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What Your Clients Should Know About IRAs

July 8, 2022 By Brian Nuttall, CPA, J.D.

IRAs are a critical component of a long-term savings plan. It’s important that your clients understand the basics of these types of accounts, including when they can and cannot make contributions, so they can make the most of them. Here’s what you—and your clients—should know about IRAs.

Contributions to a traditional IRA are tax-deferred

Traditional IRAs may be funded with pre-tax dollars. Distributions, except the return of non-deductible contributions, however, are subject to ordinary income tax rates. Because of this, consider putting the fixed income type investments of the overall portfolio in IRAs. Keep in mind that required minimum distributions (RMDs) start at age 72 (if the individual turned 70.5 years old in 2020 or later).

Roth IRAs offer true tax-free growth

Individuals must use after-tax dollars to fund a Roth IRA. Contrary to a traditional IRA, all distributions (subject to a five-year holding period that starts when the Roth IRA is initially funded) are tax-free. Although Roth IRAs do not have RMDs, remember that Roth 401k accounts do.

Requirements for contributing to an IRA or Roth IRA

To contribute to an IRA or Roth IRA, an individual must have earned income. Generally, this would be wages or self-employment income. While there isn’t an age limit, the ability to contribute does have income limitations—it’s important for individuals to discuss their eligibility with a tax advisor.

IRA and Roth IRA contributions must be made by April 15 of the following tax year—the IRS does not allow extensions. For example, individuals have until April 15, 2023, to make a contribution for 2022. Contributions in 2022 are limited to $6,000 for individuals under age 50 and $7,000 for individuals age 50 and older.

Tax factors to consider for Roth conversations

If a client is considering a Roth conversion, it’s important to steer them in the right direction. If they think tax rates will increase or they will be in a higher tax bracket, they may want to consider a Roth conversion. On the other hand, if they expect to be in the same or lower tax bracket (e.g., they’re retiring), the general recommendation is to not do a Roth conversion.

IRAs are an important part of your client’s estate plan

If your client wants to benefit a charity, consider gifting an IRA; the charity will never pay tax on the distributions. However, if a client wishes to gift their estate to family members, they may want to consider a Roth conversion. A Roth IRA is a great asset to receive, as it grows tax-free for 10 years after the original owner’s death.

Bring an expert to the table

Understanding the basics of IRAs allows your clients to maximize their tax benefits. At Elevate, we serve as your in-house tax advisor to support you in discussing IRAs with your clients and can even step in to directly advise clients as needed. By giving you access to IRA and tax expertise, we can help you add value across your client relationships. To learn more about how we can support you, contact us today.

Filed Under: Tax Planning Tagged With: Tax Planning

What Your Clients Should Know About Estate and Gift Planning

May 23, 2022 By Brian Nuttall, CPA, J.D.

For many people, estate and gift planning is an unpleasant topic and complicated process. Ignoring it, however, can lead to missed opportunities for significant tax savings. You, as an RIA, can make sure your clients are paying attention to this important task. Doing so can not only allow you to provide more value to your clients but also can help you attract new ones by engaging your clients’ families.

Here are some estate and gift planning basics you—and your clients—should know.

Estate and gift tax exclusion amounts

The lifetime exclusion is currently at $12.06 million. This applies to lifetime gifts that don’t qualify for the annual tax exclusion, which is currently at $16,000, and bequests at death. The current estate and gift tax rate is 40%; however, Biden’s tax proposal is looking to increase this to 45% and greatly reduce the lifetime exclusion to $3.5 million.

Regardless of what happens with the tax proposal, it’s important to note the $12.06 million amount is temporary (adjusted annually) and applies only to tax years up to 2025. On January 1, 2026, it will revert to approximately $7 million, unless Congress decides to make the higher exclusion permanent.

Annual gifting best practices

Under current tax law, an individual may give up to $16,000 per year to any one person. For example, say Mr. and Mrs. X have two married children and five grandchildren. Mr. and Mrs. X could give up to $32,000 to each of their two kids, $32,000 to the spouse of each kid, and $32,000 to each grandkid for a grand total of $288,000.

