Insights: The C&J Blog

We offer clients educational insights that help them make sense of the current market & economic environment.  Each monthly investment letter is written by our investment analyst and contains candid insight and perspective that facilitates a clearer and deeper understanding of our views.  Alongside our monthly investment letters, we also maintain a blog that touches on a variety of topics relating to financial planning and investing.  If there is a question or topic on your mind that you’d like for us to discuss in a future investment letter, feel free to let us know at ssmith@cjwealth.com.

Tax Law Updates to 529 Educational Plans

529 Educational Plans Should Be Gaining in Popularity

529 Educational PlansNow that the dust has settled and the tax code has been “reformed,” it’s time to unpack those changes and analyze how best they can help you. One of the changes was the expansion of 529 educational plans. Under the Tax Cuts and Jobs Act, eligible expenses include up to $10,000 per person per year for K-12 educational expenses. Given the popularity and rising costs of private education, and the state income tax breaks associated with many of these accounts, 529 educational plans should see a spike in popularity.

529 Plans – A Quick Overview

529 plans were created by Congress in the mid 1990s as way for families to save money for college education expenses, which at that time had just begun to skyrocket. There are two types of 529 plans: a prepaid plan and a savings plan. We will focus on the savings plans because they are most prevalent. If you understand how a Roth IRA works, you should have a pretty good idea of how a 529 savings plan works. A 529 plan is an investment account funded with after-tax money. The earnings grow tax-free and the withdrawals are tax and penalty free as long as they are qualified. Even better, some states provide state income tax deductions for contributions! Currently, 34 states offer some type of deduction or credit for 529 plan contributions.

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Tax Reform is Here!

2018 tax reformWhat Tax Reform Means to You

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This far-reaching piece of legislation will overhaul the tax code. But what does the tax reform mean for you and your retirement plan? Here are some highlights.

Big Changes

Tax reform keeps seven tax brackets and lowers the top rate to 37% for individuals. The Alternative Minimum Tax (AMT) has been scaled way back. The standard deduction is doubled to $12,000 for singles and $24,000 for those who are married, filing jointly, and the child credit has been expanded. Personal exemptions are suspended.

Many popular deductions have been eliminated or scaled back. The state and local tax deduction is limited to $10,000, and the mortgage interest deduction will be limited to the first $750,000 in mortgage interest debt for new home purchases.

These changes, like most of the changes tax reform brings for individuals, are scheduled to sunset after 2025. Tax reform also brought sweeping reform to corporate taxation. Changes on the corporate side, unlike the individual side, are permanent.

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Happy Anniversary to the Roth IRA!

Happy Birthday Roth IRAHappy Anniversary to the Roth IRA! Celebrating 20 years in 2018.

IRAs started small. The first IRAs created in 1974 had two purposes:

1.  As a retirement savings vehicle for employees not covered by employer retirement plans; and
2.  As an account to hold distributions from employer plans on separation from service

These first IRAs could accept annual contributions not exceeding the lesser of $1,500 or 15% of earned income, only from employees who were not covered by an employer’s qualified retirement plan. Distributions from them were subject to still familiar rules — being taxable income at ordinary rates, with required minimum distributions (RMDs) starting at age 70½, and distributions before age 59½ subject to 10% penalty. They could accept rollovers from company plans.

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Make Charitable Gifts by Year End to Save Deductions from the New Tax Law

By Jim Glass, J.D.
IRA Analyst

Charitable GivingThis is the season for charitable giving. And this year it is especially so for those who want to get the most tax benefit from charity deductions before new Tax Cuts and Jobs Act becomes law. The Act effectively reduces the tax-saving value of the charitable contribution deduction for many.

While details may change, at this writing the Act increases the standard deduction on joint returns to $24,000 from $12,700, on single returns to $12,000 from $6,350, and eliminates many popular itemized deductions. Because taxpayers claim itemized deductions only when their total exceeds the standard deduction, lawmakers project that under the Act the number of taxpayers who itemize deductions may be reduced by half or more.

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Planning for a Disclaimer in 5 Easy Steps

What is a disclaimer?

beneficiary disclaimerA disclaimer is a formal refusal of an inheritance (or part of an inheritance) by a beneficiary.  By creating a “path” for disclaimed assets to follow, a skilled planner can provide a beneficiary with the option to pass assets to alternate beneficiaries.

