Imagine the busiest, most complicated freeway intersection that you've ever experienced. Unfortunately, that scene serves as a pretty good visual of the tax situation for 2012-2013. With old laws sun-setting or exiting and new laws merging, we have potential for epic gridlock in U.S. tax policy. However, as with any traffic jam, those who maneuver the lane changes effectively may benefit by being prepared.
As a financial professional, you can be a GPS tracking device for your clients by providing them tools they can use with their tax advisor that can help them through the complicated maze of tax law changes. An effective way to spark this discussion may be to introduce the following list of eight tax topics that your clients can then utilize with their tax advisor.
If appropriate, a tax discussion can enhance your professional relationship with your clients so they consider you as a knowledgeable financial professional interested in their overall financial well-being. It can also serve as a fact-finder to help you better understand the client's current situation as you explore each topic. Finally, after the conversation you should be sure to recommend that your client meet with a tax advisor to further discuss tax topics -- and you can also make appropriate product recommendations for those strategic financial choices that your client decides to pursue after consultation with their tax advisor.
1. Are you considering converting from a traditional IRA to a Roth IRA?
For clients who are considering a Roth IRA conversion, sooner may be better than later. Federal income tax rates may increase in 2013. Also, starting in 2013 there will be a 3.8 percent Medicare surtax on higher-income client's "net investment income."
Although a Roth IRA conversion is not itself subject to the surtax, it may push a client's modified adjusted gross income over the threshold amount, causing a portion of the client's net investment income to be subject to the 3.8 percent surtax. Higher income is generally a married couple filing jointly with income exceeding $250,000, filing separately with income exceeding $125,000, or an unmarried individual with income exceeding $200,000.
Please remember that converting a traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. It is generally preferable that a client have funds to pay the taxes due upon conversion from funds outside of the IRA.
If the client takes a distribution from the IRA to pay the conversion taxes, there are potential consequences, such as an assessment of product surrender charges or the additional 10 percent federal tax for early withdrawal. Be sure to have your client consult with a qualified tax advisor before making any decisions regarding their IRA.
2. If you've taken your required minimum distribution, what can you do with it?
Year-end is always a good time to talk to clients who are over age 701/2 and have required minimum distributions coming from an IRA. Your clients could consider buying a life insurance policy if a death benefit is needed and they are interested in leaving a legacy to their beneficiaries. Or, they may wish to purchase a nonqualified annuity contract and get tax-deferred growth of potential earnings if that is appropriate for their situation.