The Widow’s Penalty: Lower Income, Higher Taxes

Contributed by: Nick Defenthaler, CFP®, RICP®

A newly widowed example client, whom we'll call "Judy," receives communication from Medicare that her Part B and D premiums are significantly increasing from the prior year. To make matters worse, she also notices that she's now in a much higher tax bracket when filing her most recent tax return. What happened? Now that Judy's husband is deceased, she is receiving less in Social Security and pension income. Her total income has decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she's a victim of what's known as the "widow's penalty."

Less Income and More Taxes. What Gives?

Simply put, the widow's penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse's death.

When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. In addition, it's also very likely that the surviving spouse will either entirely or partially lose income tied only to the deceased spouse (ex., employment income, annuity payments, or pensions with reduced or no survivor benefits). Depending on how much income was tied to the deceased spouse, the surviving spouse's fixed income could see a sizeable decrease. At the same time, the surviving spouse starts receiving less income, and they find themself subject to higher taxes.

With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married, filing jointly in the year following their spouse's death. In 2024, that means they will hit the 22% bracket at only $47,150 of taxable income. Married filers do not reach the 22% bracket until they have more than $94,300 of income. To make matters worse, the standard deduction the widow will receive will also be cut in half. In 2024, for a married couple (both over 65), their standard deduction will be $32,300. A single filer (over the age of 65) will only have a $16,500 deduction! Unfortunately, even with less income hitting the tax return, widowed tax filers commonly end up paying higher taxes due to the compression of tax brackets and the dramatic standard deduction decrease for single filers.

Medicare Premiums Increase

Tax brackets are not the only place surviving spouses are penalized. Like the hypothetical example above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Whereas there is no surcharge until a married couple filing jointly reaches an income of $206,000, single filers with a modified adjusted gross income (MAGI) of more than $103,000 are required to pay a surcharge on their Medicare premiums. This means that a couple could have an income of $127,000 and not be subject to the Medicare IRMAA surcharge. However, if the surviving spouse now has income over $106,000, their premium will increase by almost $1,000 per year. In this same example, the widow could now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying approximately $3,600 more in federal tax.

Proactive Planning

Short of remarrying, there is no way to avoid the widow's penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.

For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets and standard deduction. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse's lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.

Let's look at a hypothetical scenario with a couple we'll call John and Mary. After several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John's passing. Several months after her husband's passing, over $100,000 was converted from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes and had the significant medical deduction for the year John passed, Mary only paid an average tax rate of 10% on the $100,000 that was converted. As we stand here today, Mary would now be filing single and find herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates expire at the end of 2025).

The widow's penalty should be on every married couple's radar. It's possible that while both spouses are living, their tax rates will always remain the same, as we've highlighted above. Unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning can help dramatically reduce the impact of this penalty on your plan.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

These examples are hypothetical illustrations and are not intended to reflect any actual outcome. they are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

You've inherited an IRA – Now What?

Contributed by: Kali Hassinger, CFP®, CSRIC®

Receiving an inheritance can be confusing and filled with mixed emotions. However, when inheriting a traditional IRA, the confusion can be compounded by the multitude of rules, regulations, and tax implications surrounding these accounts. How you manage the account in the future can depend on several factors, such as your relationship with the deceased and the age of the deceased at death.

You've Inherited an IRA from your Spouse

If you inherited an IRA from your spouse, and you are the sole beneficiary, you have several options on how to manage the account in the future. The first option is to simply allow the account to remain in your deceased spouse's name.  In this example, if your spouse hadn't yet reached RMD or Required Beginning Date age (as of right now, this is age 73, but it has changed several times in the last few years), you wouldn't need to begin taking Required Minimum Distributions (RMDs) until your spouse would have reached age 73. With this process, you will have additional elections to make regarding which life expectancy table will be used to determine your RMDs.

Spouses can also transfer the account assets into their own traditional IRA. This option is specific to spouses only. With this election, the account is treated no differently than an IRA established in your name. Required Minimum Distributions would not begin until your RMD age. 

However, if you want to access the funds earlier than 59.5 without a 10% tax penalty, it could make more sense to open a beneficiary IRA. This account will be subject to annual required distributions, but again, without a tax penalty.

You've Inherited an IRA from Someone Else

If you recently (since 2020) inherited an IRA from someone else, such as a parent, aunt, or uncle, and as long as they were more than ten years older than you, you will likely need to open an inherited IRA and distribute the entire account within ten years!