1. Make sure the IRA owner names contingent beneficiaries.  Naming a contingent beneficiary directly on the beneficiary form is good practice and a pivotal part of most disclaimer planning.  When a disclaimer is executed, the person making the disclaimer is treated as if he or she had predeceased the IRA owner.  The contingent beneficiary would then inherit the property.  If there is no contingent beneficiary listed, often the funds will default to the estate of the deceased IRA owner.

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Quick Facts on Roth IRA Contributions

Here are some facts that you need to know about Roth IRA Contributions.

  • Roth IRA ContributionsYou have earned income
  • You contribute already taxed funds (after-tax funds) to a Roth IRA
  • You receive no tax deduction for your Roth IRA contribution
  • You can continue to contribute to a Roth IRA after age 70 ½
  • Qualified withdrawals are income-tax free (a withdrawal made after any Roth account has been established for 5 years and the Roth owner is over the age of 59 ½ or qualifies for the first-time homebuyer exception or the distribution is due to the account owner’s death or disability)

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Roth IRAs Favored for Annual Contributions, Neglected for Rollovers from Company Plans

Roth IRAsRoth IRAs become 20 years old in January of 2018 and now hold more than $660 billion in retirement wealth, reports the Investment Company Institute (the source of the data in this article). 

Yet while Roth IRAs have become very popular among individuals who make annual contributions to IRAs, they are near totally avoided by persons who roll over big-dollar distributions from company retirement plans into their IRAs, with these funds going overwhelmingly into Traditional IRAs.

This suggests that some people are undervaluing the benefits of making a rollover into a Roth IRA. If you are an individual with funds to roll over, it may pay to re-examine the benefits of choosing a Roth IRA to be the destination of a big-dollar rollover.

IRA Snapshots

Contributions to Roth IRAs exceeded those to Traditional IRAs by $21.9 billion to $17.5 billion in 2014, even though only about one-third of IRA owners have a Roth.  Yet Traditional IRAs now hold near $7 trillion in assets, dwarfing the total in Roths. The main reason is that rollovers of large balances from employer plans flow overwhelmingly into Traditional IRAs. Rollovers totaled $423.9 billion into Traditional IRAs versus a mere $5.7 billion into Roth IRAs in 2014 – Traditional IRAs received 98% of rollovers.

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Image courtesy of suphakit73 at FreeDigitalPhotos.net

10 Things to Know About the Still-Working Exception

By Sarah Brenner, JD
IRA Analyst with Ed Slott

Still-Working Exception

Are you approaching retirement age and not looking forward to being forced to take unwanted required minimum distributions (RMDs) from your retirement account? You may be looking for a way to delay those distributions. You may have heard about the still-working exception, which can allow RMDs to be put off. Will this exception help you? Here are 10 things you need to know.

1.  The still-working exception does not apply to IRAs. It only applies to company plans. If you are still working, that can’t help you delay RMDs from your IRA.

2.  The exception will only apply to the plan of the company for which you are still working. If you have other funds in other company plans it won’t help you with those.

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Is Your IRA Haunted?

IRA HauntedIt’s Halloween! This is the time for ghosts, witches, and trick or treating. What does Halloween have to do with your IRA? You might be surprised to hear that your IRA may be haunted. How can that be? Believe it or not, actions you take, or don’t take, can haunt your beneficiaries for years down the road.

Many IRA owners think that naming their estate as their IRA beneficiary is a good way to go. They think that they have spent time and money consulting with an attorney to draft the perfect will. All the work has been done. Why not just name their estate as their IRA beneficiary? Wrong move! That can result in scary stuff that can haunt your IRA beneficiaries. If you name your estate as the beneficiary on your IRA beneficiary designation form, your beneficiaries will not be able to stretch distributions over their own life expectancy. They may even have to take a total distribution of the IRA assets in five years. That could be a serious tax hit. There is no way to fix this after your death. To have the maximum stretch options possible, living people or a qualified trust must be named on the beneficiary designation form.

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Contact the C&J Ghostbusters!