Supreme Court Upholds Washington State Capital Gains Tax – What You Need To Know

Supreme Court Upholds Washington State Capital Gains Tax – What You Need To Know

by | Mar 30, 2023 | Advisors, Ask Merriman, News, Scott Christensen, Tech Focus, Wealth Protection

 

Supreme Court Upholds Washington State Capital Gains Tax – What You Need To Know

 

On March 24, 2023, the Washington State Supreme Court ruled in favor of a state capital gains tax, which was originally passed in 2021 to take effect starting January 1, 2022. In light of the court’s ruling, the state will continue as planned and collect the tax due for tax year 2022. The due date corresponds with the federal tax return filing deadline (which lands on April 18th this year), leaving just a few short weeks to file a return and pay the tax. With the clouds of uncertainty dispersed, it’s important for Washington residents to understand what is at play.

 

Who pays the tax?

Individuals with realized long-term capital gains above $250,000 are now required to file a Washington state capital gains tax return. A 7% tax on gains above this threshold will apply. The $250,000 annual standard deduction applies to spouses or domestic partners whether they file joint or separate returns (it is not $250,000 per person rather $250,000 per household). Income from work, pensions, social security, etc. are not included in this tax. It applies to the sale of intangible or tangible property such as stocks and bonds (including mutual funds, ETF’s, and other pooled investments), art, and other collectables. There are, of course, important exemptions to be aware of – we are talking about taxes after all! These include among others:

  • Sale of real estate, regardless of whether it’s a residential or commercial property. The property can be owned by a business, individual, or trust. It doesn’t matter how long the seller owned the property or whether the seller was renting the property.
  • The gain on the sale of a private entity, to the extent that gain is directly attributable to real estate owned by the entity.
  • Gains in retirement accounts, including 401(k)s, deferred-compensation plans, IRAs, Roth IRAs, employee-defined contribution plans, employee-defined benefit plans, and similar retirement savings accounts.

In addition to the exemptions outlined above, there are specific deductions that apply to the taxable capital gain income in Washington. Beyond the $250,000 standard deduction already mentioned, the following deductions also apply:

  • Long-term gains on the sale of qualified family-owned small businesses
  • A charitable deduction up to $100,000 for qualifying charitable gifts in excess of $250,000. The catch is that the charities need to be directed or managed in the state of Washington, which makes it unlikely for donor-advised funds to qualify for the deduction. Since the deduction is capped at $100,000 annually, to qualify for a full deduction one would need to have made qualified charitable contributions of $350,000.

The Revised Code of Washington defines the specifics for applying each of the family-owned small business and charitable deductions. Please don’t hesitate to reach out to us if you have questions.

For general examples of how the tax is calculated, please see our previous article on the topic. We also include a specific example for the charitable gift deduction below.

Charitable Deduction Example:

Sarah had $300,000 of long-term capital gains subject to the Washington state capital gains tax. She owes a tax of 7% on $50,000 (the excess above the $250,000 standard deduction). If Sarah contributed $50,000 to a charity directed or managed in the state, she would still owe tax on the full amount since the minimum charitable contribution is $250,000. Since the $50,000 charitable contribution is below the minimum, it would not reduce the $50,000 taxable income.

If Sarah had instead contributed $300,000 to a qualified charity directed or managed in Washington, she would qualify for a $50,000 charitable deduction which would eliminate her taxable realized gains subject to Washington state capital gains tax.

 

How do I pay the tax?

The Washington state capital gains tax return is filed separate from your federal tax return, but because your federal income tax return is required to be attached to your Washington state capital gains tax return, it’s necessary to first complete your federal return. Then you will submit the Washington state capital gains tax return electronically using the Washington Department of Revenue website. This video tutorial walks through the process of filing the return and paying the tax.

An extension can be granted to those who file an extension for their federal income tax return, but payments must still be made by April 18, 2023 or penalties will apply.