If the deceased was subject to Required Minimum Distributions before their death, you must also take an RMD each year (Note: This requirement has been waived in recent years but is set to begin in 2025.) Given that traditional IRA withdrawals, whether inherited or not, are subject to ordinary income tax, this can create significant tax implications for beneficiaries. Purposeful tax planning is essential to avoid unforeseen or forced distributions in later years.

The options discussed here are certainly not exhaustive, and rules differ for beneficiaries who are disabled, chronically ill, minors, or entities (as opposed to individuals). These differing rules also apply to instances in which the beneficiary is less than ten years younger than the deceased account holder.

If you've inherited an IRA and are looking for guidance on which option or planning path is best for you, we are here to help.

Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC® and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Top 5 Tips for Managing Beneficiary Selections

Contributed by: Nick Defenthaler, CFP®, RICP®

Checking your beneficiary designations each year on your investment accounts is always a wise move. Our team does this before each planning meeting with our clients, and I can't tell you how many times this has prompted an individual or family to make a change. As tax law has continued to evolve and new rules related to inherited retirement accounts have emerged, it's now even more important to be intentional with your beneficiary selections.

Here are my top five tips and considerations when it comes to prudent beneficiary management and selection:

1. Review Beneficiary Elections Annually

As we all know, mistakes happen, and life changes. Kids might now be older and more responsible for making financial decisions, family members you've listed may have passed away, and dear friends you've named as a beneficiary might no longer be part of your life. Let’s look at a hypothetical investor who we’ll call “Sam”. Sam is in his early 70s and had become divorced three years prior. Sam was also less mobile and, as a result, decided he wanted to hire a new adviser who was closer to his home.

His former wife had been named on his retirement account, which had grown to $1M. If Sam didn't take any action of the time of his divorce, his account would go to his ex-wife, and not his two children as he wants. When we identify a beneficiary that needs to be updated, we make sure the client addresses it immediately as that determines who gets that account.

2. Charitably Inclined? Consider Pre-Tax Retirement Accounts

If you have the desire to leave a legacy to charity, naming the charity as a partial or 100% primary beneficiary on a retirement account could be a very smart tax planning move. Unlike an individual, when a charitable organization receives assets from an individual's pre-tax IRA, 401k, etc., the charity does not pay tax on those dollars. Let’s look an at example client who owns a pre-tax traditional IRA ($1M) and a Roth IRA ($500k). She indicates that she wants 10% of her $1.5M portfolio to go to her church, with the remaining amount being split evenly amongst her four adult children.

To accomplish this goal, we’ll name her church as a beneficiary on her traditional IRA for a specific dollar amount of $150,000. The entire bequest would come from the traditional IRA and nothing from her Roth IRA. This amount could be adjusted as needed. By specifically naming the IRA as the account to fund her charitable bequest, more of her Roth IRA will ultimately go to her kids. If the charity received proceeds from her Roth IRA upon death, the charity would still receive the assets tax-free, so it would be foolish to not have more of these assets go to her kids. Assuming each child is in the 25% tax bracket, this move helped to save her estate almost $38,000 in tax.

3. Naming a Trust? Understand the Ramifications

It is common for clients to name their trust as either the primary or contingent beneficiary of their retirement account. However, when naming a trust, it's important to understand the tax ramifications. Irrevocable trusts aren't used as often as revocable living trusts but have a place in certain cases. While irrevocable trusts typically offer a high level of control, the tax rates for these trusts upon the death of the original account owner are much higher than individual rates with much less income.

Revocable living trusts are the most common trusts we see with a client's name listed as a beneficiary (primary or contingent). However, the correct language must be used within the trust to ensure tax-efficient distributions for the beneficiaries of the actual trust (ex., 'see through' trusts). As always, be sure to consult with your attorney on this matter. Our team always wants to collaborate with your attorney and other professionals on your financial team to ensure the right strategy is in place for you and your family.

