Our weekly roundup of tax-related investment strategies and client-related news.
From a tax perspective, there is no difference between taking a lump sum distribution from an IRA every year or making a monthly or quarterly withdrawal, according to Time. However, retired clients need to make the withdrawal before December 31, in order to avoid a 50% tax penalty, in addition to regular income tax, on the distribution. However, clients with a more complex investment portfolio may be better off taking quarterly withdrawals. “You can’t avoid the taxes, but keep what you don’t need tax deferred for as long as you can,” an expert says. -- Time
Workers and business owners who earn over $131,000 can use at least three legal loopholes to open an otherwise disallowed Roth IRA, according to U.S. News & World Report. For workers, the simplest strategy is to contribute the maximum amount to a traditional IRA and then convert the account to a Roth IRA. The same strategy applies to business owners although it is best to begin with a SEP IRA rather than a traditional IRA. Another way is to roll over after-tax contributions from a 401(k) to a Roth IRA. -- U.S. News & World Report
Clients should be reminded that canceled debt could be taxable, and they should be made aware of Form 1099-C, according to Motley Fool. Creditors will send the form to the IRS, if a debt worth more than $600 is forgiven within a single year. But, not all forgiven debt is taxable—such as debt discharged in bankruptcy, some student loans and the debt of borrowers who are deemed insolvent. -- Motley Fool
A qualified longevity annuity contract allows a client to divert up to $125,000 from an IRA, although it may kick the client into a higher tax bracket at the annuity’s start date, according to Forbes. This QLAC strategy is a better option if the funds are intended for non-spouse heirs, because it leaves the heirs zero income tax on the assets. However, if the $125,000 is intended for a younger spouse, then diverting the funds to another taxable account, against which the recipient can claim deductions due to investment losses, makes more sense. -- Forbes