdings, asset allocation and project potential for your future. Seek out a Certified Financial Planner™ practitioner and CPA that can help guide you through the confusion and help you reach your goals in a non-emotional and logical manner.

For additional, free information about managing your portfolio in a manner that allows you to sleep at night, go visit the Compass Capital Management website. You will find a wealth of information to help you navigate life!

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Simplifying Tax Filing Status

Posted on December 13, 2019December 20, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Every year taxpayers that experience marital change, during the year, are confused about their proper filing status. The Internal Revenue Code (IRC) provides guidance on the qualifications of each of the individual taxpayer filing statuses.

Confusion arises when there has been a marriage or divorce during the tax year. Dependents are no longer allowed as a personal exemption but are utilized for certain credits of the tax code. Who is a dependent for tax filing purposes? What status do I use if my spouse dies during the tax year? How long can I claim a certain filing status? To say the IRC is complex is to say the Mona Lisa is simply another painting!

The basic guidelines for filing status for an unmarried individual will be one of the following: Single or Head of Household. You are considered unmarried for the whole year if, on the last day of the tax year, you are either unmarried or legally separated from your spouse under a divorce decree. State law, not the IRS, governs whether you are married or legally separated under a divorce decree.

Some nuances in the IRC, and its regulations, regarding divorced taxpayers create additional challenges to those individuals attempting to avoid taxation through the legal means of divorce. For example, if you obtain a divorce for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intend to remarry and do so in the next tax year, you and your spouse must file as married individuals for both tax years.

If you are considered unmarried on the last day of the year, paid more than half the cost of maintaining a home and a qualified child lived with you more than half of the tax year, you may file as Head of Household. This filing status will allow a greater standard deduction than that available to an unmarried taxpayer.

Life sometimes creates difficulty for us. For example, if you were married for only one day of the tax year and your spouse dies, you may continue to file as a Married Filing Joint taxpayer for the year. Further, if your spouse dies in 2019, you may file as a joint tax filer for 2019 and use qualified widow(er) status for the succeeding two years. To claim qualified widow(er) filing status you must have a dependent, child or stepchild, you can claim during the tax year.

Don’t allow life to cause you confusion and distress. Seek out a Certified Financial Planner™ practitioner and CPA that can help guide you through the maze of laws and regulations. You will be glad you did!

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Want Less Stress at Tax Time? Do This!

Posted on December 6, 2019November 27, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Are you one of those people who lose sleep at night, suffer anxiety and, generally, feel miserable when it is time to file your individual income tax returns? One of the best methods of experiencing a better way of life is to take charge of the activity. Don’t allow yourself to procrastinate on this important task and create stress in your life.

By performing the following three steps, you will find the upcoming filing season to be less of a burden and, dare I say, even enjoyable. First, start collecting your tax reporting information before January 1, 2020. Gather all receipts, bank statements, investment statements, paystubs, etc. that may be required for the complete and accurate filing of your returns. Organize the expense receipts by topic and total the topics to make it easier for you (or your paid preparer) to complete your filings. We recommend performing this same procedure each month. You will find the process takes very little time and saves a tremendous amount of stress when January rolls around.

The second step is to review your investment statements to see if any of your positions should be sold to capture losses and offset your investment gains. This is the process for accounts that are not IRAs known as nonqualified accounts. The act of reviewing your accounts to perform this task is known as tax harvesting. Your goal is to simply sell enough positions with losses to allow you to sell an equal amount of positions with gains and no tax effect. As a side note, this would be a great time of year to review your retirement plans and other holdings with a Certified Financial Planner practitioner to confirm you are on track with your goals.

This third step is very helpful to reduce your taxable income. Review your itemized deductions for 2019 thus far. If you are needing additional deductions, you should consider charitable contributions, payment of your state income tax estimated tax payment, donation of non-cash goods to a qualified charity and other means of accelerating deductions into 2019. With the changes in standard deduction because of the Tax Cuts and Jobs Act of 2017, it may be beneficial to “bunch” deductions every other year to allow yourself a larger deduction on your returns.

As a bonus, contact your tax preparer and inform them that you are bringing your information to them earlier this tax season. If you want to make them smile, tell them you have burned the paper sack you usually bring and will be dropping off an organized list of income, deductions and other pertinent information.

For additional, free information about preparing for your tax preparation appointment, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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Time is Running Out

Posted on December 6, 2019December 6, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

As a calendar-year, cash-basis taxpayer, you will have fewer opportunities to reduce your 2019 income tax burden once the calendar rolls over to 2020. By taking a few simple steps today, you will see a better result when you file your income tax return in April, 2020.

If you participate in a Flexible Spending Health Plan, referred to as a “cafeteria plan”, through your employer, it is critical that you utilize (spend) your elected deferral amount for 2019. The IRS has liberalized the rules regarding the ability to claim qualified medical expenses and you may carry over a small portion of your elected deferral amount to a following year. Discuss your options with your company’s Human Resource Officer for your particular plan.

Consider paying your total advalorem tax assessment in full prior to December 31, 2019. The Tax Cuts and Jobs Act of 2017 increased the amount of standard deductions to such levels that most individuals will not incur sufficient qualified itemized deductions to file a Schedule A – Itemized Deductions Form – with their returns. Analyze your current level of qualified deductions to determine if you exceed your standard deduction of $12,200 for individuals or $24,400 for married filing joint taxpayers. A lowered state tax may be an added incentive to itemize deductions on your federal return.

What if you could take a deduction on your tax return for something that doesn’t require your current cash? You may receive an increased benefit by donating appreciated stocks to qualified charities. The process requires that a donor (you) physically donate the certificate of the shares to the charity instead of selling the stock and donating the proceeds. You will receive a tax deduction based on the fair market value of the stock on the date of the donation (transfer). Since the charity is generally exempt from federal and state income taxes, the charity will sell the stock and receive the much needed cash it desires to run its programs. For example, you may have basis in the stock of $1,000 and the fair market value has risen to $10,000. Your charitable deduction is $10,000 (your deduction is limited to 30% of your adjusted gross income). You do not realize the $9,000 capital gain that would be taxed if you sold the stock. It is a win-win situation!

Lastly, review any employee benefit elections for 2020 that are required this month. Most employer-provided retirement plans utilize an enrollment period in November or December of the current year to elect the amount of contributions for the next year. One of the most effective and efficient tax deductions is the contribution to your retirement. Maximizing this election will save federal and state income taxes as well as receives growth via the employer matching contribution. We advise clients to defer at least the matching percentage provided by the employer so that you literally “double” your money notwithstanding market conditions.

Be proactive in your finances and retain more discretionary income for your family. If you want additional information on the above tax strategies and other financial planning methods to help your family reach its goals, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!