 

What you need to know when filing

  • When completing the capital gain tax return, you will be asked whether the gain is allocated to Washington. Only gains allocated to Washington apply when calculating the tax. So what is and is not allocated to Washington? It depends where the sale or exchange occurred, regardless of where it was purchased. You could have purchased a stock years ago while living in a different state, but if you sell the stock while you reside in Washington, it is allocated to Washington.
  • For tangible property, such as art or collectibles, there are a few more rules to determine whether it is allocated to Washington. A FAQ can be found on the DOR website that covers tangible property, cryptocurrency, business owners, and mutual fund distributions.
  • Since this is a tax only on realized long-term capital gains (property held for more than one year), property that is sold within a year is not included in the Washington state capital gains tax. This means there may be a difference between what is reported on your federal return and the state return since both short-term and long-term capital gains are netted together at the federal level, but only long-term gains are considered at the state level. Capital loss carryovers can be used but are limited to the amount used in determining the federal net long term capital gain.
  • For those receiving restricted stock units (RSU’s), vested shares sold within one year will not be considered in the Washington state capital gains tax. Only shares held for longer than a year after vest are considered long-term and potentially subject to the tax.

 

Conclusion

It’s more important than ever to be aware of how much capital gains income is being realized. It will likely make sense to diversify from a concentrated stock position over time where possible, to not incur an extra 7% tax. In cases where cash is needed, we can help analyze other options such as using short-term borrowing tools like a home equity line of credit or margin on your brokerage account. With a payoff plan in place, these tools may present a lower interest cost than the capital gains tax that would otherwise be paid. For those subject to the tax this year, your CPA should be able to help fill out your Washington state capital gains tax return. If you have questions determining how this impacts you, we’re happy to help.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

The SVB Bank Collapse and What It Means For You

The SVB Bank Collapse and What It Means For You

by | Mar 15, 2023 | Emergency Savings, Kristi de Grys, Merriman's Take, News, Tech Focus, Wealth Protection

 

The SVB Bank Collapse and What It Means For You

 

On Friday March 10, the world woke up to headlines that Silicon Valley Bank (SVB) had “failed.” Bank failures, though rare, are nothing new and the story roughly plays out the same each time. Runs start with higher-than-anticipated demands for cash that turn into a contagion as depositors become fearful they won’t be able to get their money out and withdraw it, even though they don’t need it right then. The speed at which the SVB collapse happened showed us what a run looks like in an age when information travels almost instantaneously and money can be requested from anywhere via a simple request from a phone.

The Federal Deposit Insurance Corporation (FDIC) was established expressly to prevent the fear that drives bank runs. If depositors are guaranteed they will get their money back, there is no need for panic and small dislocations don’t turn into full-blown explosions with wide-reaching collateral damage. The challenge for SVB and Signature Bank, which was also shut down by government regulators over the weekend, was that the vast majority (up to 97%) of depositors had exceeded limits for FDIC coverage.

SVB was also particularly susceptible due to its concentrated depositor base of startups and small technology companies. In the pandemic, many of them became flush with cash and parked it at SVB. SVB, seeking yield and safety, invested it in longer-dated Treasury bond and other government backed securities. As higher interest rates hit the tech sector and startups particularly hard, companies began withdrawing cash at a faster rate. At the same time, the value of SVB’s longer-dated bonds fell. This pattern had been going on for multiple months until last week when SVB announced the sale of securities at a loss to cover withdrawals. That announcement triggered broad concern and the fear that SVB would not be able to cover the full amount of their deposits. Whether that would have ultimately been true or not remains unclear.

To avoid further panic and contagion risk across the banking system, the FDIC stepped in and took over the bank on Friday, following up with a guarantee to cover all deposits at SVB and Signature Bank, even those above the standard insurance limit. Given the commitment to cover deposits for these two banks, it seems likely they would do so for others. They also extended very attractive loan arrangements that can be used by any bank. Many believe these actions should be more than enough to provide stability.

While the government has stepped in to cover depositors, this intervention is far different than what happened in 2008 when the government also bailed out bond and equity shareholders. With the government takeover, the equity of SVB is worthless as is that of Signature Bank. Thankfully, the ETFs we recommend in our core portfolio had immaterial exposure to these stocks (< 0.1%).  

