RETIREMENT PLANNING: OPPORTUNITIES & PITFALLS

Transcription

1 RETIREMENT PLANNING: OPPORTUNITIES & PITFALLS

2 Retirement Savings 2

3 Retirement Savings The power of tax-deferred compounding Tax vs. tax-deferred investing over a 30-year timeframe $555,902 $497,266 $446,449 15% tax rate 28% tax rate $386,477 Asset location: Pre-Tax After Taxes Taxable Account Tax-deferred account Tax-advantaged accounts can shelter income-producing investments from current income taxation and result in greater long-term growth than taxable accounts 3 Source: J.P. Morgan Asset Management. Assumes $5,500 contribution at the beginning of each year and 7% annual investment return. IRA contributions are pre-tax and account balance is taken as a lump sum and taxed at 15% and 28% federal tax rate, respectively, at time of withdrawal. Taxable account contributions are after-tax and assume 28% federal tax rate during accumulation. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses.

4 Traditional vs. Roth 4 For illustrative purposes only. Hypothetical contribution to IRA accounts is assumed as an illustrative example. Traditional IRA: $2,000 is contributed to a deductible IRA and is taxed upon withdrawal. Roth IRA: $2,000 is taxed at 20% resulting in a $1,600 annual contribution amount. This ensures a direct comparison of current and future income tax rates between the two account types. The assumed annual rate of return is 7%. In retirement, the person withdraws $32,000 after tax ($32,000 for Roth in both scenarios, $35,556 in the 10% decrease scenario and $45,714 in the 10% increase scenario for the regular IRA) each year until the account is depleted. The breakeven point in the 10% rate increase scenario will change depending on the specific circumstances of the individual and tax rates. Source: J.P. Morgan Asset Management.

5 Roth IRA Contributions vs. Roth IRA Conversions Contributions Limited to $5,500 per year + $1,000 Catch-up (age 50+) Subject to Modified AGI phase-outs & limitations (Single Filers < $133,000; Joint Filers < $196,000) No tax deduction at time of contribution Conversions No annual limitations Not subject to AGI limitations Full amount of conversion is taxable ordinary income Must be contributed by tax return filing deadline not including extensions (i.e. April 15 th of following year) Contribution must be made in cash Can re-characterize (switch to Traditional IRA) any time up to the income-tax-filing deadline, plus extension, for the tax year of the contribution 5-year Rule begins with the first contribution to any Roth IRA and applies to accessing tax-free earnings Must be converted by December 31 st Conversion can be cash or securities Can re-characterize (reverse) any time up to the income-taxfiling deadline, plus extension, for the tax year of the conversion 5-year Rule applied independently to each conversion and applies to accessing penalty-free conversion principal 5

6 Backdoor Roth Contributions Higher-income individuals who are unable to make Roth IRA contributions due to AGI limitations, can possibly make an indirect backdoor Roth contribution The strategy involves making a non-deductible IRA contribution (available to anyone with earned income regardless of AGI levels) and shortly thereafter converting the contribution to a Roth. It is the taxpayers responsibility to track and report non-deductible contributions via Form CAUTION There are many obstacles and potential penalties if executed incorrectly 6

7 Backdoor Roth Contributions Potential Pitfalls The IRA Aggregation Rule When an individual has multiple Traditional IRAs, they are ALL treated as one account (including Rollover IRAs, SEP IRAs, and SIMPLE IRAs) 7

8 Backdoor Roth Contributions Potential Pitfalls The Step Transaction Doctrine When multiple steps are taken with clear intent of accomplishing a single transaction, the IRS can judge them to be a single tax event and treat it as such. For backdoor Roth contributions, this could allow the IRS to view the non-deductible Traditional contribution and subsequent Conversion as a disallowed Roth contribution subject to excess contribution penalty tax of 6% per year. Tax Courts have not yet issued a ruling applying the step doctrine to backdoor Roth contributions. 8

9 Backdoor Roth Contributions Opportunities Roll existing Traditional IRA balances into an employer retirement plan (401k, 403b, Keough, etc) Rollovers to Employer Plans cannot include after-tax assets, so any non-deductible contributions must remain in the IRA Possible opportunity to convert remainder to a Roth IRA First consider potential negatives in Employer plan (higher fees, limited investment options, etc) 9

10 After-Tax Retirement Plan Contributions Retirement Plan contributions can fall into one of Five categories Employee Pre-Tax Contribution Employee Roth Contribution Employee Catch-up Contributions (Age 50+) Employee After-Tax Contribution Employer Contribution 10

