Category: Tax Planning.

Have you ever heard of the Setting Every Community Up for Retirement Enhancement Act, better known as the “SECURE Act” affecting your 2020 tax return?  Well, you might want to pay attention because it is now law and probably affects you!

This is another round of interesting changes to the U.S. 2020 tax code. The rules regarding Required Minimum Distributions (RMDs) have changed. For those that do not know, these rules dictate when and how much people must withdraw from their retirement accounts to avoid tax penalties.  Beginning Jan. 1, 2020, the new law moves back the age at which you must begin withdrawing money from your qualified retirement accounts from age 70 ½ to 72.  If you turn 70 ½ in 2019, you will still need to take your RMD for 2019, no later than April 1 of 2020.  If you are currently receiving RMDs (or should be) because you are already over age 70 ½, you must continue to take RMDs.  Only those who turn 70 ½ in 2020 (or later) may wait until age 72 to take their Required Minimum Distributions. So, for people who turned 70 ½ in 2019, there is no change.

Beginning with the 2020 tax year, the law will allow you to contribute to your traditional IRA in the year you turn 70 ½ and beyond, provided you have earned income.  You still may not make 2019 (prior year) traditional IRA contributions if you are over 70 ½.  This plays well for both business owners and those who work past 70.

Upon the death of the account owner, distributions to individual beneficiaries must now be made within 10 years.  This is a big change from allowing them to take it over their lifetime (a.k.a. stretch). There are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner.  Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.

The new law also allows penalty-free withdrawals from retirement plans for birth or adoption expenses up to certain limits. The new rule allows each parent to use the $5,000 exemption, which means a couple could take up to $10,000 out penalty-free if they each had separate retirement accounts. While new parents can opt to repay the withdrawal amount, this is not a loan and does not need to adhere to the 401(k) repayment rules.


Over the past few months, I’ve been listening to clients, laypersons and politicians talking about how well the economy has done because of deregulation and tax cuts.  While I believe that taxes needed to come down and there were some cases of over-regulation, I’ve been a skeptic of tactic and results.  As a skeptic, I thought that I ought to research a bit of this myself.

Three things came to mind as constant sources of bragging rights.  Gross Domestic Product, Employment and the stock market.  Looking for some quality charting on the subject is not hard.  The Bureau of Labor Statistics, BLS, puts out labor analysis at least annually. The Bureau of Economic Analysis has charts on GDP quite regularly.

Why charts?  Charts depict trend and I believe that we’ve been in a long-term trend that cannot be credited to tax cuts or deregulation.  If tax cuts were fueling growth in any of the above the charts would display the rate of change in an upward steepening of the slope.

The first graph is a BEA chart of the GDP from 2008 to present.  Note that just a bit after 2009 marks the beginning of the Obama presidency, just after 2017 marks the end of Obama and beginning of Trump’s presidency.  If a tax cut was driving productivity we should see a change.  What we’re looking at is a continuation of the trend.

FRED Graph

Moving on to employment, I’ve pulled two current charts.  The first is simply the US Civilian unemployment rate from 1990 to 2019. The last three recessions are marked in light blue.  Note that unemployment bottoms and starts increasing just before a recession.  Since a recession is defined as an economic decline that is identified by two successive quarters of decline in the GDP, it only makes sense that we have a couple of quarters in an uptick in employment prior to the recession being declared.  My bigger point is that between 2010 and today, the negative slope of unemployment has not changed much.  Here are some BIS charts (BLS employment Charts)


The same goes for Unemployment by ethnicity:


Now, let’s compare market performance based upon the S&P 500 index to the aforementioned charts. Here are some things that I believe are of note.  The chart begins essentially the beginning of the Obama years and shows a steady rise through the election in November of 2016 (1st vertical bar).  From President Trump’s election, we continue a nice steady rise to the next vertical bar in December of 2017 and on until the first of 2018.  That marks the passage of the Tax Cut and Jobs Act of 2017. 

S&P today

Many years ago, I heard a quote or statement that presidents get way too much credit and way too much blame. But, things they do can affect us and our retirement accounts.  Look at the right side of the last graph (in fact, all graphs).  After the tax cut, stocks are down.  Neither the GDP growth rate nor the employment growth rate seems to have changed from their positive slopes.

Many believed that a big corporate tax cut would make us more competitive in the world.  My contention is that we have always been competitive.  Unless we alienate buyers from us and send them to other sellers, we’ll always be competitive.  This unfortunate lesson might be unfolding in the soybean industry right now.