However, our core portfolio overweighs U.S. small-cap value ETFs that have exposure to many other regional bank stocks which have been hit hard by association. Fear-driven market pullbacks are never fully logical, so one never knows what will happen in the next few days and weeks, but there are good reasons to believe that SVB and Signature Bank were outliers in many respects and that other small and medium-sized banks are in a stronger position.

It is very common in fear-driven market declines for small-cap stocks to suffer greater losses and then rise more quickly during a recovery than the broader market. The COVID crash in March of 2020 was the most recent example of this phenomenon. We believe one reason small-cap value stocks have historically delivered returns higher than the broad market is their greater volatility in times of stress. To be in a position to capture the potentially higher returns and diversification benefit of investing in these stocks, we must stay the course.

Anytime there is stress in the financial markets, it is an opportunity to assess whether we are taking undue risk. Investing is never risk free, but our goal is always to maximize our return for a given amount of risk. There are already some good reminders coming out of the current situation:

  1. Make sure the cash you hold at any given bank is below the FDIC insurance limit. There are plenty of good options to help you do this even for cash balances in the millions. If you, someone you know, or the business you work for is in this situation, please reach out to us and we can help direct you to solid options based on the specific needs.

     

  2. Reassess any concentrations you may have in your wealth. One of the major reasons SVB was susceptible to a bank run was the concentration of its depositor base and the high exposure in its investments to a single risk – rising interest rates. The likelihood of any given company going bankrupt is small, but the consequences can be catastrophic if a significant portion of your wealth and livelihood are tied to a single entity. The power of diversification across all aspects of your current and future wealth should not be underestimated as an effective means of protection.

Financial market stress and the associated volatility can be unnerving. We strive to provide peace of mind by designing our portfolios to keep clients on track to reach their goals through a variety of market conditions.

 

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Pet Insurance Guide — Worth the Cost & What Coverage to Choose?

Pet Insurance Guide — Worth the Cost & What Coverage to Choose?

by | Feb 28, 2023 | Family Talk, Healthcare, Wealth Protection

 

For many people, pets represent an unlimited source of comfort, companionship, and joy that they simply couldn’t imagine life without. Almost 70 million US households are proud dog owners, and over 45 million families share their living space with a feline friend. In fact, overall pet ownership across the states accounts for around 70% of the entire US population.

 

Protecting our beloved pets, however, isn’t always simple. Unexpected illnesses, broken bones, and unforeseen medical conditions can unfortunately arise out of nowhere; and given that veterinary care prices have risen by 10% in the last year alone, many pet owners may struggle to provide the care that their furry friends need. 

 

Taking this into account, does it make sense to get pet insurance? And if so, how do you determine which one to get? Below we’ll discuss the pros and cons of the most common forms of pet insurance in the US, including the coverage you can expect and ultimately whether insurance is worth it for the average family.  

 

Uninsured treatment costs

Before we look at the expected costs of pet insurance itself, let’s go over the price of some common veterinary procedures performed out-of-pocket with no coverage at all. Most procedures will increase in price relating to the size of your pet, meaning canine procedures often cost more than those performed on a feline, and any services that require a specialist will come with their own premium.

 

Procedure

Cost for Dogs

Cost for Cats

Broken bone

$2700

$2000

Cancer

$4000

$3800

Ingested objects

$3500

$3400

Heart murmur

$1200

$1400

Diabetes

$2600

$2000

Arthritis

$700

$500

Bladder infection

$400

$1100

 

Animal-specific conditions such as feline kidney disease and hereditary conditions like hip dysplasia in larger dogs should also be considered when weighing up your pet care options. Treatments for these issues can drastically increase your expenses over the course of your pet’s life, so it’s worth gaining a clear understanding of how likely these conditions are to appear somewhere down the line.

 

Treatments covered by pet insurance

Now that we know a little about the costs of common veterinary treatments, let’s take a look at the procedures you can expect your pet insurance to cover. 