4. Beneficiaries in Different Tax Brackets: How to Choose

In addition to intentionally identifying which account would be best served to go to a charity, the same rule applies to individuals who find themselves in very different tax brackets. Let's look at a family we'll call the 'Jones Family' as an example. Mrs. Jones is recently widowed and is in her early 80s. She has two adult children: Ryan (51) and Mark (55). All of them reside in Florida, where there is a 0% state income tax. Mrs. Jones' current portfolio value sits at just shy of $1.1M, allocated as follows: $575,000 in a traditional IRA, $300,000 in a Roth IRA, and $200,000 held in an after-tax brokerage account. Her youngest son, Ryan, finds himself in the 12% federal tax bracket, while her older son, Mark, is in the 35% tax bracket. While Mrs. Jones still wants her estate to be split 50/50 between Ryan and Mark, she wants to make sure the least amount of income tax is paid over time on the inheritance her boys will be receiving. To accomplish this goal, we structure her beneficiary designations as follows:

• Ryan: 100% primary beneficiary on traditional IRA (Mark 100% contingent).

• Mark: 100% primary beneficiary on Roth IRA and after-tax brokerage account (Ryan 100% contingent on both accounts).

• Ryan would be subject to Required Minimum Distributions (RMDs) from the Inherited traditional IRA from his mother, and the account must be depleted in 10 years. However, he would only pay 12% in tax on these distributions. If we assume he stays in this bracket for the next decade, Ryan will end up with $506,000 net of tax [$575,000 x .88 (1 – 12% tax rate)] from the account.

• Being that Mark is in a significantly higher tax bracket, it would be much more tax-efficient for him to inherit his mother's Roth IRA and after-tax brokerage account. While Mark's Inherited Roth IRA will also carry an annual RMD and must be depleted in 10 years, the RMDs he would be taking would NOT be taxable to him. The after-tax brokerage account would also receive what's known as a 'step-up' in cost basis upon Mrs. Jones' death, thus eliminating any large, unrealized capital gains she had in several meaningful stock positions in her account.

While there is never a 'perfect' beneficiary plan, the one outlined above accomplishes Mrs. Jones' goal in the best way possible. If we had named Ryan and Mark as 50% beneficiaries on each account, the total tax burden on the overall inheritance would have been $66,000 higher, primarily due to Mark paying a much higher tax rate on the RMDs from the traditional IRA. Our plan gives Ryan and Mark' net' the same amount. This means more of Mrs. Jones' estate is staying with her family, and a lot less will be going towards tax.

5. End of Life Tax Planning Strategies

As clients age in retirement, they may spend less money and/or incur large medical costs that would result in significant tax deductions. If the owner of a traditional IRA or 401k finds themselves in this situation, they should closely evaluate completing Roth IRA conversions (full conversions, a single partial Roth conversion, or partial conversions over the course of several years).

When converting funds from a traditional IRA to a Roth IRA, the converted funds are considered taxable income. In general, a conversion only makes sense if the rate of tax paid today on the conversion will be less than the tax rate on distributions in the future (either by the current account owner or a future beneficiary). If an individual or family is spending much less and is now well within the 12% bracket, it could make sense to complete annual Roth conversions to completely 'fill up' this low bracket. Another common occurrence that clients might experience is large medical deductions. Unfortunately, these tax deductions ultimately either go to waste or are greatly diminished because there is not enough taxable income to offset the deduction. I have seen scenarios where clients could have converted $30k+ to a Roth IRA completely tax-free due to a large medical deduction. However, the deduction essentially went to waste because no income was generated on the tax return for this deduction to offset. In a sense, this is like striking a match to free 'tax money'. Keep in mind that inherited IRAs cannot be converted to one's own Roth IRA or an Inherited Roth IRA, so exploring conversions during the original account owner's life is imperative. Roth conversions will not make sense for everyone, but when they do, the potential tax dollars saved can be massive.

Naming beneficiaries and having a clear understanding of how you would like funds allocated is step one. Once this is known, the job is usually not complete. A quality adviser who has extensive knowledge of tax planning should be able to offer guidance on how to accomplish this goal in the most tax-efficient manner possible. As mentioned previously, collaboration with other professionals on the client's financial team (ex., CPA and attorney) is ideal. Doing so could allow more of your hard-earned money to stay in the pockets of those you care most for and less going to the IRS!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

These examples are hypothetical illustrations and are not intended to reflect any actual outcome. they are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

Can You Move Required Distributions from Your Tax-Deferred Retirement Plan or IRA to Your Roth IRA?

Contributed by: Kelsey Arvai, CFP®, MBA

Contributed by: Nick Errer and Ryan O'Neal

Required Minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your Traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after December 31st, 2022, or 75 if you were born after 1960).