I contend that the timing of the cut was ill-timed.  We were sub-5% unemployment and growing our GDP.  That hasn’t changed.  That sort of cut would have been better in 2009 when we were in a recession and had a 10% unemployment rate.  The money hasn’t gone toward hiring new employees, bring part-time employees to full-time or much corporate infrastructure.  The money has gone to stock buybacks which prop up corporate share values of officers, board members, and major shareholders.  As I was wrapping this piece up, I saw a Fortune article that confirmed my opinions.

Ronald Reagan cut taxes twice but increased them 11 times.  Most agree that the 1981 cuts helped pull us out of a recession that began under Carter.  In other words, a well-timed stimulus.

I’m sure we will be waiting several years to determine if the 2017 Act will perform as advertised.

A Story of 403b v. 457

People who work in the public non-profit sectors may have a choice in the Defined Contribution Plan (403b or 457)from their employer.  We’re often asked which is better or what makes the most sense for me and my family.  Like most things in the financial world, “It depends!”

Defined Contribution plans come in many flavors.  But, for public employees, it basically boils down to 403(b) Plans, 457(b) Plans (both shortened herein). Federal employees have access to Thrift Savings Plans (TSP). I’m going to explain the features and benefits of each of the first two plans and save TSP for a separate article.

A 403b plan is typically offered to government employees, employees of privately owned nonprofit businesses and churches. This would include government employees at almost any level including public school employees. Like the well-known 401k, 403b plans are a type of “defined-contribution plan”. All of these plans allow employees to shelter money on a tax-deferred basis for retirement. You put untaxed money into the plan and it grows “tax-deferred” until withdrawal. These plans became law in 1958. Originally known as tax-sheltered annuities (TSA) or tax-deferred annuities (TDA) plans, they could only be invested in annuity contracts at that time. These plans are most commonly used by educational institutions.  I can remember my mother-in-law having those as late as the 70’s.

457b plans are offered to state and local government employees and are a form of deferred compensation.  In other words, you defer your current compensation to a future date.  In addition, you can invest the deferred compensation and grow it tax-deferred until you withdraw at a future date.

Both plans have two types of deferral:

  • Non-Elective Contributions are contributions made by the employer in the employee’s name.
  • Elective Deferrals are contributions determined by the employee and withheld from their paycheck.


  • Both plans offer deferral of current taxes and tax-deferred growth
  • 403b plans have a maximum employee contribution of $18,500 for 2018
  • 403b plans can have additional matching funds added by the employer raising the aggregate total to $55,000/year in 2018
  • 457 plans have a maximum total contribution of $18,500 for 2018
  • Both plans have Catch-up provisions for people over 50.  Allowing an additional $6,000/year
  • 457 plans are not ERISA governed plans and have no early withdrawal penalty
  • 457 plan allows for a double catch-up ($12k/yr.) for people who have under contributed over the life of their plan
  • Many 403b plans have loan provisions. The maximum under the law is $50,000 or ½ of your account (whichever is less)


  • 403b plans have a 10% tax penalty for pre- 59 ½ distributions (in most cases)
  • Both plans require a minimum distribution (RMD) each year after the year you attain 70 ½ years of age. The percentage of distribution goes up each year after that.
  • You must take your RMD whether you want to or not
  • Not taking RMD subjects you to a 50% tax penalty on the amount you did not withdraw. OUCH!!
  • RMDs can subject you to the extra taxation of Social Security Benefits
  • You may have limited investment choices (more later)
  • Withdrawals are treated as ordinary income when much of the growth is actually capital gains


All of this is informational and not an attempt to dissuade anyone from joining a plan.  These plans are probably the best any of us will see for saving toward retirement.  As I said earlier, the plan you pick will depend upon many things, including Marital Status, age, health, prior savings, future plans (ie: financial plan), spouses access to a plan, intended retirement age, part-time work in retirement and more.

Your employer may offer both plans.  But, inside each plan is a host of offerings from various annuities to brokerage plans.  Each of these plans has their own pros and cons.  Wading through this muck often requires professional advice.

“Plan Early and Plan Often!”™

The IRS just gave guidance that a “nondeductible” IRA may still be converted into a Roth IRA.  We have had our concerns that the new tax codes might have changed the IRS interpretation.

Until 1997, taxpayers over a certain level of income were no longer able to deduct their IRA contribution.  Many advisors thought that the rule was that the higher income earner could not open an IRA, which was incorrect. Note, that they were still able to make the contribution but simply lost the ability to deduct them.