 

Pet insurance plans often come in two forms: accident-only coverage and accident and illness coverage. As expected, accident-only plans just cover expenses related to an accident (broken bones, ingested objects, etc.), whilst accident and illness plans also provide added protection against the costs of ongoing treatments for issues like cancer, ear infections, and other long-term illnesses. 

 

Accident and illness plans are, of course, generally more expensive, but for pets with a higher predisposition toward long-term illness, they can end up saving a lot of money in the long run.

 

You can expect the average accident and illness policy to cover:

  • Dental illnesses
  • Chronic conditions
  • Toxic ingestion
  • Surgery
  • Hospitalization
  • Broken bones
  • Breed-specific conditions
  • Prescription medications
  • Emergency care

 

Some accident and illness pet insurance policies also offer routine care coverage as part of your plan. Opting for this additional coverage will take care of recurring wellness procedures like microchipping, routine check-ups, and vaccinations throughout the duration of your pet’s life.  

 

Treatments not covered by pet insurance

There are some common exclusions to pet insurance policies that are worth looking out for. 

 

These often include procedures not accepted by your state’s medical board (experimental treatments) and any treatments for pre-existing conditions that your pet had before the start of your policy. However, this does vary across providers, with some accepting coverage for curable conditions or for conditions that your pet seemed to be free from for an extended period before the start of your policy.

 

Other common pet insurance exclusions include:

  • Food
  • Nutritional supplements
  • Grooming
  • Licenses and certifications
  • Waste disposal services

 

Pet insurance deductibles

As part of your pet insurance policy, you’ll need to decide on a deductible amount. This describes the amount that you’ll pay for any procedures before your pet insurance will begin to pay out. This value can range between $50 to upwards of $1000 and will depend upon your level of coverage.

 

Pet insurance deductibles generally come in two varieties: 

 

Annual – You pay the deductible each policy term. Once this value is met, you pay nothing further until the next year.

 

Per-condition – You pay your deductible amount for each individual condition or incident as and when they occur. 

 

You’ll also need to choose a reimbursement level. This is the amount your insurer is expected to pay after your deductible is met. Reimbursement levels are generally between 70–90%, though there are a few select providers that will reimburse policyholders by a full 100%.  

 

Average pet insurance costs

Now that we have a clear understanding of the finer details, let’s see how much pet insurance costs for the average consumer.

 

Pet insurance prices for dogs come in at around $20–$44 a month for dogs and $12–$46 a month for cats. That’s about $35 a month for dogs and $28 a month for cats on average to make up $5,000 in coverage for the year.

 

The price you pay will vary to some extent depending on a few important factors. Your pet’s breed, for example, needs to be considered as some breeds are more susceptible to long-term conditions. Age, gender, and location are a few other factors that will affect the overall cost of your insurance policy. 

 

Is pet insurance worth it?

Whilst pet insurance providers (like any business) are certainly looking to turn a profit, that doesn’t mean their services won’t be worthwhile to you and your pet. The average pet owner visits their vet 2.5 times a year, and with 42% of pet owners claiming that they’re unable to cover an unexpected vet bill, a decent pet insurance policy could be a lifesaver in more ways than one. 

 

If your pet carries an increased risk of developing a long-term health condition, pet insurance can become even more of a necessity, but in the end your choice will depend on the unique circumstances that you and your pet find yourselves in.

 

Weighing up all the facts and considering the rising costs of veterinary visits, we believe it’s at least worth looking into a pet insurance policy for most pet owners out there.

 

 

Written Exclusively for Merriman.com by Madison Smith

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

I’ve Been Laid Off — What Now?

I’ve Been Laid Off — What Now?

by | Feb 13, 2023 | 401k, Advisors, Ask Merriman, Chris Waclawik, Emergency Savings, Frank McLaughlin, Lowell Parker, Risk & Reward, Sarah Kordon, Sierra Butler, Tech Focus, Wealth Protection

 

News headlines everywhere are talking about widespread layoffs, particularly in the technology industry. Thousands of people have lost their jobs with still many more losses predicted in Q1 of 2023. With so many heavy hitters right here in the Pacific Northwest—Microsoft, Google, and Amazon, just to name a few—it’s likely these tech world layoffs affect you or someone you know.  Many of our own clients have expressed concern over their own job security, understandably anxious and full of questions.