11 After-Tax Retirement Plan Contributions 2017 Maximum Retirement Plan Contribution Limit: $54,000* Max $18,000* Subject to Overall Limitation Employee Pre-Tax Contributions Employee Roth Contributions Employee After- Tax Contributions Employer Contributions (Pre-Tax) *Additional $6,000 Age 50+ Catchup 11

12 After-Tax Retirement Plan Contributions Withdrawing After-Tax Retirement Contributions Prior to 2015, you had two basic options: Withdraw the after-tax contributions tax free, stopping future tax-advantaged growth, and roll the earnings into a Traditional IRA. Roll the after-tax contributions and earnings into a Traditional IRA. The contribution portion received similar treatment as Non-deductible Traditional IRA contributions subject to the IRA Aggregation Rule. IRS Notice created new opportunities After-Tax contributions can now be rolled into a Roth IRA. Accumulated earnings can be rolled into a Traditional IRA. 12

13 After-Tax Retirement Plan Contributions Not all Employer Plans allow after-tax contributions Plans that do allow after-tax contributions typically cap the amount at a percentage of employee s salary After-tax contributions can usually be maximized even if a participant is a Highly Compensated Employee with otherwise limited contributions Most employer plans will include the after-tax contributions in their matching formulas If Employer tracks the after-tax contributions in a separate account and allows inservice after-tax distributions, then there might be opportunity for periodic in-service rollovers. Caution: Read the Plan document carefully! 13

14 Roth Conversions 14

15 Roth Conversions Opportunities Social Security Timing Tradeoffs 15 For illustrative purposes only. For , two months are added to the Full Retirement Age each year. Source: Social Security Administration, J.P. Morgan Asset Management.

16 Roth Conversions Opportunities 16

17 Retirement Account Distributions Qualified Employer Plan Traditional IRA Roth IRA 10% Early Withdrawal Penalty Age Exception Required Minimum Distribution (RMD) Beginning Age Age 59.5 Rule of 55: If you separate from service in the year you turn 55 or older, distributions from that employer s plan are not subject to the 10% penalty. April 1 of the year following the later of the year you turn 70 ½ or the year you retire (if allowed by your plan). If you are a 5% owner, you must start RMDs by April 1 of the year following the year you turn 70½. Age 59.5 Earnings: Age Also not taxable if 5 years following account inception. Contributions: Not subject to penalty, nor taxable, regardless of age or account inception. Conversions: Principal not subject to penalty after 5 years. Not taxable regardless of age or length of time. Must take your first RMD by April 1 of the year following the year in which you turn 70½, regardless of whether you are still employed. Order of Distributions: Contributions Conversions Earnings (Account aggregation rules apply) Not required. 17

18 Missed RMDs If the full RMD is not withdrawn on-time, then the penalty is 50% of the RMD shortfall. Don t panic! There are clear steps to request a penalty waiver. As soon as the shortfall is realized, withdrawal the missed RMD from the IRA. File form 5329 requesting a waiver of the penalty due to Reasonable Cause (RC). Do NOT pay any taxes/penalty when you file the form. 18

19 Missed RMDs If multiple RMDs have been missed, separate 5329 forms must be filed for each tax year. (If no other changes to prior tax returns, then a 1040X might not be required.) Include a copy of the documentation showing the RMD has been removed from the account. Include a brief letter describing the reasonable error and the steps taken to remedy it. No news is good news - The statue of limitations begins after the form is filed. 19

20 Missed RMDs from Traditional IRAs Example Abatement Request Letter 20

21 Retirement Account Beneficiaries Passes outside of estate directly to named beneficiaries Verify beneficiaries periodically for changes especially at life events Read the beneficiary form carefully If a beneficiary pre-deceases the account holder, will their share be split among the remaining beneficiaries or pass to their decedents? Avoid naming the estate as beneficiary either intentionally or unintentionally Tax advantages in naming a charity as beneficiary of an IRA vs a Taxable Account Trusts as beneficiaries There are no income tax advantages to naming a trust Not necessary to avoid probate Generally used for control (non-tax) purposes Complex RMD rules consult experts Directly name sub-trusts as beneficiaries if applicable 21

22 Disclosures This presentation is limited to the dissemination of general information pertaining to Mariner Wealth Advisor s investment advisory services and general economic market conditions. The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. There is no guarantee that any claims made will come to pass. The opinions and forecasts are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. Please consult with a tax professional. Mariner Wealth Advisors, LLC ( MWA ) is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment advisor does not imply any level of skill or training. MWA and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which MWA maintains clients. MWA may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MWA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MWA, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein or refer to the Investment Adviser Public Disclosure web site ( Please read the disclosure statement carefully before you invest or send money. 22

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