Account owners in a workplace retirement plan (for example, a 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire unless they own 5% of the business sponsoring the plan.

These amounts vary depending on the value of your account and your life expectancy factor. The amount of your Required Minimum Distribution (RMD) is calculated by dividing the value of your account value at the previous year's end by a life expectancy factor, as determined by the Internal Revenue Service (IRS). If the sole beneficiary of your IRA is your spouse and your spouse is ten years younger than you, use the life expectancy table from Table II (Joint Life and Last Survivor Expectancy).

For the 2024 tax year, the annual contribution limit to an IRA is $8,000 if you're 50 and older. The limit is the total of all your IRAs – traditional and Roth. (The limits are $1,000 less for anyone under age 50). The IRS requires you to have enough earned income to cover your Roth IRA contributions for the year – but the actual source of your contribution need not be directly from a paycheck. The IRS defines Earned income as any income from wages, salaries, tips, and other taxable employee pay, including self-employment income. However, the IRS does not regulate the pool of money from which the contribution comes. This means you can take your RMD from a Traditional IRA, pay the taxes, and reinvest into your Roth IRA. The only catch is that you would need enough earned income to cover the contribution, but not too much, so you are over the contribution threshold.

The Roth IRA contribution rules are based on your income and tax-filing status. If your modified adjusted gross income (MAGI) is in the Roth IRA phase-out range, you can make a reduced contribution. You can't contribute if your MAGI exceeds the upper limits for your filing status. If your RMD was $8,000 or less, you could deposit all the money into your Roth IRA; however, if you contributed $4,000 to another IRA in the same year, you could just place $4,000 of your RMD into a Roth IRA.

Just because you can, doesn't mean you should… 

It is important to remember that no method is perfect for every individual and there are important factors you should consider before reinvesting RMD income into a Roth IRA. Any contribution to a Roth IRA must be held in the account for a five-year period to avoid a 10% early withdrawal penalty. Additionally, converting RMDs to a Roth IRA is not the only reinvestment vehicle you have. Other options include Roth Conversions, 529 Contributions, and Qualified Charitable Distributions. Talk to a financial advisor today to find a solution that works best for you. Reach out to us here or call us at 248-948-7900.

Sources:

• https://www.investopedia.com/ask/answers/08/ira-rmd-reinvest.asp

• https://smartasset.com/retirement/planning-to-take-rmds-convert-to-roth-why-not

• https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

• https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:~:text=The%20RMD%20rules%20apply%20to,while%20the%20owner%20is%20alive.

Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Beat the Squeeze: ACA Income Planning for Pre-Medicare Retirees

Contributed by: Nick Defenthaler, CFP®, RICP®

Are you currently retired or planning on retiring before Medicare begins at age 65? If so, congratulations! If you have the ability to retire in your early 60s, chances are that you’ve saved aggressively over the years and have prepared well for retirement. In our experience, the top concern or area of stress for those retiring before 65 is the potential cost of health insurance and the impact it could have on their long-term financial plan.

Prior to the Affordable Care Act (ACA), private health care for those in their early 60s could be rigid and very expensive. Since the ACA was signed into law in 2010, a lot has changed. While certainly not perfect, the ACA now allows individuals to obtain private health insurance, the premiums of which are based on their current or projected income for the upcoming year.

If your income is within a certain percentage of the federal poverty level, you will receive a subsidy on your monthly health insurance premiums. Through recent legislation, these income parameters have substantially expanded, now benefiting individuals and couples with income levels that would previously disqualify them from receiving any subsidy on their health insurance premiums.

Open enrollment for ACA plans typically runs from early November until mid-January. When applying for coverage, you must estimate your income level for the upcoming year. From this information, your potential subsidy is determined.

If your actual income level is higher than projected, you will have to pay back a portion (or potentially all) of your subsidy. Your payback amount will depend on how much higher your income is as compared to your original projection. This determination occurs when you file your taxes for the year. On the flip side, if your income is lower than initially projected, you’ll be entitled to the higher subsidy amount you should have received all along (once again, determined when you file your taxes and received as a tax credit).

If you are someone who has saved very well in preparation for your retirement, you likely have various forms of retirement/investment accounts as well as future fixed income sources, which create retirement income flexibility for you. This flexibility makes it possible to structure a “retirement paycheck” that assures your spending needs are met but with significantly less income reported on your tax return. We call this “ACA income planning,” and it allows you to structure your income in a way that could help save you tens of thousands of dollars in reduced health insurance premiums! Read on as we dive into the details of the key elements of ACA income planning to see if this concept could make sense for you.