 

Of course, the primary concern when facing a layoff is finding a new job, but that can take time. Here are a few things to think about as you adjust to your new normal. Perhaps most importantly, DON’T PANIC!

 

Here are the things that should be first on your list:

  • Give us a call! Your Wealth Advisor is here to help put your financial picture into perspective and to assist with planning to protect your investments. We can help you wade through the pros and cons of everything in this article—decisions regarding your 401(k), insurance, benefits, cash flow, taxes, retirement concerns, and more.
  • Start networking! Reach out to alumni groups, job boards, professional organizations, former colleagues, recruiters, etc.
  • Understand your rights under state law.
  • Review company documents and your severance agreement. There may be some terms of the layoff you can negotiate, like extending healthcare or retaining some company perks.
  • Apply for unemployment benefits.
  • Once you know the details of your severance agreement and unemployment benefits, plan out how to fill the income gap. See below for the pros and cons with some of the different options available.
  • Look at your options for any vested and unvested stock options or RSUs.
  • Review healthcare options. Should you sign up for Cobra, get coverage via a Marketplace plan, or join your spouse’s coverage? A layoff is a triggering event, so these options are all available to you, but there are pros and cons to each that depend on your situation.
  • Review your expenses and cut back if needed.
  • Consider your 401(k) options.

 

 

What are your options for filling the income gap?

 

Spending down your assets – Sarah Kordon, CFP®, CRPS®, Wealth Advisor

Ideally, you have an emergency savings account specifically appointed for a situation like this. If so, this should be the first asset you begin to use to supplement your income. Keep in mind that you will want to rebuild your emergency savings account after you are settled in a new job, so don’t spend frivolously. Revisit your monthly budget and look for ways to cut costs so you can stretch these savings for a longer period and rebuild them quickly when your new income stream picks up.

Spending down assets may also affect your larger financial goals, so before you dip into your savings and investments too heavily, be sure to consider the ramifications. Hopefully shorter-term goals, such as buying a new home or taking a grand vacation, can simply be postponed. Longer-term goals, such as retirement at a certain age, can also be adjusted if needed, but hopefully your emergency cushion is large enough to keep that from being necessary.

If you need to take distributions from investments, we can help you evaluate the tax consequences and understand the impact of such actions on your goals, which may make some tough decisions a little easier and provide you peace of mind.

 

Taking a 401(k) loan or withdrawal – Sierra Butler, CFP®, CSRIC™

When you’ve stopped getting a paycheck, using some of your 401(k) assets through a loan or withdrawal might seem like an attractive choice, but here are some reasons why it should be your last resort.

Most 401(k) plans do not allow new loans after an employee has left the company. If you already have a 401(k) loan, the plan may demand an immediate repayment or a shorter repayment plan. The loan must be repaid before rolling over the balance into a new 401(k) or IRA, which would prevent you from consolidating your accounts and potentially taking advantage of superior investments in a different account.

If you instead take a withdrawal from your 401(k), or if the loan is not repaid, it will be treated as a taxable withdrawal and is subject to ordinary income tax. Additionally, you will incur an early withdrawal penalty of 10% if you are younger than age 55.

One of the biggest risks of a 401(k) loan or withdrawal is missing out on market gains should the investments do well after you take the withdrawal. I caution folks from viewing their retirement accounts as piggy banks for current spending as it can be a quick way to deplete their retirement nest egg.

 

Should I take on gig or contract work? – Frank McLaughlin, CFP®, CSRIC™

This question depends entirely on your financial situation and tradeoff preferences. Assess these by asking yourself questions like:

  • Have I saved up enough cash to weather this period between jobs?
  • Am I able to cut back on certain expenses to allow me to search for a new job without taking on a gig? Is cutting back on expenses worth it, or do I prioritize maintaining a certain lifestyle?

Note: Don’t forget to consider new potential expenses, such as healthcare costs.