Why would anyone open an IRA that they could not deduct?  Well, it still allowed tax-deferred growth after it was opened. It was a “tax-deferred annuity” that could be invested in any way that an IRA could be invested.  With the creation of a Roth IRA (1997) and the Roth conversion rules that developed afterward, the planning community spared no time in putting two and two together. Now we could convert the “excess” IRA contribution that had never been deducted into a Roth IRA. The future growth would be “tax-free” instead of “tax differed”.  Some refer to this as a “Back-Door Roth”. This allowed a way for Roth contribution for people who would previously not have been allowed to contribute.

With some of the changes in the new tax code, the planning community wondered if that ability had been forfeited.  The ruling came down in favor of allowing that to continue.

So, at least that part of the planning race is over until 2025!

The changes to the tax code have left bits and pieces like this for clarification that will take years to decipher.  Even grander in scope are new sections of the code like 199A, and new terms of art like “QBI” (Qualified Business Income) that will need to be further defined.  That endeavor will take so much time that several years of business returns will be filled without reliable guidance, so battles over letter audits will likely continue until 2025 and after.  Then, it all sunsets and goes away. We are back to the 2017 tax code. Right about the time we actually understand what we’re doing and reframe our business tax practices.

What should the Trump tax code be nicknamed?  “Finish Line 2025”!  Or, “The Constant Confusion of the American Taxpayer Act”.

So, if you have never used a tax planning firm in the past and have just used tax preparation firms, you may want to rethink that. If you need proof, consider that H&R Block just announced the closing of 400 offices and their stock has dropped significantly in value as a result.

“Plan Early and Plan Often!”™

Let’s say, you’re already contributing the maximum amount to your 401(k) and you’re wondering what else you could possibly do to save for a comfortable future or even early retirement?  What are your retirement options? Depending on your situation, there are several options.  Some are driven by your taxable income and others are not.

Retirement Option One:

The common option is a ROTH IRA.  But, that isn’t really new.  People have known about ROTHs for years.  This is a type of qualified savings account in which you deposit “after-tax” money, it grows tax-free and you are not taxed upon withdrawal.  Unlike your 401(k) or IRA (and others), you are never “required” to withdraw. You can also withdraw your basis prior to age 59 ½ with no penalty.  This is greatly simplified but covers the basics of a ROTH account.

Running the calculations to their conclusion, let’s say that a 40-year old put $500/month into a Roth until age 65 and earned 7% on the investment.  That would be 300 payments of $500 for a total of $150,000.  A couple of clicks on the old financial calculator and we find that this account would hold $405,000!  That’s absolutely awesome!

Most people become more conservative when they retire.  So, let’s assume a 5% ROI after age 65.  Also, this saver wants to start reaping the rewards of their 25-year savings plan by taking $30,000 in tax-free income from the account.  Nothing abnormal with this.  How long until the account spends to zero? This account carries to age 87 or a total of 22 years.

What happens after that?  They take a $30k/year pay cut! The account is exhausted.

Another Retirement Option:

What if there were another type of account that acted in a similar way, but with other benefits? Imagine depositing the same amount into this new account for the same period and actually having about 44% more tax-free income? Imagine that while this happens your account is subject to much lower risk!

Looking at the first ROTH account, can you imagine that if 2007/9 hit 2 years before you retired?  To recap that period:

  • The SPY (a good S&P measurement) peaked on 10/15/07 at 157.52
  • 17 months later, it bottomed at 67.73
  • Total loss, if you pulled out at the bottom, 57.13% OUCH!!
  • The SPY next passed 157 on 4/15/13
  • Your recovery time was just over 4 years

Assuming you bought and held, your $500k account would now be worth $214,989. There are other ways to grow the money without taking on that potential for loss.  There may be other potential benefits for you as well.  As they are very specific to you as an individual, I’m not going to go into that discussion in a broad forum like this.

Each of these options has a utility based upon the needs of the individual.  Each is a tool and some are better while others are worse.

Is the right tool in here?

The thing about tools is that you should always choose the right tool for the job! Contact us is you have any questions.


“Plan Early and Plan Often!”™

People’s Opinions Matter

The talking heads on CNBC and some of the other more neutral media outlets are talking about the signs we are already seeing of increasing confidence in the economy from the tax cut. This is the highest level since November of 2000. People are starting to see a little more in their paychecks this week, which brings a nice warm feeling this time of year.   For many working Americans, even $30/paycheck can be the difference between eating out, buying a new shirt…or doing nothing!  We seem to have been fighting off a stock market correction since the lows of Feb 9th.  Many analysts believe that businesses have more money to feed the economy and resist the correction. Others are concerned about the possibility of up to 4 more increases in the Fed Rate.

The reason that we taxpayers need to do a self-check on the happiness scale is that the bad news has been so bad for so long that it doesn’t seem to get the attention it deserves these days. Things are getting better in the tax code, but if this doesn’t work….