It is important to remember that gifts into a trust for the benefit of the donee are generally not eligible for the annual gift tax exclusion. When a client embarks on a gifting strategy, it’s important that no assumptions are made. Careful planning is critical to avoid unintended consequences such as generation-skipping tax, underutilization of annual gifting, or inadequate disclosure on gift tax returns.

Opportunities that are NOT considered gifts

Your clients should know that certain “gifts” are not considered as such in the eyes of the IRS. These include payments made directly to a school for tuition, including K–12 as well as higher education. Medical expenses paid directly to a medical provider also do not count as gifts. Both types of payments are a great way to increase annual gifting and truly provide a valuable benefit for the donee.

How you can add value

You have an opportunity to help your clients plan—immediately. Given the current estate and gift tax rules and potential changes to them, urge your clients to engage an estate planning attorney sooner rather than later. In 2025, these attorneys will be very busy!

<p”>As an RIA, you can help clients determine what asset values are available for gifting and which are best to receive as a beneficiary. You can also serve as your client’s advocate, to make sure their attorney is hearing and executing their wishes.

As I mentioned, discussing estate and gift planning with your clients gives you a way to engage their younger generations. This could not only increase the value you provide but also the value of your practice.

Bring an expert to the table

As your in-house tax expert, we can support you in discussing estate and gift planning with your clients. In addition to helping, you identify opportunities and vetting your suggestions to clients, we can come in to directly advise you and your clients where needed. If you’d like to discuss how we can help you add value, contact us today.

Filed Under: Tax Planning Tagged With: Tax Planning

Expert Tax Advice for RIA Firms, Lesson 3: Help Your Clients Free Up Interest Expense

February 24, 2022 By Brian Nuttall, CPA, J.D.

Not all interest an individual pays is deductible. With careful planning, however, you can help your clients free up some of their interest expense—and maximize the tax-efficiency of their investments. Here are a few things to consider.

Look to taxable investments.

Current tax rules allow individuals to deduct any interest associated with a loan—if they use the loan proceeds to purchase a taxable investment. So, before your client uses loan proceeds to buy tax-exempt bonds or move cash into their 401(k), make sure they consider taxable securities first.

Separate loan proceeds from other dollars.

For an individual to be able to deduct the loan interest, the loan proceeds must be traced to the purchase of a taxable investment. Best practice calls for opening a separate account for loan proceeds. This allows the client to explicitly show where those dollars went, making the interest deductible.

Be strategic.

The bottom line: When advising your clients, it’s important to consider all sources of funds. With careful planning and thought, your clients can be creative on the dollars they use to make certain interest expenses deductible.

Partner with a tax expert.

The ins and outs of investment interest are complicated, to say the least. At Elevate, we partner with you to advise your clients on these matters and more. If you’re ready to add more value to your client relationships, contact us today.

Filed Under: Tax Planning

Expert Tax Advice for RIA Firms, Lesson 2: Why the Structure of Your Firm Matters

November 29, 2021 By Brian Nuttall, CPA, J.D.

There are countless factors to consider when choosing a business structure for your RIA firm. At the top of the list: tax implications. These vary between each structure, so it’s important to understand them in full. Only then can you make a sound comparison—and choose wisely for your firm.  

For RIA firms, we typically recommend a multi-member limited liability company (LLC), partnership, or S corporation. To help you determine which is best for your RIA firm, here’s what you should know about tax implications. 

Tax implications of a multi-member LLC or partnership:

Structuring your RIA firm as a multi-member LLC or partnership, such as a limited liability partnership (LLP) or limited partnership (LP), gives you substantial tax advantages as well as flexibility. 

Each of these structures allows you to tax-efficiently convert to an S corp, making them a good starting place for your firm. (It’s not as seamless or tax efficient to go from an S corp to a different structure.) As we tell our clients: When in doubt, start with an LLC or partnership. 

Additional benefits of an LLC or partnership: 

  • Allows you to give a key employee ownership in the entity (by issuing a profits interest) without causing an immediate tax to the employee.
  • Offers flexibility in succession planning (more tax-efficient than an S corporation). 
  • Gives you more flexibility in the structure of your RIA firm. The owners don’t have to be individuals—they can also be other entities. This enables you to tax-efficiently bring in non-individual investors. 
  • Provides complexity and flexibility in ownership structure including distribution and profit allocations.

