If you have met with one of our advisors, we have probably asked you to share your most recent tax return with us. While we are not tax advisors or tax preparers, we do have a lot of experience with the impact that taxes have on a family’s financial plan and investments. So, what are we looking for when we look at your tax return?
Roth Conversion Opportunities
Converting traditional (pre-tax) IRA dollars into a Roth can make a lot of sense for some people, particularly those who are in an “income valley” – they have retired from regular work and their taxable income has been reduced, but they know in a few years the combination of Social Security benefits and required minimum distributions from their IRAs will force the income back up into a much higher tax bracket. In many cases, this is an ideal scenario to do a Roth conversion. By looking at your income tax return and planning ahead, we can potentially create the opportunity for multiple years of paying taxes at a lower rate while increasing the tax-free (Roth) portion of your overall portfolio.
Realizing Capital Gains Efficiently
A primary tenant of our investment philosophy is rebalancing your portfolio regularly to maintain an appropriate allocation. Why do we do this? We believe in the power of diversification; that your portfolio is best served in the long run by not being too concentrated in one place, which will tend to happen if it’s unmanaged. The challenge in rebalancing a portfolio is most apparent in your single-name, trust, or joint investment accounts (not your IRA) because everything that happens in that account is potentially a taxable event. By reviewing the Schedule D on your tax return, we can have a better understanding of your capital gains situation, and we’ll be able to use any capital loss carryforwards to help offset the current gains in your account if we need to rebalance. We will also coordinate with your CPA to understand your tax thresholds so that rebalancing your portfolio does not push you into a higher tax bracket.
Charitable Giving Opportunities
At age 72, the IRS requires that you begin distributing funds from your 401k or IRA – these are the “required minimum distributions” mentioned earlier. These distributions are of course considered taxable income to you. If you are charitably inclined, a “qualified charitable distribution” will allow you to make contributions directly from your IRA to your charity or charities of choice. That money will not be considered taxable income to you.
Proactively Managing Distributions
If you are actively distributing funds from your portfolio to enjoy retirement, tax consequences for those distributions varies depending on the type of account used. A single-name, trust, or joint-named account has very different rules than an IRA, which is different than a Roth IRA. By analyzing your tax return and working with your CPA, we can provide an accurate and proactive plan for the order in which you pull money from your accounts. In many cases, this proactive approach can give you the opportunity extend the life of your portfolio while potentially paying less in lifetime taxes.
Ongoing Management of your Marginal Tax Bracket
A common thread running through these suggestions is with some forethought, it is possible to optimize your investment accounts and how you make distributions or contributions. As income and your tax bracket changes over time, due to a new job or a raise, retirement or layoffs, sale of assets or large medical expenses, it is possible and desirable to create a plan for your portfolio that takes the changes in your life into account.
Collaboration
Another core tenant at BentOak Capital is professional collaboration. We believe you are best served when all of your professional advisors – CPA, attorney, insurance agent, and financial planner – communicate and work together for your common good. Proactively communicating with your CPA can pay huge dividends by deferring or reducing your potential tax burden.
How to Love the 1040
There are many more things that could be said about each of these, but this should give you a good idea of how your financial plan goes deeper than your portfolio. Tax planning is another consideration. Give us a call to schedule some time to get a deeper dive into your tax planning strategy.
IMPORTANT DISCLOSURE INFORMATION: Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by BentOak Capital [“BentOak”]), or any non-investment related services, will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. BentOak is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for personalized investment advice from BentOak. Please remember that it remains your responsibility to advise BentOak, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request at www.bentoakcapital.com/disclosure. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your accounts; and, (3) a description of each comparative benchmark/index is available upon request. Please Note: Limitations: Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any designation, certification, or license should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if BentOak is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see link as to participation criteria/methodology, to the extent applicable). Unless expressly indicated to the contrary, BentOak did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of BentOak by any of its clients. ANY QUESTIONS: BentOak’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including the criteria used for any reflected ranking.