April 14, 2025 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Required Minimum Distributions – RMDs

Radon and Murs discuss a crucial yet often confusing topic for retirees: Required Minimum Distributions (RMDs). Joined by their colleague Taylor Wolverton, a Certified Financial Planner and Enrolled Agent, they break down the rules surrounding what are RMDs, how they’re calculated, and the updates brought by the Secure Act RMD changes...
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Required Minimum Distributions – RMDs

Folks approaching retirement or already enjoying their golden years may have heard of Required Minimum Distributions, or RMDs. Understanding RMDs and how they can impact your financial and tax planning is a key part of long-term investing and successful retirement plannin,…
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The ABCs of RMDs: Required Minimum Distributions

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Folks approaching retirement or already enjoying their golden years may have heard of Required Minimum Distributions, or RMDs. Understanding RMDs and how they can impact your financial and tax planning is a key part of long-term investing and successful retirement planning

In this blog, we’re breaking down everything you need to know: What are RMDs, how do RMDs work, the new RMD rules, tax considerations, and planning strategies that can help you retire comfortably and securely.

What Are RMDs?

RMDs, or Required Minimum Distributions are the mandatory withdrawals you take each year from most tax-deferred retirement accounts, including:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • Employer-sponsored retirement plans such as 401(k), 403(b), and 457 plans

These accounts have allowed you to defer taxes while accumulating retirement savings. Eventually, the IRS wants to start collecting its share—hence the requirement to withdraw and pay income taxes on those distributions once you reach a certain age.

Keeping You Updated: New RMD Rules in 2025

Over the years, the Secure Act and Secure Act 2.0 have significantly altered the landscape for RMDs. These changes impact when you must start taking RMDs and how much you must withdraw.

RMD Age by Birth Year:

  • Born before July 1, 1949: RMDs began at age 70½
  • Born 1951–1959: RMDs begin at age 73
  • Born 1960 or later: RMDs begin at age 75

So, if you turn 73 in 2025, your first RMD year is 2025. You don’t have to wait until your actual birthday month to take your RMD—you can start as early as January 1st of the year you turn 73.

 

Did you know? A Special RMD Rule

RMDs must be taken by December 31 of each year, starting the year you reach your required age. However, there’s a special rule for your first RMD only:

  • You can delay your first RMD until April 1 of the following year.

⚠️ Caution: If you delay your first RMD until April 1 of the following year, you will need to take two RMDs in that year—your first and your second—which could have serious tax implications.

To avoid potential tax spikes, most advisors recommend not delaying your first RMD unless there’s a compelling reason.

How Do RMDs Work?

RMD amounts are based on your account balance and your age. Each year, the IRS publishes the Uniform Lifetime Table, which provides a life expectancy factor used to calculate your RMD.

Here’s a simplified example:

  • You are 73 years old in 2025.
  • Your IRA balance on December 31, 2024, is $1,000,000.
  • According to the table, the distribution factor is 5.

Your RMD = $1,000,000 / 26.5 = $37,736

Each year, the divisor gets smaller, which means the percentage of your account that must be withdrawn increases.

Your IRA custodian (e.g., Schwab, Fidelity, etc.) typically calculates your RMD for you, so you don’t need to worry about doing the math manually. But it’s good practice to verify that it’s done correctly.

RMD Tax Rules and Penalties

RMDs are taxed as ordinary income at both the federal and state level. Since these distributions are from tax-deferred accounts, every dollar withdrawn is fully taxable in the year it’s received.

You have two main options to handle taxes:

  1. Withhold taxes directly from the RMD
  2. Make estimated tax payments quarterly

Failing to plan ahead can lead to large tax bills and unnecessary stress. That’s why retirement tax planning is so important.

What if You Miss Your RMD?

Missing your RMD triggers a penalty:

  • 25% of the amount you failed to withdraw
  • Reduced to 10% if corrected within two years and reasonable cause is provided

The penalty used to be 50%, so recent changes have made it less severe—but it’s still best to avoid the risk entirely by staying on top of your RMD schedule.

RMD and Charitable Giving: The Power of QCDs

If you’re charitably inclined and don’t need the RMD funds for personal spending, consider a Qualified Charitable Distribution (QCD).

  • A QCD allows you to directly transfer up to $100,000 per year from your IRA to a qualified charity.
  • The amount counts toward your RMD but is not included in your taxable income.

This strategy can lower your Adjusted Gross Income (AGI), which may reduce Medicare premiums and other tax-related thresholds. It’s an excellent tool for those who want to give back and minimize their tax liability.

