Allow your retirement to work for you by planning ahead and taking advantage of tax loopholes that can allow you to withdraw from your IRA 100% tax free. You can also structure a Roth IRA contribution even though your income exceeds the maximum threshold. This is a lengthy post but well worth the read.
Retirement Planning Secrets
The PATH Act allows the direct transfer of IRA money to a charity which can be a tremendous tax planning tool for many retirees. This tip leads us to a discussion on lesser known retirement withdrawal secrets but first let’s review two key principles.
Secret 1: The direct IRA to charity exception does not apply to 401-k’s or corporate plans. To circumvent this, a taxpayer could roll their retirement plan into an IRA and then use this tool!
Secret 2: Avoid quarterly estimates in retirement. Many retired Americans are required to pay quarterly tax estimates and they find them confusing and difficult to pay. These are often the same people who are required to take minimum distributions from retirement plans. Try this simple tool: because the distribution can be made all the way up until December 31 and have it apply to the whole year, take the distribution near year end, have it all apply to Federal and state withholding, and stop making quarterly payments. Because the withholding is treated as having been paid evenly throughout the year the taxpayer does not face underpayment penalties, has an even cash flow while retired, and also meets any RMD requirements. It takes a little work to calculate, but the results are worth the effort.
Secret 3: In 2014 the IRS added a new “Qualified Longevity Annuity Contract” provision to the IRA rules. This special tool, which should only be used by individuals with an extremely long expected lifespan into their late 80’s, allows the annuity balance to be excluded from RMD calculations until the taxpayer is 85 years old. No more than 25% of the retirement account (up to $125,000) may be placed into this annuity, but as noted the break-even point on the tax savings is somewhere in the late 80’s, so this secret should be used sparingly.
Secret 4: Short term borrowing from your IRA. A taxpayer may make a cash withdrawal once per year of any amount from their IRA and as long as they redeposit it into another qualified IRA (called a rollover) there is no tax, penalty or withholding. This allows for the equivalent of a tax-free short-term loan from the taxpayer to themselves. If they miss the 60 days (by even one day) they will pay tax on the amount, and potentially a penalty if the taxpayer is under 59 and ½.
Secret 5: Not really a secret, but a reminder. A Roth IRA held for 5 years by someone over 59 and ½ is free of tax forever under current law, and that tax-free treatment extends to heirs. This tax-free forever treatment will shelter any big wins from tax forever, whereas in a conventional IRA the tax will be paid at some point.
Secret 6: The backdoor Roth is a tool used by higher income Americans who are normally unable to make a Roth contribution because their income exceeds the allowable limits. This tool allows the taxpayer to make a non-deductible IRA contribution and then convert it to a Roth IRA. Controversial, subject to Congressional change, and with some ugly traps, the backdoor Roth works, but do your research or consult a professional before attempting this.
Secret 7: Buy some insurance? For the taxpayer with a large retirement account that they want to leave to their heirs, withdraw a sizeable amount and buy a “no-lapse, last-to-die” insurance policy on the taxpayer (and spouse). This policy will be payable at the taxpayer’s death (or the spouse’s death if married) to the kids. The advantage is that any build up is tax-free, all payments are tax-free to the kids, and it avoids probate in most states.
Potential changes to the tax code in 2017 or 2018 may affect these strategies. Please contact us to be sure that these strategies are right for you.
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Robert W. Morris & Company, PC
19 E Main St, PO Box 68
New Bloomfield, PA 17068