  • Do I have another source of income, such as a working spouse who could temporarily pick up the additional burden for a while? Would my significant other be okay with that arrangement?

If you find yourself answering no to more than one of the assessment questions above, taking on a side gig or contract work may be a great option to explore.

 

 

Could there be a silver lining?

 

Consider retiring early, staying home with the kids, or taking a sabbatical – Lowell Parker, CFP®

After a layoff, the most common course of action is to work toward finding a new job. But that isn’t the only path available to you. Burnout is real! Maybe this is your sign to take a break if you can afford to. Can you take this opportunity to retire early or stay home with the kids for a few years? Or perhaps take advantage of the temporary break from work and go on that long trip you’ve been dreaming about, or use the time off to work on a home remodel?

The obvious and large warning for any of these options is that your financial plan must support it. Do you know what these choices would mean for your future lifestyle? This is a major decision to make, and there are many factors to consider. What retirement lifestyle are you dreaming of? Are the assets you have saved enough if you won’t continue to have an income stream from a job? It’s important to revisit your financial plan and make sure you have saved enough to make work optional, whether temporarily or permanently, throughout a variety of potential future market scenarios. If this is something you’re considering, reach out to your Wealth Advisor to see if you can make it happen.

 

Make it work to your advantage at tax time – Chris Waclawik, AFC®, CFP®

After you’ve reviewed your income sources following a layoff and you have an estimate of the tax impact of using these sources for income, you may be able to create a plan to take advantage of the situation.

The “good” news is that a layoff, especially one that happens early in the year, can potentially place you in a lower tax bracket for the year, which opens up some planning opportunities. Here are a few to consider:

First, your health insurance choice may come with tax perks. When being laid off, many employees have the choice of COBRA, to extend current health insurance, or health insurance through the Marketplace. Purchasing coverage through the Marketplace can have subsidies (provided through your tax return) that can reduce the cost of coverage by over $1,000 per month depending on age, income, and the number of family members to cover.

Second, it may be possible to realize long-term capital gains at a 0% rate. This is a great opportunity to diversify out of a concentrated position without incurring a huge tax burden.

Third, finding yourself temporarily in a lower tax bracket can be a good opportunity for Roth conversions. By intentionally moving some investments from an IRA to a Roth account, you may be able to reduce taxes over your lifetime.

While I think everyone agrees layoffs aren’t fun to experience, at least we may be able to take advantage of them to reduce our tax burden for that year and potentially well into the future.

 

If you are experiencing a layoff yourself, remember: Your first step should be to contact your Wealth Advisor. If you’re not already working with one, schedule a meeting today. We can take some of the stress of these decisions off your plate and help you find the silver lining.

 

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

by | Oct 4, 2022 | After you retire, Chris Waclawik, Goal Planning, Preparing for Retirement, Retirement Savings, Tech Focus, Wealth Enhancement, Wealth Protection

 

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

Moving into retirement is an exciting opportunity to live fully. It can be a time to travel, explore new hobbies, or spend time with grandchildren.

For many, this period at the start of retirement can also be an opportunity to provide additional financial security—and minimize lifetime taxes—by making partial Roth conversions.

 

The Retirement “Tax Valley”

Many retirees will be in a lower tax bracket early in retirement than they were just before retirement while they’re still working—or than they will be in later in retirement. To understand why, consider Jim and Susan (both age 61) who recently retired.

While working, Jim and Susan had a combined household income of $250,000. This put them right in the middle of the 24% tax bracket for a married couple. At retirement, Jim and Susan have the following assets:

  • $1 million (Jim’s IRA)
  • $1 million (Susan’s IRA)
  • $100,000 (Jim’s Roth IRA)
  • $500,000 (Taxable account – with a $300,000 cost basis)
  • $300,000 (Cash savings in bank accounts and CDs)
  • $800,000 (House – No Mortgage)

Jim and Susan will also have the following income in retirement:

  • $50,000 (Jim’s annual pension – starting at age 65)
  • $30,000 (Susan’s annual pension – starting at age 65)
  • $40,000 (Jim’s annual Social Security – Starting at age 70)
  • $35,000 (Susan’s annual Social Security – Starting at age 70)

 

In addition to that income, Jim and Susan will each have to start taking required minimum distributions (RMDs) out of their IRAs starting at age 72. Assuming they don’t make withdrawals from the IRA between now and age 72, and that the accounts grow at 7% annually over the next 11 years, they would each be worth about $2.1 million by age 72. They would each have an RMD of about $76,650 the year they turn 72 ($2,100,000 / 27.4).

