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Joint With Rights of Survivorship or Joint Tennants in Common

By Justin Fundalinski, MBA | September 21, 2017

JTWROSIn general , there are two ways to own property with somebody else and how you title it makes all the difference. Maybe over the years you have seen the acronyms JTWROS and TIC on an account statement, and maybe you even know what they stand for. But, do you know what happens to property titled as such when you die? This article focuses on sorting out the very subtle yet important technicalities between these two Joint ownership registrations.

JTWROS and TIC – What do these acronyms stand for?

JTWROS stands for Joint Tenancy with Right of Survivorship and TIC stands for Tenants in common. A couple of letters make all the difference! Let’s take a look at ownership rights, how the property is treated when one co-owner dies, and how basis is stepped up for whoever inherits this property.

Ownership rights:

JTWROS gives each co-owner equal rights to the entire asset or account. That is, both parties own 100% of the property (it’s not split 50/50). If the asset is sold, the consent of both parties is often necessary. You cannot just cash out 50% and ask for a check to be made out directly to you.

On the other hand, TIC assigns an interest percentage to each owner. That is, one party can own 30% and the other 70% (or whatever split is appropriate). You can sell your portion of the asset independently or you could contribute more to the asset independently. As you contribute to or sell parts of the asset your ownership interests adjust up and down pro-rata.

When you die:

When you die the titling distinction becomes very apparent. With JTWROS assets the property is not disposed of via your will or state intestacy law. It is passed directly to the surviving owner(s) without going through probate, and the surviving owner then owns 100% of the asset/account. For my tax geeks out there, the amount of the property that is passed through the gross estate for estate tax purposes depends on whether or not the joint owners are spouses. If they are spouses then 50% of the asset automatically passes through the estate. If not, then it depends on the decedent’s percentage of contribution.

TIC is very different. The assets are disposed of via your will or state intestacy law and must go through probate. The property is not passed directly to the other property owner and will not be passed to the other owner unless your will or intestacy law says so. Since there are independent ownership interests, only the portion attributable to the decedent goes through probate and is eventually inherited based on what the will or intestacy law dictates. Of course, this share of the decedents account is passed through their gross estate for estate tax purposes.


Basis is essentially the cost of the asset that is not subject to taxes when you receive it back. In a very simplified example, if I bought a rental house for $100,000 and then later sold it for $150,000 I would be taxed only on the $50,000 gain and my $100,000 that I originally contributed (it’s basis) is received back tax free. However, if instead of selling the property that day I died then my beneficiary would receive a “step up” in basis bringing the basis of the property up to $150,000. Now my beneficiary could turn around and sell the property for $150,000 and not pay taxes at all. Easy enough right? Well, often is much more convoluted than this and account titling plays its hand here too.

Reflect back to the previous paragraphs that touch on how much of the property passes through the decedent’s gross estate. This is your guiding light regarding how much of a step up in basis is received. If it passes through the estate, it receives a step up in basis.

JTWROS property’s step up in basis depends on whether or not the owners are married. If married there will be a 50% step up in basis. If not, it is based on the decedent’s percentage of contribution.

TIC property receives a step up in basis depending on the ownership interest percentage of the decedent.

In conclusion:

Titling matters a lot! If you don’t know the ins and outs of ownership, what happens when you die, and how basis is affected you could be putting yourself or your heirs and a major disadvantage due to a silly titling mistake. We recommend you seek professional guidance when making/reviewing such decisions.

A Tax Perspective on Rental Properties

By Justin Fundalinski, MBA | July 20, 2017

rental propertiesWith the real estate market showing strong growth year over year in Northern Colorado we have seen many clients purchasing rental properties to hopefully benefit from higher rents and rapid capital appreciation. This month’s article is not going to dig into the viability of such investing; rather it will overlay a perspective on how rental income, depreciation, and capital appreciation of rental properties affect one’s taxes now and later.

Rental Income and Expense Deductions

From the many tax returns I have reviewed or prepared there is a common theme. That is, because large depreciation expenses can be deducted against the income generated from rents, a hefty portion – if not all – of the income generated appears to be received tax free (and quite possibly creates a loss).  Of course, it is narrow minded to believe that you will never be taxed on this income and understanding the effects of how this effective tax deferral works may have you second guessing the alleged benefit of these so called “tax free rents.”  