Overview of Income Sources

As discussed above, the premiums you pay for pre-65 health insurance are based on your projected modified adjusted gross income (MAGI) for the upcoming year. Because of this, it’s important to understand what constitutes as income in the first place:

• Employment/Earned Income: Will generally be 100% included in your MAGI for the year.

• Pension Income: Will generally be 100% included in your MAGI for the year.

• Social Security: While you may not pay tax on your full Social Security benefit, your ENTIRE monthly benefit (taxable and non-taxable component) is included in your MAGI for ACA income determination purposes.

• Traditional IRA/401(k)/403(b) Distributions: Because these retirement accounts were funded with pre-tax income, distributions will generally be 100% taxable and included in MAGI.

• Roth IRA Distributions: Because this retirement account was funded with after-tax dollars, distributions will NOT be taxable or included in MAGI (certain rules such as attaining age 59 ½ and having the Roth IRA open for at least five years will come into play, however).

• After-Tax Investment or “Brokerage” Account: Unlike 401(k) or Roth IRAs, these accounts are not tax-deferred and were initially funded with after-tax dollars. Capital gains, dividends, and interest (even tax-free, municipal bond interest) produced by the investments within this account will be included in MAGI. However, funds withdrawn from this account that have previously been taxed (the cost basis) will NOT be included in MAGI.

• Cash: Similar to an after-tax investment/brokerage account, funds initially deposited into a cash account, such as checking or savings, have already been taxed. Because of this, when funds are withdrawn from your checking/savings account for spending, these dollars are NOT included in MAGI.

• For even more details on various income sources and how they can impact MAGI, please click HERE.

Intentional Distribution Strategy

Because drawing from different accounts will have drastically different tax consequences, it is imperative to have a sound retirement income plan in place while on an individual health care plan before Medicare.

Consider a retired married couple in their early 60s who have saved into other accounts besides 401(k)s or IRAs (e.g., Roth IRAs or after-tax brokerage accounts). Some significant tax and health insurance premium planning opportunities could exist. In many cases, it could be wise for them to spend less out of their pre-tax IRA or 401(k) accounts during this time and take more funds out of Roth IRAs or an after-tax brokerage account. By doing so, income hitting their tax return would likely be significantly less compared to drawing the majority of income from the IRA or 401(k). This, in turn, could qualify them for large health insurance premium subsidies that could save them tens of thousands in the years leading up to Medicare.

Conclusion

As with any retirement income planning strategy, multiple factors must be considered, and the above example is certainly not a one-size-fits-all approach. If you find yourself in this window, where you are on an individual plan before Medicare, I encourage you to discuss your retirement income plan with your adviser. Not doing so could end up costing you thousands in unnecessary tax and insurance premiums.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Bob Ingram, CFP® and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) I the U.S. which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Should I Participate in a Deferred Compensation Plan?

Contributed by: Robert Ingram, CFP®

Many executive compensation packages offer types of deferred compensation plans. If you have one available, it can be a powerful tool to accumulate additional retirement savings. But is it right for you?

While this can be an effective way to reduce current income and build another savings asset, there are many factors to consider before participating. Plans can be complex, often less flexible than other savings vehicles, and dependent on the financial strength and commitment of the employer.

How Do Non-Qualified Deferred Compensation Plans Work?

By participating, you generally defer a portion of your income into a plan with the promise that the employer will pay the balance to you in the future, plus any growth and earnings on those assets. The amount you defer each year does not count towards your income in that year, thereby reducing your taxable income (at least for now). When the deferred income pays out to you in the future, it counts toward your taxable income at that time. These accumulated funds within the plan can also grow tax-deferred through different investment options, depending on how the plan is set up. This sounds a lot like contributions to a 401(k) plan in that contributions are not taxed in the year contributed, and earnings can grow tax-deferred.

However, unlike a qualified plan such as a 401(k) or pension plan, a non-qualified deferred compensation plan is not covered under ERISA, and there are no mandated income caps and annual contribution limits, like the annual maximum on a 401(k) (in 2024 $23,000 plus an additional $7,500 “catch up”  for those age 50 and above). For high-income employees, having this ability to defer an even larger portion of income in addition to qualified plan contributions (and subsequently the taxes on that income) can be a significant advantage. 

