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In This Edition
IRS Permits High-Earner Roth IRA Rollover Opportunity
Business Life Cycles and Transitions
Shifting Capital Gains to Your Children
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IRS Permits High-Earner Roth IRA Rollover Opportunity
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Are you a highly compensated employee (HCE) approaching retirement? If so, and you have a 401(k), you should consider a potentially useful tax-efficient IRA rollover technique. The IRS has specific rules about how participants such as you can allocate accumulated 401(k) plan assets based on pretax and after-tax employee contributions between standard IRAs and Roth IRAs.
High-Earner Dilemma
In 2017, the top pretax contribution that participants can make to a 401(k) is $18,000 ($24,000 for those 50 and older). Plans that permit after-tax contributions (several do) allow participants to contribute a total of $54,000 ($36,000 above the $18,000 pretax contribution limit). While some highly compensated supersavers may have significant accumulations of after-tax contributions in their 401(k) accounts, the tax law income caps block the highest paid HCEs from opening a Roth IRA.
However, under IRS rules, these participants can roll dollars representing their after-tax 401(k) contributions directly into a new Roth IRA when they retire or no longer work for the companies. Thus, they'll ultimately be able to withdraw the dollars representing the original after-tax contributions - and subsequent earnings on those dollars - tax-free.
An Example
Participants can contribute rollover dollars to conventional and Roth IRAs on a pro-rata basis. For example, suppose a retiring participant had $1 million in his 401(k) plan account, $600,000 of which represents contributions. Suppose further that 70% of that $600,000 represents pretax contributions, and 30% is from after-tax contributions. IRS guidance clarifies that the participant can roll $700,000 (70% of the $1 million) into a conventional IRA, and $300,000 (30% of the $1 million) into a Roth IRA.
The IRS rules allow the retiree to roll over not only the after-tax contributions,
but
the earnings on those after-tax contributions (40% of the $300,000, or $120,000) to the Roth IRA provided that the $120,000 will be taxable for the year of the rollover.
Alternatively, the IRS rules allow the retiree to delay taxation on the earnings attributable to the after-tax contributions ($120,000) until the money is distributed by contributing that amount to a conventional IRA, and the remaining $180,000 to the Roth IRA.
Under each approach, the subsequent growth in the Roth IRA will be tax-free when withdrawn. Partial rollovers can also be made, and the same principles apply.
Golden Years Ahead
HCEs face some complex decisions when it comes to retirement planning. Let our firm help you make the right moves now for your golden years ahead.
 Contact: Jeff Dvorachek, CPA
[email protected]
920.684.2545 |
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Business Life Cycles and Transitions
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Business life cycles can closely mirror our own progression through life, with one difference. If a succession plan is in place, a business can keep thriving after a business owner has transitioned into retirement or passes away.
While businesses always need to plan ahead, for start-up, growth, and perhaps mergers, planning for transition or succession may be the most important. Here are some abbreviated elements of transition planning.
- Start early. At least five years before you expect to transition or sell, increase your focus on elements of the business that will position you to obtain the maximum value and give your successor the best chance for continued success. Consider debt, cash flow and key performance ratios that can be managed in advance to make your business more attractive.
- Prepare the next generation of leaders. Whether you intend family members or employees to take over the business, have a written succession plan. The plan should detail what to expect and what is expected of them. This will minimize conflicts. Begin to pass on your knowledge and contacts so that your business doesn't lose value because you exit.
- Be realistic about value. Watch that tax-motivated transactions and reporting don't reduce your true value in the eyes of a buyer. Setting the right value will help your successor be successful.
- Plan for retirement. Plan for income, gift and estate taxes, along with future cash flow, to make sure retirement is everything you dreamed about.
Our hands-on and caring professionals have experience to help you capitalize on every step of your business cycle. We work with businesses of all sizes, and provide some of our highest-value services to businesses that are starting up, expanding, or transitioning to the next generation.
 Contact:
Art Raak, CPA
507.252.6670
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| Shifting Capital Gains to Your Children |
If you're an investor looking to save tax dollars, your kids might be able to help you out. Giving appreciated stock or other investments to your children can minimize the impact of capital gains taxes.
For this strategy to work best, however, your child must not be subject to the "kiddie tax." This tax applies your marginal rate to unearned income in excess of a specified threshold ($2,100 in 2017) received by your child who at the end of the tax year was either: 1) under 18, 2) 18 (but not older) and whose earned income didn't exceed one-half of his or her own support for the year (excluding scholarships if a full-time student), or 3) a full-time student age 19 to 23 who had earned income that didn't exceed half of his or her own support (excluding scholarships).
Here's how it works: Say Bill, who's in the top tax bracket, wants to help his daughter, Molly, buy a new car. Molly is 22 years old, just out of college, and currently looking for a job - and, for purposes of the example, won't be considered a dependent for 2017.
Even if she finds a job soon, she'll likely be in the 10% or 15% tax bracket this year. To finance the car, Bill plans to sell $20,000 of stock that he originally purchased for $2,000. If he sells the stock, he'll have to pay $3,600 in capital gains tax (20% of $18,000), plus the 3.8% net investment income tax, leaving $15,716 for Molly. But if Bill gives the stock to Molly, she can sell it tax-free and use the entire $20,000 to buy a car. (The capital gains rate for the two lowest tax brackets is generally 0%.)
 Contact:
Greg Kenworthy, CPA
608.793.3141
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