What to Do with RMDs You Don’t Need

A common frustration we hear from clients is: “Ok, I satisfied my RMDs, but I don’t need this money. What do I do with it?”

Here’s three common options:

  1. Spend it: Use it for travel, family gifts, or hobbies
  2. Reinvest it: Open a brokerage account and invest the funds in a diversified portfolio
  3. Donate it: As mentioned above, use a QCD to reduce your taxable income

⚠️ Important: You cannot reinvest RMDs back into your IRA or convert them to a Roth IRA. Once the funds are withdrawn, they cannot be re-contributed.

Roth IRAs and RMDs

Unlike traditional IRAs, Roth IRAs are not subject to RMDs for the original account owner.

This is one of the reasons Roth conversions have become a powerful tax-planning tool. By moving funds from a traditional IRA to a Roth, you pay taxes now, but avoid RMDs in the future.

Less RMD means:

  • Greater control over your taxable income
  • Lower chance of Medicare IRMAA surcharges
  • Better tax management in retirement

To learn more, read the article “401K Rules in Retirement After Reaching Age 50“.

Planning Strategies Around RMDs

Understanding how RMDs work is just the start. Here are a few proactive strategies for navigating RMDs with confidence:

For folks that work with Peace of Mind Wealth Management, RMDs and tax strategy are included in your Peace of Mind Pathway, a structured retirement planning process that simplifies investment, income, and tax decisions.

Tax strategy is a huge component of achieving peace of mind in retirement. RMDs are an important part of the retirement tax strategy conversation. Schedule your complimentary 15 minute call with us to get started on your RMD questions.

September 9, 2024 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for September 9, 2024

CLICK HERE TO WATCH THE UPDATE

Retirement Tax Withholding – Tips for Avoiding Tax Surprises

Radon and Murs discuss the importance of understanding tax withholdings in retirement to avoid tax surprises.  To help navigate this complex terrain, they bring in Taylor Wolverton, a Certified Financial Planner and Enrolled Agent specializing in tax strategy.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

Retirement Tax Withholding – Tips for Avoiding Tax Surprises

Navigating the complexities of tax withholding in retirement can feel like venturing into uncharted territory. During your working years, taxes are often a distant concern. Employers handle withholding from each paycheck, ensuring that the process remains smooth and largely invisible to the employee. However, retirement changes this dynamic entirely…

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Retirement Tax Withholding – Tips for Avoiding Tax Surprises

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Navigating the complexities of tax withholding in retirement can feel like venturing into uncharted territory. During your working years, taxes are often a distant concern. Employers handle withholding from each paycheck, ensuring that the process remains smooth and largely invisible to the employee. However, retirement changes this dynamic entirely. Suddenly, there are no regular paychecks with taxes already deducted, and you must actively manage your tax withholding to avoid any unpleasant surprises come tax time.

Imagine expecting a comfortable, worry-free retirement only to find yourself facing a hefty tax bill or a confusing tax scenario that catches you off guard. Such surprises can disrupt your financial peace and leave you scrambling for solutions. The key to avoiding this predicament lies in understanding and proactively managing your tax withholding in retirement. In this blog, we’ll explore various tips and strategies to help you steer clear of tax surprises, ensuring that your retirement is as financially secure and stress-free as you envisioned.

Understanding Retirement Tax Withholding

For many, transitioning from a regular paycheck to retirement income requires a fundamental shift in thinking about taxes. During your career, tax withholding from your salary is automatic, making tax planning seem effortless. However, when you retire, various income sources, such as Social Security, pensions, annuities, and investments, must be managed for tax purposes. Understanding retirement tax withholding is crucial to avoid either overpaying taxes throughout the year or facing a substantial tax bill when filing your return.

The Role of a Financial Planner

To navigate this complexity, financial advisors like Taylor Wolverton, a CERTIFIED FINANCIAL PLANNER™  and an Enrolled Agent (EA) specializing in tax strategy, recommend conducting regular reviews of your tax withholding status. By understanding your different income sources and their tax implications, you can better estimate your annual tax liability and adjust your withholding accordingly. This proactive approach helps ensure you’re neither overpaying nor underpaying, giving you peace of mind.

Common Income Sources in Retirement and Their Tax Implications

Retirement income often comes from various sources, each with unique tax treatment:

  1. Social Security Benefits: Up to 85% of Social Security benefits may be taxable, depending on your overall income level. It is essential to decide whether to have taxes withheld from these payments or to pay estimated taxes quarterly.
  2. Pensions and Annuities: These are typically taxable as ordinary income. If you have a pension or annuity, you should consider setting up automatic tax withholding to avoid a large bill at tax time.
  3. IRA and 401(k) Withdrawals: Withdrawals from traditional IRAs and 401(k) plans are subject to ordinary income tax. You can elect to have taxes withheld from these distributions to avoid owing a large sum when filing your return.
  4. Investment Income: Interest, dividends, and capital gains are also taxed, often at different rates. Understanding the tax treatment of your investments is key to managing your overall tax liability.