This would potentially give them a taxable income at age 72 of about $308,300 from pensions, Social Security, and their RMDs. This puts them back at the top of the 24% tax bracket, and they could easily move up to the 32% tax bracket or higher.

However, in their first years of retirement, they could basically have no taxable income if they are using cash savings and the taxable investment account to fund their goals if they choose to do so. Is it a smart idea to minimize taxes this much during these early retirement years?

 

Strategic Roth Conversions Early in Retirement

Let’s say that Jim and Susan would have $0 taxable income in early retirement. Their modest interest, dividend, and realized capital gain income is offset by their $25,900 standard deduction.

If they each convert $65,000 annually from their IRA to their Roth accounts ($130,000 total), they will initially pay tax on that conversion primarily at the 10% and 12% rates, with just a little being taxed in the 22% bracket each year.

If they do this each year until age 72 when their RMD begins, they would have about $1,079,000 in each IRA, assuming 7% annual returns. This would reduce their initial RMD at age 72 by about half. Their taxable income at age 72 would be reduced by about $74,500 and their tax liability by about $17,880 since they were in the 24% tax bracket.

Much of the earlier conversions each year would have been taxed at 10% or 12% rates, resulting in less overall tax being paid during their lifetimes.

 

Protection Against Rising Tax Rates

The example above shows the benefits of Jim’s and Susan’s Roth conversions, assuming tax rates stay the same. If 10 years from now, tax rates on higher earners increase, they will have less income being taxed at those higher levels due to the smaller IRA balances and smaller RMDs.

They would also have about $1,000,000 in each Roth IRA by age 72, assuming a 7% rate of growth. This can be withdrawn tax-free if additional money is needed. This is always a benefit but especially so in a world where overall tax rates are higher.

 

Roth Conversions to Take Advantage of a Market Decline

In addition to the benefit of taking Roth conversions when in lower tax brackets, Jim and Susan can take advantage of market declines to make strategic Roth conversions.

Say a market decline in the first six months of the year produces the following negative returns:

-2% (Bonds)

-10% (Large US stocks)

-15% (Large international stocks)

-20% (Small US stocks, small international stocks, emerging market stocks)

This becomes a great opportunity for Jim and Susan to strategically move some of the small US, small international, and emerging market stocks from the IRA to the Roth accounts. Assuming the investments recover as expected, Jim and Susan can pay tax on the conversion when the prices are down and enjoy a significant tax-free recovery after the investments are in the Roth account.

 

Additional Factors to Consider

There are several other factors for Jim and Susan to consider when making Roth conversions early in retirement.

When purchasing individual health insurance in retirement before Medicare begins, retirees may qualify for subsidies to reduce the cost of their premiums based on their taxable income. In Jim and Susan’s case, they have retiree healthcare from their employer that doesn’t qualify for tax subsidies, so this is not a factor.

Once Medicare Part B benefits start at age 65, there is an additional IRMAA premium cost when taxable income increases beyond a certain level. In 2022, this additional premium begins when income is above $182,000 for a married couple.

For retirees who expect to have money at the end to leave to an heir, Roth conversions can be an important part of an estate plan, as leaving Roth assets to heirs are significantly more valuable than leaving traditional IRA money to heirs.

 

Conclusion

While they won’t be a perfect solution for everyone, for the right families, Roth conversions early in retirement can be a powerful tool to minimize taxes over your lifetime and maximize overall expected wealth.

This can be one more tool to ensure the ability to make the most of retirement and really live fully!

