W H E R E T R U S T I S A N A S S E T

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1 WHERE TRUST IS AN ASSET

2 Sanderson Wealth Management Sanderson Wealth Management is a completely independent, registered investment adviser and CPA firm headquartered in Buffalo, NY. As truly independent advisors, we are different from brokers and money managers, and do not have any financial ties to any fund or investment product, assuring you complete and objective advice so you will know that the only thing on our agenda is the state of your portfolio. Our approach is also different from other firms in that it integrates all aspects of your financial world, from investments and financial planning to taxes and estate planning Timothy J. Domino CPA, CFP Director of Tax & Estate Planning 50 Fountain Plaza Suite 750 Buffalo, New York SandersonLLC.com

3 Introduction Common Client Retirement Misconceptions: They won t spend as much money in retirement They won t be working at all during retirement They only have to worry about supporting yourself & spouse in retirement Their taxes will be lower in retirement!

4 Introduction Tax-Efficient Retirement Planning The process of: Building an optimally tax diversified portfolio of retirement assets, then Deploying those assets prior to and during retirement to achieve spending goals and portfolio preservation goals in a manner that Results in the least amount of aggregate taxes paid over time

5 Introduction Drivers of Income Tax Liability During Retirement Years Spending Needs Forced Sources of Income (RMD, SS, Pensions) Optional Income from Retirement Savings Tax Rates & Deductions

6 Introduction Keys to Achieving a Tax-Efficient Retirement Plan Tax Asset Diversification Tax Bracket Management Understand tax constraints of retirement portfolio Evaluate opportunities to change tax status Understand tax impact of forced & optional income Evaluate opportunities to reduce effective tax rate over time Realistic Spending Assumptions Projecting retirement income & tax liability under various scenarios TAX-EFFICIENT RETIREMENT PLAN

7 Tax Asset Diversification

8 Tax Asset Diversification Goal - Building a retirement portfolio consisting of groups of assets (accounts) with different tax attributes At first glance, diversification seems difficult: Constrained by savings vehicles available Temptation of current taxdeferral Limited outside account savings discipline Tax-Free Accounts Tax- Deferred Accounts Taxable Accounts

9 Tax Asset Diversification Tax-Free Accounts No taxation at time of distribution Tax-Free Retirement Accounts: Roth IRAs & Roth 401(k)s Contribute after-tax assets but grow tax-free Limited in ability to save directly into these accounts Diversification Opportunities: Roth conversions & back-door contributions After-tax 401(k) contribution rollover segregation Roth 401(k) contributions Utilizing HSAs as tax-free retirement medical expense savings vehicle

10 Tax Asset Diversification Tax-Deferred Retirement Accounts: 401(k)s & IRAs (traditional, SEP, etc.) Ability to defer income taxation on contributions (and growth) until time of distribution Takes advantage of increased compounding returns and ideally lower tax rates in the future Diversification Opportunities: Tax-Deferred Accounts Taxation of assets and growth delayed until distribution Maximizing pre- and post-tax contributions Lump sum pension distributions

11 Tax Asset Diversification Taxable Outside Retirement Accounts: Typical brokerage and savings accounts Taxed on current income and capital gains Withdrawals only taxable to extent gains are incurred to generate cash Taxable Accounts Taxation of distributions depends on how cash is generated Diversification Opportunities: Increase tax asset diversification through systematic building of taxable accounts Reduce tax exposure through municipal bond exposure and tactical location of income producing assets in tax-deferred/taxfree accounts Refresh basis through capital gain harvesting & keep build flexibility through capital loss harvesting Consider unrealized gains and stepped up basis at death

12 Tax Asset Diversification Tax Asset Diversification Retirement Income Source Diversification Tax Bracket Management TAX-EFFICIENT RETIREMENT PLAN

13 Tax Bracket Management

14 Tax Bracket Management Tax Bracket Management The process of subjecting income to the lowest tax rates possible to reduce tax drag on cash flow and retirement portfolio assets Evaluate tax minimization opportunities both before and during retirement, and after death Consider the power of compounding returns in tax-deferred or tax-free accounts Understand tax asset diversification and forced income constraints

15 Tax Bracket Management

16 Tax Bracket Management Medicare Surtaxes $200K Single & $250K Married Filing Jointly 3.8% surtax on Net Investment Income 0.9% surtax on wage or self-employment income Personal Exemption Phase-out & Pease Limitation AGI Above $259,400 Single & $311,300 Married Filing Jointly PEP: Reduction of personal exemption amount by 2% for each $2,500 (or part thereof) that AGI exceeds threshold Pease Limitation: Reduction of itemized deduction amount by 3% of the amount that AGI exceeds threshold (up to 80%)

17 Tax Bracket Management Traditional Withdrawal Strategy: Taxable Accounts Tax- Deferred Accounts Tax-Free Accounts Modern Withdrawal Strategy: Accounts work in tandem to develop the most taxefficient withdrawal strategy from each account to meet spending needs Balance estate planning wishes with need for current income Taxable Accounts Tax-Free Accounts Tax-Deferred Accounts

18 Tax Bracket Management Planning Opportunities for Tax-Deferred Accounts: Understand RMDs at 70 ½ and impact on future marginal and effective tax rates Tax-Deferred Accounts Roth conversions or distributions during income gap or anomaly years Systematic partial Roth conversions during early years to subject income to lower average tax rates, lower RMD Withdraw from IRA while delaying Social Security to reduce future RMDs and increase Social Security benefits Distributions to capture state income tax benefits Delay RMDs by rolling balances into post-retirement employment 401(k)s Roth conversions for heirs with tax burn incentive

19 Tax Bracket Management Planning Opportunities for Taxable Accounts: Utilize tax-free municipal bonds when appropriate Consider deploying asset location strategies to minimize current taxable income yet maintain overall portfolio balance Capital loss harvesting to offset future gains during liquidation and withdrawal Capital gain harvesting in 0% bracket or to maintain taxation at 15% Consider avoidance of recognition of capital gains where significant step-up in basis possible Taxable Accounts

20 Tax Bracket Management Planning Opportunities for Tax-Free Accounts: Income tax nirvana planning opportunities are getting assets into a tax-free wrapper Utilize accounts for flexibility in spendable income during income anomaly years Lack of RMDs Ability to make income-tax free gift to heirs Tax-Free Accounts

21 Tax Bracket Management Minimizing Tax Liability by Maximizing Deductions & Exemptions: Qualifying relative dependency exemptions Maximizing Tax Related Itemized Deductions State & local sales tax deduction Prepaying state income tax Medical expenses paid for parents whom you are providing more than half of the support for Miscellaneous deductions may be beneficial again Maximizing tax benefit of charitable donations Front-loading, DAFs, Qualified Charitable Distributions

22 Tax-Efficient Retirement Planning IRS Circular 230 Notice: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax provisions.