The Importance of Tax Strategy Meetings

A regular tax strategy meeting can help retirees better understand their current tax situation and anticipate future changes. In these meetings, financial planners like Taylor Wolverton review income sources, evaluate tax brackets, and adjust withholdings to align with financial goals. For example, Taylor conducted over 85 tax strategy meetings last year, helping clients optimize their withholding strategies to avoid surprises.

Case Study: John and Jane’s Social Security Withholding Strategy

Consider the case of John and Jane, who retired a few years ago and have been living primarily on savings. This year, they decided to start their Social Security benefits, prompting a reassessment of their tax situation. Their combined Social Security income amounts to $55,000, with 63% taxable due to their other income sources.

To avoid a significant tax bill, Taylor recommended setting withholding rates of 12% for John and 7% for Jane on their Social Security benefits. This strategy ensures that they withhold sufficient tax throughout the year, resulting in a manageable tax liability when they file their return.

How to Adjust Your Tax Withholding

Adjusting your tax withholding is a critical component of effective retirement tax planning. Here are some steps to consider:

  1. Evaluate Your Income Sources: Review all potential income sources, including Social Security, pensions, investments, and required minimum distributions (RMDs) from retirement accounts.
  2. Estimate Your Taxable Income: Calculate your expected taxable income for the year. Be sure to consider both ordinary income and capital gains, as well as any deductions or credits you may be eligible for.
  3. Use the IRS Tax Withholding Estimator: The IRS provides an online tool to help taxpayers estimate their tax liability and adjust withholding accordingly. This can be particularly useful for retirees with multiple income sources.
  4. Adjust Withholding on Social Security Benefits: Social Security allows you to withhold at rates of 7%, 10%, 12%, or 22%. Choose a rate that aligns with your estimated tax liability to avoid surprises.
  5. Consider Quarterly Estimated Taxes: If you have significant investment income or other sources of taxable income that do not withhold taxes, you may need to make quarterly estimated tax payments to avoid penalties.

Why are Regular Reviews Essential?

Income needs and sources can change annually, especially in retirement. Regular reviews ensure that your tax withholding remains appropriate for your current situation. For instance, if you sell a major asset, like real estate or stocks, you may face a large capital gain that changes your tax bracket. Similarly, changes in Social Security benefits or required minimum distributions (RMDs) can alter your taxable income.

Case Study: Bob and Sue Adjust Their Withholding

Bob and Sue, both aged 71, have a different scenario. With Bob’s first full year of retirement, they need to adjust their withholding to reflect their lower taxable income. They prefer receiving a small refund, around $2,000, rather than a large one. Taylor recommended reducing their Social Security withholding from 22% to 12% for Bob and 7% for Sue, aligning with their lower income bracket.

By making these adjustments, Bob and Sue managed to reduce their tax withholding while still securing a small refund, thereby improving their cash flow throughout the year.

Tax Withholding Tips for a Smooth Retirement

Here are some additional tax withholding tips to help you avoid surprises in retirement:

  • Stay Informed: Keep up with any changes to tax laws that may affect your retirement income.
  • Review Regularly: Conduct annual reviews of your tax situation to adjust withholding as needed.
  • Consider a Professional: Engage with a financial planner or tax professional who understands retirement tax strategy to help guide your decisions.
  • Plan for Large Expenses: If you anticipate large medical expenses or charitable contributions, these can impact your tax liability and withholding needs.

Conclusion

Understanding and managing your tax withholding in retirement is essential to maintaining financial stability and avoiding unwanted surprises. By proactively adjusting your withholding and engaging in regular tax strategy meetings, you can ensure a smooth transition into retirement and enjoy peace of mind.

If you want to understand all this a little better, we offer a complimentary phone call that you can schedule with us on our website. If we can’t answer all your questions in just 15 minutes, we’ll guide you to the next steps to find the answers you need.

Schedule your complimentary call with us to learn more about Retirement Tax Withholding – Tips for Avoiding Tax Surprises.