What do we mean?

These tax cuts are a “bet” that we as a country are making.  The “bet” is that since we can’t seem to curb our spending at the federal level, we will be able to grow our way out of all of our government obligations through a larger tax base. The tax cut was $1.5 trillion.  At an average tax of 20%, we need to grow the economy $7.5 trillion to break even on the cut. The 2016 GDP was $18.624 trillion, meaning we need to grow the economy by 40.27% to break even. Ahh, the magic of numbers!  Only a politician can make those numbers meet.

However, we have other issues to compound this problem. We have 20+ trillion dollars in federal debt. Add the promised nearly 13 trillion dollars (some say more some say less) out in future Social Security obligations. Now, factor in another 25-40 trillion (again, some say more, some say less) in unfunded expected health care obligations through Medicare and Medicaid.   How much more do you think we will need to grow our income to cover all of this?

Does anyone else see a problem here?

What if you and your spouse maxed out all of your credit cards, applied for more credit cards and maxed those out as well? Then to fix this, borrowed money on your house with a balloon mortgage note, then borrowed money from your parents. Then you solve the problem by saying “We’ll reduce our revenue and hope for the best!”

Don’t misunderstand, stimulating the economy is a very good thing! Putting more spendable dollars in the hands of Americans will do just that.  The best solution would be to spend less at the same time we are achieving more growth, but that’s not looking possible with today’s political process.

Toss in the towel?

Should we all just toss in the towel and give up?  No, not at all.  Just look down the road to the finish line in 2025, when the tax cuts are expected to expire.  If we have paid down enough debt to solve these problems, or at least make them more manageable, we will all be happy!  However, if instead, we are still in the same spot or worse, it will be time to cut the leg off the patient to save his life.  What will that look like?  Possibly a drastic reduction in all welfare programs. Remember, Social Security, Medicare and Medicaid are essentially welfare. We could see increasing the Social Security retirement age to 70, 75, or 80?  End Medicare as we know it, move the enrollment age back 3-4 years, or make premiums 40% of income for everyone over 65?   No one believes these things would be allowed to happen.

I certainly do not believe politicians are capable of making hard decisions.

It will likely be more likely this. All 401K, IRA, 403B…any retirement plan or retirement savings will need to be taxed at the same rate they were when you deferred them with a minimum rate of, let’s say 20%.  This means no 0% tax, no 10% tax, and no 12% tax.  Those are all set to expire at finish line 2025 and go back to 2017 rates.

So, what should YOU do?

Granted, it’s all opinion.  One possible goal will be developing a plan to expose all of your pretax accounts to taxation in a strategic manner over the next several years and before the finish line is reached in 2025.  Then, when the next sweeping tax changes happen, you would have no pretax dollars left. You could have only “tax-free” dollars that have already been taxed by the government, and cannot be taxed again!  If you don’t get yourself to “no pretax money” before 2025, some guess that the US government will do it for you.

Go see a tax planner, today!

“Plan Early and Plan Often!”™

Tax Rule Changes

With regards to your tax, mortgage interest deduction is always claimed on schedule A of your federal return. So, the first observation is that many people will simply no longer get any value from their mortgage interest because the new standard deduction is twice as much as before.  In 2018, the new tax rule dictates that second mortgages and Home Equity Lines of Credit (HELOC) are no longer deductible.  When “HELOC” interest became deductible they were not so common and had smaller balances but over the last several years they have become a popular way to fund the giant college spending needs for many, and for others, they have become a popular way to finance vacation homes and even investment property.

So, what can you do to fix this problem?

First, relax! The changes are not necessarily going to mean an increase in taxes at all.  In fact, many people may see a lower tax bill because of the increased standard deduction.   However, anyone with a large amount of HELOC debt should sit down with a tax planner and look at alternatives.  People who used HELOCs to pay for college or are currently using it because they felt they would not qualify for student loans may now want to find a college planner and really try hard to find that kind of loan. Educational loans are still deductible on a part of the tax return that is not connected to schedule A. So you might still enjoy that deduction as well as the big increase in the standard deduction.  People who used it for investment property might go and seek out a commercial mortgage to replace the HELOC. Even with generally higher rates and closing costs it could be beneficial.  Moving the interest to a line expense on your Schedule E (investment property schedule) and off your Schedule A might more than make up for the cost associated with getting the new loan.