Because the plan is not under ERISA, it is also not a protected asset from creditors. The plan’s security depends on the financial strength of the employer and whether the employer has established certain funding arrangements. 

The deferred compensation agreement also establishes when and how you can withdraw funds. Typically, the plan defines certain triggers for it to pay out, such as at a retirement date/age or at separation from service, for example. The plan can also have several different ways to allow for withdrawing (paying out) funds. Different options can include a lump sum distribution or set withdrawals spread out over a number of years (e.g., a schedule over three years, five years, or even as many as 15 years). Some plans may allow payouts to begin during your working years, while others may not. You may not have any other early withdrawal choices for hardships, plan loans, etc. There are no IRS-imposed required minimum distributions for qualified retirement plans (beginning at age 73 in 2023). However, you may also have less control over your withdrawals from a deferred compensation plan. 

Advantages of a Deferred Compensation Plan 

• The plan allows you to defer current income or additional compensation today and claim it in the future. Doing this can lower your income, which is subject to income taxes in the current year, and help keep you in a lower tax bracket. 

• It can allow you to build tax-deferred additional assets for future needs (typically an additional retirement savings vehicle).

• The plan is not subject to the ERISA requirements and the annual contribution limits of qualified retirement plans such as a 401(k) (unless otherwise set by the employer plan).

• It can be customized for an employee or groups of employees.

Disadvantages of a Deferred Compensation Plan

• These plans are not protected under ERISA, so you may risk losing your promised income and potential earnings if the employer company goes bankrupt or does not properly fund the plan.

• The plan language may impose rules where you lose the money if you leave the employer.

• The ability to withdraw funds is typically set on a predetermined schedule in the plan, such as at retirement, at termination, and either as a lump sum or spread over several years. This can limit some control and flexibility over when you have access to the money and how much income you will claim from the plan in a given year.

• Deferring income today means having to claim that income in the future.  If your income is higher in the future or if tax rates increase, deferring more income today could be less attractive.

Planning Considerations for Using Your Deferred Compensation Arrangement

• Financial strength of the employer. 
  Since the dollars in the deferred compensation plan are not yours until they are paid out to you, the employer must be in a strong enough financial position to make good on its promise to pay. 

• Are you maximizing your contributions to your employer retirement plan?
  If you’re not contributing up to the annual maximum to your 401(k), for example, doing that first makes more sense. The dollars you contribute are your own, not the employers’ and generally are more flexible for when and how you can take distributions.  

• What is your timeframe for needing the funds?
  Ideally, the funds in your deferred compensation should be used in retirement. That is a benefit of deferring taxable income during your working years.

• What is the right payout schedule? 
  There may be options for a single lump sum or a series of installment payments, such as an equal amount distributed over five or seven years, for example. Spreading out your payment may help limit the taxable income in a given year. However, when taking installment payments, you need to be comfortable remaining tied to the plan until the full balance is distributed.

These are some examples of the considerations for contributing to this deferred compensation plan. As with other types of employer compensation and retirement plans, deferred compensation plans can impact your financial situation in different ways, both in the current year and in future years. That’s why it’s critical that you work with your financial and tax advisors when making these kinds of planning decisions. So please don’t hesitate to reach out if we can be a resource.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Bob Ingram, CFP® and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

How to Use a 529 Plan to Fund a Roth IRA

Contributed by: Josh Bitel, CFP®

Before the passing of SECURE ACT 2.0 in late 2022, folks with unused funds sitting in a 529 account had a few options for using leftover 529 funds. Generally speaking, the most common options were: 

1. Save the funds for future educational use (either for the current or future beneficiary) or

2. Withdraw the money and pay federal income taxes and a 10% penalty on any gains within the account.

While these options may be feasible for some folks, others are left scratching their heads when they see leftover funds in a 529 plan when their child finishes college. This can also be a concern if a student wins a scholarship, attends a military academy, or receives unexpected gifts to help pay for school. 

Fortunately, among the legislative changes brought forth by SECURE ACT 2.0 is a solution to help ease some of these concerns. Starting in 2024, 529 account holders are permitted to roll excess college savings plan funds into a beneficiary’s Roth IRA without incurring taxes or penalties. Sounds great, right? Well, as with most new laws, there is some important fine print to understand before going forward with such a transfer:

• The 529 plan must have been open for at least 15 years before you can execute a rollover to a Roth IRA.