 

June 10, 2024 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 10, 2024

CLICK HERE TO WATCH THE UPDATE

Form 5498 Demystified – Essential Tax Information for Retirement

Radon, Murs, and Taylor discuss the significance of Form 5498 as an essential tax information document. Taylor describes Form 5498 as an informational document that reports contributions, rollovers, and required minimum distributions (RMDs) related to IRAs.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

Form 5498 Demystified – Essential Tax Information for Retirement

Our in-house tax guru, Taylor Wolverton, CFP®, EA, sat down with us on this week’s podcast to help explain the ins and outs of Form 5498. Just a few days ago, a client sent us an email they received from Schwab saying, “important tax information.”  The email said that Form 5498 was available for him to download. Our client was concerned because he had already filed his 2023 tax return and didn’t know why he was receiving this form or what implications it had.  He asked us what he needed to do. That prompted us to…

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Form 5498 Demystified – Essential Tax Information

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Our in-house tax guru, Taylor Wolverton, CFP®, EA, sat down with us on this week’s podcast to help explain the ins and outs of Form 5498. Just a few days ago, a client sent us an email they received from Schwab saying, “important tax information.” 

The email said that Form 5498 was available for him to download. Our client was concerned because he had already filed his 2023 tax return and didn’t know why he was receiving this form or what implications it had. 

He asked us what he needed to do. That prompted us to have Taylor on the podcast to help all of our listeners and clients learn more about this form. 

Taylor’s Response to the Client’s Email 

First off, do not stress about Form 5498. For this particular client, the form was generated because he had transferred a 401(k) to a traditional IRA in 2023. The form was issued from the custodian of the traditional IRA to document that the 401(k) rollover was received as expected.  

This does not change anything in terms of filing taxes. 

You do want to keep Form 5498 for your records in case you’re audited or have to prove such a transaction was completed properly to the IRS. 

Why Form 5498 is Important 

When you open your email and the form, you’re likely to see some information about your contribution to your Roth IRA, Traditional IRA, SEP IRA, or Simple IRA. If you put money into these accounts the prior tax year, you’ll receive this form. 

An account receiving a 401(k) or other employer-sponsored retirement plan rollover (like what happened with the client in our example) is also reported on this form. 

In some cases, Form 5498 may also report what your required minimum distributions (RMDs) are if that applies to your situation. You’ll see the fair market value of the IRA from the year prior and what the previous year’s distributions should have been. 

Form 5498 vs 1099 

A 1099 is a tax form that reports distributions or sources of income, which are normally taxable. You need this information for your tax return, so be sure that you have this form before filing your taxes. 

In contrast, your 5498 reports contributions to your account, RMD information, and/or that a rollover has occurred. 

To make it simple: 

  • A 1099 reports distributions 
  • A 5498 reports contributions 

Does Form 5498 Help Reduce Taxable Income? 

Whether this form affects your taxable income depends on what the form is reporting. Contributions to a traditional IRA (or SEP IRA or Simple IRA) can be deducted on a tax return to reduce taxable income. However, you don’t need to wait to receive Form 5498 to report those contribution types on your tax return.  

If the form contains information about an RMD, this should have also been already reported on your tax return. Because RMDs are a source of income, they will generate form 1099R which you should receive before your tax return is filed. The RMD information reported on Form 5498 is a way for the IRS to reconcile the distributions reported on your tax return with what the form says needed to be distribution to ensure you’ve met the requirement.  

If Form 5498 reports your Roth IRA contribution or a rollover, this does not reduce your taxable income. Roth IRA contributions are not reported on the tax return. Rollovers are noted on the tax return but if done correctly, also do not impact taxable income in any way. 

Form 5498 is Reported to the IRS 

A Form 5498 is for checks and balances. Your custodian will send both you and the IRS the same form. The IRS will reconcile the information reported on your tax return with the information on this form. 

Example of a Rollover Contribution  

Let’s assume in 2023 someone had their 401(k) with Empower. If the person chose to transfer the 401(k) from Empower to a traditional IRA at Schwab: 

  • They would receive a 1099-R in January or February from Empower 
  • The 1099-R would show that the 401(k) no longer exists and the full amount at the time of the rollover, which is recorded as a distribution that is not taxable. 
  • The rollover is noted on the tax return by the tax preparer 
  • In May of 2024, Schwab would send out Form 5498 showing the same amount from the 401(k) confirming that it was received into a traditional IRA. 

In this scenario, the 5498 confirms that the rollover didn’t simply end up in your checking account and that you did move the money into a traditional IRA like it should have been. 

If you did pocket the money and never did the actual rollover, you potentially owe taxes and penalties on the distribution. 

Why Does Form 5498 Come Out So Late in the Year? 

