Individuals and families, just like businesses, are being forced into approaching planning more rigorously and strategically than ever before. Due to increasing stock market volatility and worldwide economic dysfunction as evidenced by a simultaneous rising of U.S. interest rates and an overall decline of global interest rates including for the first time negative interest rates in some global markets, planning is now not optional.
Individuals, especially those who are retired, must have a complete understanding of their personal financial situation today. They must also possess a vision of their future needs and resources in order to cope and respond to the anemic market returns being experienced and the potential of deflation in some markets with concurrent inflation in other markets. This, when combined with increasing geopolitical and security risks makes for a very difficult and scary world and one that requires a disciplined approach, a degree of risk management, and intelligent professional guidance. In short, planning for your future is like being a skier, one’s eyes need to be looking down the hill and not at one’s feet.
With 2015 closing behind us, it is time to reflect on what can be done differently. Tax efficient thinking and planning can provide better returns than market returns in many situations. Some general ideas to consider include:
- Retirement plans—Do you or will you have self-employment income? If so, it is possible to still put certain retirement plans in place before April 15th and obtain a 2015 tax deduction. Are you maximizing your retirement plans for 2016 and when was the plan design last reviewed?
- Based on a review of a multi-year tax and financial plan it may be beneficial to make 401(k) plan contributions to a Roth account versus a traditional pretax account depending on current and future marginal tax rates. In addition, some 401(k) plans allow employees to make additional after tax contributions to their 401(k) plan. If so, it may be possible (depending on your company plan and your age) to effectively create a back door Roth IRA that you otherwise could not do. If your plan allows additional after tax contributions, you should discuss with your tax professional. Have them review IRS Notice 2014-54 to determine if you should consider the feasibility of the following ideas:
- Consider contributing after-tax dollars to a 401(k) plan and then roll over those dollars to a Roth IRA, thus supplementing pre-tax or Roth 401(k) plan contributions along with any eligible direct Roth IRA contributions. Note that you cannot roll over after-tax contributions without also rolling over the tax-deferred earnings on those contributions between the time the contributions were made and the time they are rolled over.
- If your plan does not have a designated Roth 401(k) option consider contributing 100% of your contributions on an after-tax basis and eventually rolling over these funds to a Roth IRA. This way you can approximate being able to fund a designated Roth 401(k) without actually having this option available. This approach is especially worth considering if you expect your marginal income tax bracket to be higher over time.
- If you have access to a non-qualified deferred compensation plan (NQDC), consider funding after-tax dollars to a 401(k) plan ahead of the NQDC plan. NQDC dollars ultimately will be taxed, while after-tax 401(k) plan contributions rolled over to a Roth IRA will not be taxed.
- Philanthropy is a fundamental part of many wealth plans and just like everything else it must be approached strategically and efficiently:
- Is your philanthropy goal based or dollar based? If you are trying to achieve certain goals, ensure that your giving is concentrated and strategic so as to be most effective.
- Charitable giving is a tax advantaged activity. Be tax aware and conscious on how you give. Consider donating appreciated long term capital gain property. Consider your current and future year’s income and try to maximize the tax benefits based on income tax savings and highest tax rate year utilization.
- Consider using charitable structures such as charitable remainder trusts to achieve both income tax savings and charitable goals when selling highly appreciated assets while retaining an income stream from the sale.
- Wealth transfer is a critical element of multi generation wealth maximization:
- Maximize the use of the annual gift exclusion of $14,000 per person. Over time a significant amount of wealth can be transferred tax free and income tax savings can also potentially be achieved.
- Consider the use of the unlimited gift tax exemption associated with the direct payment of tuition and medical expenses of others.
- Consider using trusts to achieve not only wealth transfers but also multi-generational creditor and spousal protection.
- With interest rates still low, revisit intra-family low interest loans and even GRATs as a way to shift growth out of your generation.
The earlier in the year one starts planning, the more effective and tax efficient the results can be. At Telemus, we act as the quarterback to coordinate your entire financial life and your other advisors (be it CPA or attorney) to achieve greater results for you.
We suggest meeting with your Telemus trusted advisor as soon as possible to update your wealth based Financial Life Plan and to ensure you are on the best path to achieve your goals.