• Rollovers are subject to the annual Roth IRA contribution limit. For 2024, this limit is $7,000. Additionally, if the beneficiary makes any IRA contributions in a given year, the eligible 529 to Roth IRA rollover amount is reduced by the size of that contribution. For instance, if the beneficiary contributes $3,000 to an IRA in 2024, the eligible rollover amount decreases to $4,000, based on the 2024 total IRA contribution limit set by the IRS.

• 529-to-Roth rollovers are subject to a lifetime limit of $35,000 per beneficiary. So, if you wanted to roll over the entire $35,000, you would have to do it over five years under the current 2024 contribution limits. (Although IRA contributions limits tend to rise in most years with inflation).

• 529 plan contributions made in the last five years cannot be transferred to a Roth IRA (including any earnings accrued on those contributions).

• The beneficiary of the 529 plan must match the owner of the Roth IRA. For example, if you have a 529 for your grandson Teddy, you can only roll over any excess funds to a Roth IRA in Teddy’s name. 

• Just as when making a normal contribution to a Roth IRA, the owner must have earned income at least equal to the amount of the rollover. For example, if Teddy has a part-time job earning $4,000 in 2024, you may only roll over $4,000 in 529 funds to the Roth for that year.

• There are no income limits restricting a 529-to-Roth rollover for either the beneficiary or 529 owner. For someone contributing directly to a Roth IRA (not using 529 funds) they are not permitted to do so if they earned $161,000 or more in taxable income as a single person in 2024. This rule does not apply to 529-to-Roth rollovers, so it is an excellent way for high earners to get money into a Roth.

As you can see, there is a lot to know before performing one of these rollovers, but for the right person, this can be a great retirement savings option. A more concise flowchart can be found here to help determine if you or your beneficiary is eligible for this transfer.

Overall, this new provision is a great way for savers to utilize excess 529 funds penalty and tax-free. However, there are still many questions that remain unanswered as it pertains to SECURE ACT 2.0. We are continuing to monitor and research as more details emerge. We will provide additional information as it is available, but if you have any questions about how this could affect you, please contact your Financial Planner. We are always happy to help!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Keep in mind that, unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Any opinions are those of Josh Bitel and Center for Financial Planning, Inc., and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or protect against a loss This material is general in nature and provided for informational purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds and protection from creditors. The tax implications can vary significantly from state to state.

Required Minimum Distributions (“RMDs”) – Everything You Need to Know

Contributed by: Nicholas Boguth, CFA®, CFP®

“What is a required minimum distribution?”

RMDs are the amount you are required to withdraw from your retirement accounts once you reach your required beginning date. Remember all those years you added money to your IRA and 401k and didn’t have to pay tax on those contributions? Well, the IRS wants those taxes EVENTUALLY – which is why we have RMDs. These required distributions ensure that you will spend down the assets in your lifetime, and the IRS will receive tax revenue on that income. 

“When do I have to take RMDs?”

When you turn 73. This age has changed multiple times in the past few years from 70.5 to 72 and is intended to change further to 75 in 2033, but for now, anyone turning 73 in the next nine years will have to begin taking RMDs. You must withdraw the RMD amount by December 31st of each year (one minor exception is being allowed to delay until April in your first RMD year). 

“What accounts do I have to take an RMD from?”

Most retirement accounts such as IRAs, SIMPLE IRAs, SEP IRAs, Inherited IRAs/RIRAs, and workplace plans such as 401k’s and 403b’s require RMDs. RMDs are NOT required from Roth IRAs during the account owner’s lifetime. 

“How much will my RMD be?”

The IRS provides tables that determine RMD amounts based on life expectancy. For anyone taking their first RMD this year at age 73, the current factor is 27.4. So, for example, if you have $500k in your IRA, then you will have to distribute $500k / 27.4 = $18,248. That number may be lower if your spouse is listed as the beneficiary and is more than ten years younger than you. 

“What if I don’t take my RMD?”

There is a 25% penalty on the RMD amount. 

“Can I withdraw more than the RMD amount?”

Yes.

“What if I’m still working?”

For most accounts, such as IRAs, you must still take your RMDs. If you have a 401k with your employer, you may be able to delay RMDs in that account until you retire. 