While it may seem inconvenient that Form 5498 doesn’t come out at the same time as all other tax forms such as forms 1099, there is a delay because the deadline to contribute to many of your accounts is the same as the tax filing deadline. 

So, for example, if you wanted to make a Roth IRA contribution for 2023 as part of your retirement planning strategy, you have until April 15, 2024, to make this contribution. 

Form 5498 cannot be generated and sent out until after the contribution deadline, so that is why you’ll receive it later than your other tax forms. 

In conclusion, if you do receive Form 5498, simply keep the form with your other tax records. If you’ve already filed your tax return, there’s nothing else that you need to do with it. 

Do you have any questions regarding Form 5498 or about your retirement plan? 

Click here to schedule a consultation with us. 

March 25, 2024 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for March 25, 2024

CLICK HERE TO WATCH THE UPDATE

Navigating Tax Withholding – A Guide for Retirees

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss navigating tax withholding for retirees. When you retire, you have various sources of income, and you can choose to either withhold the tax on them, make estimated tax payments throughout the year, or do a combination of both.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

Navigating Tax Withholding – A Guide for Retirees

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

CLICK HERE TO READ THE BLOG

Navigating Tax Withholding – A Guide for Retirees

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Taylor Wolverton joined us on our podcast this week, and for those who don’t know, she’s our go-to person for everything taxes. This week we’re discussing tax withholding, which can change considerably when you retire.

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

What is Withholding vs Estimated Tax Payment?

There are two main ways to pay taxes (you can do a combination of both) which include:

  1. Withholding from income sources
  2. Making estimated tax payments

For our first method, taxes can be withheld from pensions, social security, IRA distributions, etc. Once you have your withholdings set up properly, this option requires the least amount of effort to maintain.

Estimated tax payments are another option and are due quarterly. At the time your tax return is filed, it’s common for your CPA / tax preparer to help you estimate how much you’ll need to pay every quarter with vouchers listing the amount to pay and when you need to pay it. You can go to IRS.gov and your state government website to make your quarterly payments.

The payment due dates are not even quarters and are:

  1. April 15th (for tax due on income received January 1 – March 31)
  2. June 15th (for tax due on income received April 1 – May 31)
  3. September 15th (for tax due on income received June 1 – August 31)
  4. January 15th (for tax due on income received September 1 – December 31)

The IRS requires taxpayers to ‘pay as you go.’ For example, if you sell highly appreciated stock before the end of March, the IRS requires that you make an estimated tax payment for the tax due on that sale of stock by April 15th of the same year. If you sold the stock during the month of November, your estimated tax payment would be due by January 15th of the following year. The potential consequence of not making estimated tax payments on time is underpayment penalties from the IRS which will be determined and reported on your tax return once it has been filed.

What You Need to Think About: Social Security

Social Security is something we review with our clients annually. You might receive your benefits immediately and your spouse years from now, so there may be a transition period for some families to consider.

The default withholding amount on Social Security is 0%. If you don’t make an election to have federal taxes withheld from social security, you may need to pay quarterly taxes on the income. We have an entire episode on taxation of social security benefits (listen to the podcast or read the blog post) if you’re interested.

Most benefits will be taxable on the federal level, but each state varies on whether they will tax social security benefits or not. The state of North Carolina does not tax social security.

If you want to withhold taxes from your Social Security, you can Google “form W-4V” or go to the IRS site (here). It’s an easy form to fill out and will allow you to start withholding taxes, with options for:

  • 7%
  • 10%
  • 12%
  • 22%

Once you fill out the form and submit it to the social security administration office, taxes will automatically be withheld. If you want to stop withholding taxes, you’ll fill out the same form again but ask for the withholding to stop.

It is not possible to withhold state tax on social security.

What You Need to Think About: Pension Income

Not everyone will have a pension, but if you do and want to begin withholding taxes from your pension, you’ll need to fill out Form W-4P. You’ll often receive the form from where your pension is coming from, such as the government or a union, but you can also find it publicly available online.

Unfortunately, the form is not as straightforward as the social security withholding form, and it’s more of a guide to approximate withholding taxes.

We recommend using the IRS Tax Withholding Estimator, which will help you fill out the form.

What You Need to Think About: IRA Distributions

An IRA is an interesting form of income because you contribute to your IRA for so long, and then in retirement, may begin withdrawals to cover expenses, and/or be forced to withdraw through required minimum distributions (RMD).

Clients turning 73 begin RMDs for the first time and will owe federal and state tax on those distributions. The amount of the RMD, the associated tax liability, and appropriate rate for withholding is a conversation we often have with clients.