Tax implications of an S corporation

Because S corps aren’t as flexible as LLCs and partnerships, they’re simpler. The tax rules surrounding S corps are established and straightforward, making the cost of tax preparation less expensive. What’s more, tax planning for an S corp involves less uncertainty. 

Additional benefits of an S corporation: 

  • Although owners of S corps must pay themselves a reasonable compensation, there isn’t a bright line on what is reasonable.
  • Flow-through income from an S corp is not subject to self-employment tax, which can provide a 2.9% to 15.3% tax savings when compared to an LLC. However, the Build Back Better Act, if passed, may reduce or eliminate this advantage.
  • Offers flexibility to use year-end bonuses to owners to pay for any tax due, allowing you to avoid the administrative hassle and need of quarterly estimated tax payments. 

What about C corporations and single-member LLCs?

We often steer RIA firms clear of C corps for two reasons: First, a great deal of uncertainty exists around the future of corporate tax rates. Second, it is expensive and often tax-inefficient to change from a C corp to another structure. In other words, you could be stuck in a tax-inefficient structure because the costs to convert are prohibitive. 

Single-member LLCs that are taxed as sole proprietors carry the highest audit risk, so we typically avoid this structure as well.  

Which business structure is best for your RIA firm? 

Looking at potential tax implications is a great place to start when choosing a structure for your RIA firm. What we’ve covered here is not an exhaustive list—it’s important to do your research and consider other factors as well. 

If you’d like to explore business structure options for your RIA firm, we can help. To learn more, contact us today.

Filed Under: Tax Planning

Expert Tax Advice for RIA Firms, Lesson 1: How to Help Your Clients Avoid a Surprise Tax Bill

November 24, 2021 By Brian Nuttall, CPA, J.D.

When one of your clients receives a bonus, you may be among the first to know if they wish to invest it. Before you do, however, it’s important to make sure your client fully understands the tax obligations that come with it. 

Often, supplemental payments—such as bonuses, equity compensation, and even exercising non-qualified options—can leave the recipient with an unexpected tax bill. Here’s how you can help your clients avoid this rude awakening.  

How does a supplemental payment lead to a surprise tax bill?  

A supplemental payment is a one-time compensation that falls outside of an employee’s regular payroll. The federal withholding rate for supplemental payments under $1 million is 22%; the rate jumps to 37% for anything over $1 million. 

This is where things get complicated: The 22% federal income tax bracket is capped for individuals at $86,375 and for married couples filing jointly at $172,750. If your client were to fall in a higher income marginal tax bracket, this would create a withholding rate differential between the supplemental payment and their regular payroll.  

For instance, say your client is in the 22% tax bracket, but they receive a supplemental payment that bumps them into the 32% tax bracket. Now the 22% withholding on the supplemental payment is no longer adequate. Because the client was bumped into the 32% bracket, the supplemental payment they received was under withheld by 10%—which undoubtedly will show up on their tax bill. 

When can a surprise tax bill become a problem? 

Clients are often confused about this because they know withholding was on their supplemental payment—they just didn’t realize it wasn’t enough. 

Unfortunately, many individuals use supplemental payments for investments or luxury purchases. This means the money isn’t readily available to pay the additional, unforeseen tax. It can quickly become a cash-flow problem. 

This is largely a federal tax issue; most states keep their supplemental payment rates closer to or the same as the income tax rates. 

What should do you as an RIA? 

If your client comes to you and wants to invest their supplemental payment, consider pumping the brakes on their enthusiasm. Make sure your client understands their tax obligations, so they won’t be hit by unexpected tax due in April. 

Your job: Be the hero. 

As you know, expectations make all the difference. If you can step in early and say, “hey, let’s make sure you won’t owe anything else on this bonus,” you can be the hero who saves your client from a surprise tax bill.

If you think your clients could benefit from this type of tax advice, we’re here to help. We can work as your in-house tax advisor to make sure your clients aren’t left scrambling to deal with unexpected tax payments. To learn more, contact us today.

Filed Under: Tax Planning

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