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

Security Tips When Choosing a New Home

Security Tips When Choosing a New Home

by | Aug 30, 2022 | Tech Focus, Wealth Protection

 

Property crime is much more rampant in the US than violent crime. If you’re moving homes, you need to ensure that where you’re moving to is a safe area and take every precaution to avoid a break-in.

This post will discuss the top security investments you can make when moving to a new residence and the best security features to look for in a new house. Keep these considerations in mind, and you will find yourself safe and content in your new home.

 

Top Security Considerations When Choosing Your New Home

When we move house, we often look for open spaces with large windows and plenty of natural light. However, what we forget to look for is one of the essential features of a new home—security. You deserve to feel safe in your new home, so security must be a priority when making your decision about where to live.

 

Security Perimeters and Gates

Securing your personal property is crucial, but it can also be beneficial to secure your land from intruders. You might consider looking for a gated community with on-site security staff to ensure your safety. If that’s out of your budget, look for a home with a secure perimeter, such as trees and fencing bordering the garden. This will prevent intruders from gaining access. You should also invest in a gated driveway to ensure no unauthorized vehicles can enter your property.

 

Access Control

One of the essential features of home security is access control. Using keys for your doors leaves you vulnerable—a motivated intruder could easily pick a lock. If you wish to secure your home and have more convenience in your daily comings and goings, you should invest in access control door locks.

Touchless access control systems can operate without a key; simply use your mobile device to enter. You don’t have to take your mobile phone out of your pocket, either. Waving your hand in front of your access reader will trigger remote communication via WiFi, Bluetooth, and cellular communication with your mobile device.

Modern touchless access control solutions can also be cloud-based, enabling you to operate your security system remotely. If you’re out of the house, you can view your security information and lock your doors using a mobile application or cloud-based control center. No longer will you have to cope with the sinking feeling that you’ve forgotten to lock your door upon leaving the house. You can conveniently check the status of your doors and lock them from anywhere.

If you’re moving to an apartment complex, access control can have the following benefits:

  • Convenient entry – You can enter your building with your hands full and enter quickly. The triple-unlock feature uses three methods of communication to ensure first-time entry. Enter your dwelling rapidly without standing outside the apartment complex in a vulnerable situation.
  • Remote operation – If you get locked out of your apartment building, you can quickly contact your building manager, who will be able to unlock your door remotely without the need to visit the building in person.
  • One credential for all doors – You can enter your building and your apartment with a single credential, saving time and providing convenience.

 

Security Cameras

If a crime occurs on your property, you need a security camera system to provide evidence in an investigation. If your security cameras are displayed visibly, this could deter criminals from attempting to enter the property.

If you’re looking for a streamlined, multi-purpose security tool, you might consider investing in a doorbell camera or video intercom reader. The device comes with built-in touchless access control and high-definition video. So, if someone enters your property without permission, you will have clear visibility of their face and identity.

Doorbell cameras are also helpful in preventing parcel theft. If a stranger comes to your door to take your parcels, they will be deterred when they see that you have a doorbell camera, which will help to keep your packages safe.

 

Mobile Alerts and Alarm Systems

Any home security system is not complete without an alarm system. Cloud-based motion sensors will alert you to any activity on your property when you’re not home. If you receive a security alert on your phone while you’re out of the house, you can act swiftly and call the police to detain the intruder. Mobile alerts allow you to maintain consistent awareness of your home’s security, even when you’re out and about.

If your home does experience a break-in, you need to know how to respond. You must protect the valuable and priceless items in your home, and educating yourself on how to respond to a break-in is the best way to ensure your safety and protect your possessions.

 

Summary

You deserve a beautiful home in the area you desire. You also deserve to feel safe at home and not fall victim to a property crime. When choosing your new home, consider investing in a house with a secure perimeter. You should also look into security technologies that protect your dwelling from intruders and notify you of any security alerts when you’re out of the house.

 

 

Written Exclusively for Merriman.com by Madison Smith

Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial stride in their lives by providing expert insight on anything from credit card debt to home-buying tips.

 

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be taken as such.