“Will my beneficiaries have to take RMDs after I am deceased?”

Yes. These rules have also changed recently, and like most things in the IRS, there are plenty of caveats and asterisks, but generally speaking, your beneficiary will have to deplete the account within ten years. Certain beneficiaries, such as your spouse, have more options for determining required distributions. 

Tax-deferred accounts like IRAs and 401ks are a significant part of most retirees’ financial plans, so many of us will have to navigate this topic. We’re proud to say that we’ve been helping clients navigate the maze of retirement accounts, RMDs, and beneficiaries for over thirty years, so we are here to help if you have any questions. 

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Is My Pension Taxable in Michigan?

Contributed by: Kali Hassinger, CFP®, CSRIC™

In 2023, a tax relief bill many are calling “Lowering MI Costs” was signed into law that will eventually phase out state tax on pensions (both public and private) and other retirement income for many Michigan residents! As with many laws, however, the timeline for implementation and how and when this law will affect everyone can be confusing. Ultimately, the amount that can be deducted depends on when you were born and is adjusted incrementally over the next few years. I’ve outlined below what you can expect based on the year you were born. 

First, it’s important to note that there is no change for those born in 1945 and before. The maximum allowed deduction can still be claimed each year. The bill will also allow those taxpayers collecting a pension for service as a public police or fire department employee (including corrections officers and state police) to claim the same full deduction as those born in 1945 and prior. For 2023, that amount is $61,518 for single filers and $123,036 for joint filers.

For those born after 1945, however, the amount that can be deducted varies based on the year you were taken. By 2026, everyone will be allowed to deduct the full amount, just as those born before 1945 do now. 

2023 

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or, under the new law, they can deduct up to 25% of the max 2023 deduction amount (Single Filers: $61,518 x .25 = $15,379.50; Joint Filers: $123,036 x .25 = $30,759).

• For those born between 1953 and 1958: Single filers can deduct up to 25% of the 2023 amount of $61,518 ($15,379.50), Joint Filers can deduct up to 25% of the 2023 amount of $123,036 (30,759). Under previous law, there was no deduction allowed. 

• For those born 1959 and after:  No deduction allowed.

2024  

• For those born between 1946 and 1952:  Taxpayers will choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 50% of the 2024 maximum deduction amount.

• For those born between 1953 and 1962:  Can deduction up to 50% of the maximum deduction allowed in 2024.

• For those born in 1963 and after: No deduction allowed.

2025

• For those born between 1946 and 1952:  Taxpayers will get to choose between claiming the current exemption of $20,000 for single filers or $40,000 for joint filers, or under the new law, Single and Joint filers can deduct up to 75% of the 2025 maximum deduction amount.

• For those born between 1953 and 1966:  Can deduct up to 75% of the maximum deduction allowed in 2025.

• For those born in 1967 and after: No deduction allowed.

2026 

• For all taxpayers: Full Deduction will be allowed for everyone!

The Bill noted that as it is currently, the deduction available for joint returns will be based on the older spouse’s date of birth. If you have any questions about your pension or how this law will impact you, we are here to help! 

Source: House Bill 4001 (2023): http://legislature.mi.gov/doc.aspx?2023-HB-4001

Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

24800 DENSO DRIVE, STE 300, SOUTHFIELD, MI 48033 | 248.948.7900

Raymond James does not provide tax advice. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. Please discuss these matters with the appropriate professional. This document is a summary only and not meant to represent all provisions within the Lowering MI Cost plan.

Important Information for Tax Season 2023

Contributed by: Andrew O’Laughlin

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2023 Form 1099 Mailing Schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages.

• February 15 – Mailing of original Form 1099s.

• February 28 – Begin mailing delayed and amended Form 1099s.

• March 15 – Final mailing of any remaining delayed original Form 1099s.

Additional Important Information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2024, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts.

• Processing of original issue discount and mortgage-backed bonds.

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options.

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation.

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008).

• Changes made by mutual fund companies related to foreign withholding.

• Tax-exempt payments subject to alternative minimum tax.

• Any portion of distributions derived from U.S. Treasury obligations.

What Can You Do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2023.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

You can find additional information here.

And Don’t Forget…

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Andrew O’Laughlin, CFP®, MBA; is a Senior Client Service Manager at Center for Financial Planning, Inc.® He has the CERTIFIED FINANCIAL PLANNER™ certification.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.