Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
How to reduce taxes in retirement
Clients need to plan on how to draw income from their retirement portfolio to minimize the tax bite, an expert says in this Forbes article. They should also consider delaying their Social Security benefits, as up to 85% will be subject to income taxes, the expert adds. This will also create an opportunity for them to convert some of their traditional 401(k) and IRA assets into Roth and reduce the amount of taxable required minimum distributions when they reach 70 1/2.
IRS to waive this penalty for more than 400K filers
The IRS has announced that the tax underpayment penalty will be waived automatically for over 400,000 taxpayers who have already filed their 2018 tax return but failed to secure a special penalty waiver, according to this article in CNBC. “This waiver is designed to provide relief to any person who filed too early to take advantage of the waiver or was unaware of it when they filed,” says IRS commissioner Charles Rettig.
It’s not just clients in high-tax states buying up muni bonds.March 14
Taxpayers won’t get big federal write-off above state credit.August 24
Salt Financial plans to spend as much as $50,000 to woo buyers into its new low-volatility stock fund.March 13
8 ways to minimize taxes in a taxable account
Clients should not discount the idea of investing outside the tax-advantaged retirement accounts, as they can still achieve tax efficiency in taxable accounts, according to this article in U.S. News & World Report. To minimize the tax bite on returns, investors should “favor long-term capital gains over short-term, qualified dividends on common stock and to a lesser extent preferred stock over bond coupons and bank interest, and municipal bonds over Treasurys or corporate bonds of comparable credit quality,” according to an analyst at Bankrate.
Procrastination can cost clients $83K
Although clients have until April 15 to contribute to a traditional IRA and reduce their taxable income for the current year, they should make the contributions as early as possible, according to this article from Motley Fool. That’s because they will miss out on the opportunity to maximize tax-deferred growth on their savings. Clients who contribute early will end up with bigger returns than those who procrastinate and wait until the last minute to make IRA contributions.
Clients who are already retired or a few years away from retirement should consider reducing their exposure to equities, writes Morningstar’s Christine Benz. Aside from selling these shares, clients may opt to do dollar-cost averaging into a higher position in more conservative stocks, and invest dividends and capital gains distributions from appreciated shares in their underweight positions, she writes. “You could direct all new contributions to cash and bonds, for example; that’s particularly advisable if your taxable accounts need to be rebalanced.”