If you’re starting recurring monthly distributions from an annuity, the most common default federal tax withholding is 10%. You can fill out Form W-4R to withhold an amount other than 10% or not withhold taxes at all.

What You Need to Think About: Income Not Eligible for Withholding

Some forms of income are not eligible for withholding. Some of these sources of income include interest (from a money market account, CD, checking account, and/or savings accounts) dividends, capital gains, sale of property, rental income, self-employment income, royalties, alimony, etc.

For a one-off income event such as the sale of property or sale of highly appreciated stock, you may consider making a one-time estimated tax payment.

However, if you have income not subject to withholding that recurs more regularly such as self-employment or rental income, you want to consider paying quarterly taxes before each due date during the year.

To review your situation in-depth and determine whether any adjustments to withholdings are needed, you will need to review all sources of income, determine the annual dollar amounts expected to be received, and review all current tax withholdings.

Every client’s goal is different. You may want a refund every year, or you might prefer to make a payment at the time your tax return is filed.

Your financial professional can help you set this up properly to align with your goals.

If you’re unsure about taxes in retirement, just reached retirement, or want to adjust your withholdings so that you’re not hit with a surprise tax bill, feel free to give us a call and we’ll be more than happy to help you through this process.

Schedule a call to speak with Taylor Wolverton.

Harnessing the Power of Step-Up in Basis

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Step-up in basis is something that the average person only needs to deal with once or twice in their lifetime. If you’re not sure what this means or how it relates to retirement planning, don’t worry: we’ll explain in detail.

There are two main scenarios in step-up in basis you may want to focus on:

  1. You inherited property or stock.
  2. You own a highly appreciated asset and want tax efficiency on the future disposal of the asset

What is Basis?

Basis is a tax term that the IRS and tax professionals assume everyone understands, but many don’t. “Basis” is your original purchase price of an asset. Let’s say you purchased a stock for $100. Your basis is $100.

If you purchase a real estate property for $300,000, this initial purchase price is your basis. Real estate does have a few additional nuances to determining cost basis, but for simplicity, this example works.

Cost basis is required when determining the gain or loss of a stock or other security; the difference between the sale price of an asset and the basis, or purchase price, of an asset is your gain.

Understanding your basis is crucial when talking about a “step-up.”

What is Step-up?

Let’s say that you purchased a property for $100,000 and have owned it for quite some time. Then in today’s market, you sell the property for $500,000. The difference between the purchase price and sale price means that you have a $400,000 gain.

If, instead of selling that same property, you decide to gift the property to your child (or anyone else), your child’s basis will be the same $100,000 basis that you had before you gifted the property. If your child decides to sell that property, they will have to pay taxes on the property’s appreciation in value beyond the $100,000 basis.

If you keep the property rather than selling or gifting it during your lifetime, and then your child inherits that property after you pass away, that is when a step-up in basis occurs. Instead of your original $100,000 basis carrying over to your child, their basis in the property will now “step-up” to the current market value of the property at the time of your death. Thus, if the value of the property at the time of your death is $400,000, your child (or whoever inherits the property) will have a basis of $400,000.

This difference matters. In the scenario where your child receives the property as a gift and later sells it for, let’s say $425,000, they will owe tax on the difference between their $100,000 basis and the $425,000 sale price which is a $325,000 gain. In a scenario where your child inherits the property and later sells it for $425,000, they could owe tax on the difference between their stepped-up basis of $400,0000 and the $425,000 sale price which is a $25,000 gain. The table below shows a side-by-side comparison of the example numbers in these scenarios.

Gifted Property Inherited Property
Basis $100,000 $400,000
Market Value at Sale $425,000 $425,000
Taxable Gain $325,000 $25,000

 

The more the property appreciates in value beyond the time of a gift or inheritance, the higher the potential taxable gain will be. But an inherited property with a stepped-up basis is more favorable as it will likely reduce what the potential taxable gain could be compared to a gifted property with a carryover, or transferred, basis.

Put simply, a step-up in basis helps relieve inheritors of what could otherwise be massive capital gains taxes.

Example of Step-up in Basis and Stock

Many people hold Tesla, Apple, NVIDIA, and other stock as part of their portfolio. For this example, you purchased $100,000 worth of stock many years ago, and today it’s worth $500,000. You might be receiving dividends, and this may be all you really need in terms of income from the stock.

If you were to sell all the stock today at a $400,000 gain, this would trigger substantial capital gains tax. Another option aside from selling could be to hold onto that stock with the plan to pass it onto your beneficiaries as their inheritance. With this intention, you do need to have faith in the company for it to at least maintain its stock value or ideally continue to increase in value; be aware of the risk that the stock’s value may decline by the time your beneficiary does inherit it.