There are also many lesser-known but very smart bank products out there to replace both a traditional mortgage and HELOC and wrapping them into an “All in One Loan”. This is a primary mortgage and still fully deductible but also leaves HELOC like access to equity.  That access could be used for either investment, for college funding, or whatever you fancy.  More importantly, it applies payments to principle first, before interest, helping people to pay off a home potentially much faster than a traditional mortgage without making larger payments.   See for additional information.

Lastly, the mortgage interest deduction is now limited to the first $750,000 in principal loan amount (it was previously a $1,000,000 limit).  That’s not a problem for people who had already established their mortgage before December of 2017. They are “grandfathered”.  Going forward, it is simply “buyer beware” that $750,000 is the new deduction limit.  If you can afford a million dollar plus home then you are likely smart enough to find a creative way to buy the mortgage down to $750,000 loan.  You could also take out two loans, one for $750,000 and another for the balance. The tax law does not prevent you from buying a 1.5 million dollar home. You simply cannot get a tax deduction for any mortgage above $750,000.

As I write this I can hear the wheels turning. UNDER NO CIRCUMSTANCES would it ever make sense to take money from pre-tax accounts like 401(k)s to pay down mortgages or fund refinances or purchases. The lack of a deduction would be a small penalty in comparison to the financial suicide of taking retirement money out while working.

So, what is the summary of the information dump above?  Go see a Tax Planner!

“Plan Early and Plan Often!”™


Soon after the trick-or-treaters are done banging on your doors its time for fall wrap up. Remaining lawn chairs, storm windows, et cetera, are dealt with ahead of winter except for places here in the Southwest.  Here in Scottsdale, winter is just a nice break from the heat.  In 2016 we had 30 days of 110° or higher and average 110 days of 100° weather. Crazy, isn’t it?  But, for a majority of the country that lives in the Snowbelt, November means batten down the hatches. The same is true for finance and tax planning. Many people start looking at holiday shopping budgets and year-end projections to see if they are on target.  Tax 911 calls usually start in early December.

I’m going to talk about the most used tax planning concept in the month of November and December, charitable planning.  If you’re a regular contributor to charities, good for you. There are many ways to do this beyond simply writing a check to a charity and saying goodbye money.  Savvy investors often create “Donor Advised Funds” (DAF) with a financial planner.  It’s a simple subset of a 501c charity that allows you to name your fund. In many cases, you can control the investments inside your funds, or at least have some say, and then finally, make recommendations to the 501c about where to send that money.  The fund normally follows your recommendations. The only caveat is that the charity must qualify by IRS rules.

Here is an Example:  The Smiths give $10,000 a year to their church and several local charities that they care about.  Rather than simply writing those checks, Mr. and Mrs. “Smith” decide to use their own personal philanthropy as a learning experience to make sure their children understand the importance of giving. Perhaps planting the seeds so that their children don’t become too entitled.  They also asked their children what charities they would like to give to and why. Then, instead of giving money directly to their church and charities, the parents create the “Smith Donor-Advised Fund”.  They name themselves as the trustees of the funds, and their children are the successor trustees of the fund.

With a DAF, the family gets to name charities that it wants to donate to today. In addition, they state the purpose of their charitable giving as a guideline for the document and build in flexibility for the future. The trustee can add or subtract churches and charities. Therefore, if a charity stops needing funds because it’s endowed by another greater charity or it merges with another charity or for any other reason, they can instantly change recipients of the Fund.

Most likely, even though it’s been happening for years most children are truly unaware of the gravity of the size of the gifts that their families give. Soon they will be talking about the fact that they’ve started a permanent lifelong charitable foundation that will be in effect their entire lives and their children’s lives, and tell their children that someday they’ll be in charge of this charity and they’ll have to make the decisions that you’re making currently today.  The children can then help decide what types of charities to fund.

Here is the best part; the money put into the DAF will provide a tax deduction even though the actual gifting to the charities might not happen in the same calendar year.  A $10,000 deposit in the family Donor-Advised Fund gets treated as a $10,000 deduction on their schedule A in the year it is made.

Contributions can be many different types of assets:

  • Cash
  • Highly appreciated stock
  • Mutual Funds shares
  • Real Estate
  • Shares in privately held businesses

You potentially could contribute highly appreciated stock or real estate at its current value and get a deduction of up to 50% of your AGI in the year of donation while avoiding having to pay tax on the accumulated capital gains.  Imagine donating stock in which you originally invested $50,000 with a current value of $250,000.  You could get up to a $250,000 charitable deduction and avoid capital gain tax on $200,000 in accumulated capital gains.  This could be a significant tax windfall.

Much tax planning these next weeks will be charitable in nature. Talk to us about a Donor-Advised Fund that you can name, guide, and control the assets in, and take your family philanthropy to the next step.

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