Let’s say you choose the second option to continue holding the stock, and by the time your heirs receive the stock, it is worth $1 million. By doing so, you avoid the capital gains tax that you would have paid if you liquidated the stock during your lifetime. And your heirs inherit the stock with a stepped-up basis of $1 million.

Your heirs could sell the $1 million in stock at the time they inherit it without a capital gains tax.  If they hold the stock in their own portfolio, they will not owe tax until the stock appreciates above their $1 million basis.

Dividend Reinvesting

Dividend reinvestment is one strategy that we see a lot of people engage in. What this means is that if you buy a dividend-paying stock, each dividend you receive will purchase more of that same stock. Each dividend purchase creates basis in that stock.

To correctly calculate the gain at the time the stock is liquidated (sold), you need to know the basis on each of these buys. Currently, most custodians do keep a record of basis for you that can be viewed on most statements or online in your account. As long as the custodian has a record of the basis, it will also be reported on the tax form generated for that account.

In contrast, when your children or someone else inherits the stock from you, your basis is no longer relevant because the inheritor’s basis will be the stock’s value at the time it is received.

How to Determine Basis at Inheritance

The IRS is easy to work with when dealing with step-up in basis. Your basis is the value of the inherited asset on the day of death. For stock or other securities, you can use historical values and all the data that is available on stock price value for a given day.

Real estate will need to be appraised for value at the time of death.

Should You Hold Something for Step-up in Basis or Diversify Because of Risk?

You may or may not want to hold an asset for the purpose of step-up in basis. Perhaps you need the money and want to sell the investment. You may also see that the investment’s value is likely to decrease soon, so you decide selling while the price is high is optimal.

Ideally, you should speak to financial professionals to understand the risks and benefits of selling versus holding.

You may have a $1 million portfolio and the stock in question is worth 10% of your total portfolio. If the stock has a good run and now accounts for 20% or 30% of your total portfolio value, you’re increasing your concentration risk by continuing to hold it. A significant decline in the value of that particular stock can negatively impact a substantial part of your portfolio, so it’s something to think through.

Diversifying by selling some or all that concentrated stock will likely require you to pay taxes, but it may be a better option long-term because it allows you to safeguard your total portfolio by spreading your dollars out. Speaking to your financial professional(s) on this topic can help with your decision, because your situation is unique, and you may not want to carry such a high risk.

If you want to talk to us and have us evaluate your situation, we’re more than happy to schedule a call with you.

Click here to schedule a call with us to discuss your step-up in basis situation.

February 5, 2024 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for February 5, 2024

CLICK HERE TO WATCH THE UPDATE

Preparing To File Your 2023 Taxes in Retirement

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss how to prepare to file for the 2023 taxes. The first things you should be looking at include your different sources of income and tax forms connected to that income. Listen in to learn the importance of working with a professional tax preparer to avoid misreporting different income taxes.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

Preparing To File Your 2023 Taxes in Retirement

Taylor Wolverton sat down with us to discuss prepping your taxes in 2023. Taylor helps our clients with a focus on tax planning, and she shares a wealth of information in our recent podcast that you’ll find invaluable. Waiting until the last minute to file your taxes is stressful. The earlier you begin, the less anxiety and stress you’ll experience. What do you need to be thinking about when preparing to file your 2023 tax return?

CLICK HERE TO READ THE BLOG

2023 Tax Planning to Tax Preparation in Retirement

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Taylor Wolverton sat down with us to discuss prepping your taxes in 2023. Taylor helps our clients with a focus on tax planning, and she shares a wealth of information in our recent podcast that you’ll find invaluable.

We’re going to be covering all the insights she provides in the podcast below, but feel free to listen to the episode, too.

Waiting until the last minute to file your taxes is stressful. The earlier you begin, the less anxiety and stress you’ll experience.

What do you need to be thinking about when preparing to file your 2023 tax return?

Gather Tax Forms

  • Report all 2023 Sources of Income; to name a few:
    • W-2 from your employer
    • Self-employment income and all amounts reported on 1099-NEC (nonemployee compensation)
    • 1099-INT for interest income 
    • 1099-DIV and/or 1099-B for investment income
    • 1099-R for IRA/401k/annuity/pension account distributions
    • SSA-1099 for Social Security benefits
    • Documentation of rental income
    • Any other income that applies to your situation

With money market interest rates around 4% – 5% this year, the interest reported from those accounts will likely be higher than you’re used to. If you made transfers to and from accounts in 2023 to take advantage of higher interest rates or for any other reasons, be sure that you track down your tax forms from both institutions. 

Rental Properties

Rentals are popular and allow you to make an income from properties you own throughout the year. We have many clients with rentals who will need to report this source of income on their tax return. Supply your tax preparer with as much documentation as you have available; deducting expenses associated with your rental property will lower your overall tax bill.

If you have an Airbnb or long-term rental, consider the following:

  • Work with a CPA/professional tax preparer to not avoid misreporting information
  • Maintain documentation on your rental income
  • Maintain documentation for all expenses relating to the rental
    • Include mortgage interest from your form 1098

Standard Deduction vs Itemization

Everyone who files a tax return can at least take the standard deduction. If you had certain expenses during the year that add up to a value greater than the standard deduction, you can use that value as an itemized deduction instead. If those expenses add up to less than the standard deduction, you’ll take the standard deduction since that will offer the greatest benefit in lowering tax liability.

Itemized deductions include:

  • Mortgage interest
  • Real estate property taxes on primary home
  • Personal property taxes
  • Charitable donations (subject to dollar limitations)
  • Medical expenses (subject to dollar limitations)

It can be a lot of work to gather the above information, but especially if you’ve just started working with a tax preparer that is new to you, it may be worth submitting all of these documents to see the outcome. If you took the standard deduction last year and these items haven’t changed much, you probably don’t need to supply all of these documents. Every person is unique and there’s no right or wrong answer for everyone.

Note: For the year during which you turn age 65, your standard deduction increases. Verify your date of birth with your tax preparer to be sure you are receiving the additional standard deduction; otherwise, you may be unnecessarily overpaying taxes.

Reporting QCDs on Your Tax Return

Qualified charitable distributions (QCDs) are something we talk a lot about because they’re such a valuable tool for anyone who is charitably inclined. You can donate to whatever charities you’d like to support while reducing your tax bill in doing so. As an example, let’s assume you’re in the 22% tax bracket and made a $1,000 QCD. As long as you meet the requirements, you’ll save an immediate $220 in federal tax. 

Overview on QCDs:

  • Must be over age 70.5 when the donation is made
  • Donation must be distributed directly from your IRA and be sent to a 501(c)(3) charitable organization
  • Limited to donating $100,000 through this method in 2023
  • The donated IRA distribution is completely federal and state tax free because you won’t claim the distribution as income on your tax return

QCDs are reported as normal distributions on form 1099-R from your IRA. For that reason, you will need to be the one to provide the additional context to your tax preparer by letting them know the dollar amount of the QCD. For example, let’s assume you took $50,000 in distributions from your IRA and also made a QCD of $5,000 from the same IRA account in 2023. Your 1099-R will show $55,000 in distributions with no specification that $5,000 went to charity. You need to be the one to let your tax professional know to input the $5,000 as a QCD. Otherwise, it may be reported as a fully taxable distribution which negates the whole purpose of QCDs and may result in an unnecessary overpayment in taxes. 

Reporting Roth Conversions and Contributions on Your Tax Return

Like QCDs, tax forms reporting Roth conversions will not differentiate Roth conversions from normal distributions. It is true that whether it was a distribution to your checking account or a conversion to your Roth IRA, the distribution is taxed the same; however, not specifying that it is a conversion can have other consequences. 

If you’re under age 59 ½, you cannot take a normal distribution from an IRA without penalty (unless you meet certain exceptions), but you are eligible for Roth conversions at any age. It will be helpful for your tax preparer to know the additional context around the dollar amount of the Roth conversion to eliminate any unnecessary penalties that would otherwise attach to early distributions from an IRA. 

The second important specification is not just that it was a Roth conversion, but WHEN it was processed. If the WHEN is not communicated to the tax preparer, it could put you in danger of owing unnecessary underpayment penalties. For example, one of our clients did a Roth conversion in November and paid estimated taxes in November. Since the IRS is a pay-as-you-go system, they want you to pay taxes at the same time you’re receiving income/distributions, so the timing is another detail that will be important for your tax preparer to be aware of.

Context matters!

Reporting Contributions on Your Tax Return

Roth IRA contributions will not impact your taxes and are not reported on tax returns at all. You will receive a form 5498 from the account you contributed to, but oftentimes, this form isn’t available until May. You don’t need to delay submitting your tax return until you receive this form as it is just to show the contributions that you made.

If you do have any questions and are a client of ours, feel free to give us a call and we’ll help clarify anything that we can.

Want to schedule a call with us?

Click here to book a call or reach us at (919) 787-8866.