How Depreciation Works

When you write off depreciation against your income you are essentially taking a write off at whatever your marginal tax rate is that year.  What you are also doing is lowering your basis in the property which will later be taxed at a special capital gains rate (not the normal 0%, 15%, or 20% rates) when you sell the property.  This special capital gains rate is called “unrecaptured section 1250 gains” and its rate is 25%.  So, what this essentially means is that any depreciation deduction that you write off on the building structure you are locking in a future tax rate of 25%.

 I would venture to say that an appropriate thought process on this tax deferral is similar to how we think about Traditional IRA or 401(k) contributions (sans the tax deferred growth factor).  If you are going to take a deduction from your income now to save on taxes the goal should be to realize the tax hit at a lower rate in the future than what it could be taxed at currently.  With the special capital gains rate on the depreciated portion of the structure at 25% that may be a difficult hurdle to overcome.  However, depending on other income that you are generating from employment or other sources this may be no hurdle at all.

Side Notes 

On a side note, I can feel that a savvy reader may be saying, “Well I don’t have to take the depreciation deduction and I can realize the income now at my current lower tax rate.”  Unfortunately that thinking is flawed.  The IRS assumes that the basis in a rental property is reduced at the maximum allowable depreciation amount; not at the rate at which you choose to depreciate.  

On a secondary side note, for any rental properties that were depreciated at an accelerated rate (that is purchased before 1986 and did not use straight line depreciation) there is a different set of “recapture rules.” It gets ugly to explain and does not apply to most people now that we are in 2017, but if you do have questions let me know.

On a tertiary side note, I will say that due to lending opportunities in the real estate market, I could make compelling arguments that using the rents to cover lending expenses solely for the sake of taking advantage of capital appreciation (and ignoring the income aspect) could be a viable strategy. However, that is not the topic of this article and warrants much more discussion around the pros and cons (so please to don’t take any aspect of this article as a recommendation for or against rental properties).

What about appreciation?

Capital appreciation (or any increase in value that you have above and beyond the original purchase price) is likely what most people are seeking right now when they purchase rental properties. The taxation on capital appreciation is just like any other capital gain.  You will be taxed at normal 0%, 15%, or 20% capital gains rates depending on what your total adjusted gross income is. In most cases that I have seen, some of the gain is taxed at 0%, the majority of the gain is taxed at the 15% rate, and if it is a very large gain or there is other significant income factoring into the equation some of the gain is taxed at 20%.  Keep in mind that this will be different for everybody and may significantly vary.



Don’t Overlook These Retirement Risks

By Justin Fundalinski, MBA | June 20, 2017

retirement risksI was perusing through the introduction of Wade Pfau’s (a well published, well researched, retirement planning guru) book on Reverse Mortgages and I was just in awe as to how precisely his principals matched up to our office’s in regards to retirement planning. That said, he concisely addressed the retirement risks that that we at the office are ever challenged to overcome for our clients. In this month’s newsletter I wish to share his bullet points with some additional perspective.

Retirement Risks [1]:

  • Reduced earnings capacity
  • Visible spending constraints
  • Heightened investment risk
  • Unknown longevity
  • Spending Shocks
  • Compounding Inflation
  • Declining cognitive abilities

Reduced Earnings Capacity:

We relate this to human capital (skills, knowledge, or experience) in the office, but reduced earnings capacity is pretty concise. The risk here is fairly clear.  Once you retire (or age) it will be much more difficult for you to use your human capital to generate earnings or return to the labor force.  The real risk is that you cannot respond to poor portfolio returns or unexpected expenses by earning income.  In some cases human capital can be included from a planning perspective as a buffer to other retirement risks because it may be easily capitalized on or used in consulting capacities; however it is very rare that we see such cases so don’t count on it.

Visible Spending Constraint:

We tend to relate this to the concept that retirees need to move from an accumulation portfolio (a portfolio that does not have any outgoing cash flow and has significant time to recover from market downturns) to a distribution portfolio (a portfolio that is constrained in growth by lower risk capacity and risk tolerance, outgoing cash flows and how disruptive distributions can be to a portfolio that is experiencing negative returns, and the need to stretch withdrawals for an unknown period of time). The risks of this come down to a few things:

  • Growth is constrained
  • Reducing your spending due to market conditions is difficult if not impossible
  • Generating sustainable income is not addressed in traditional accumulation portfolio management styles
  • Because of outgoing cash flows, a retiree’s portfolio simply does not recover when markets recover from downturns.

Heightened Investment Risk:

This is synonymous for sequential risk.  Sequential risk is the risk of receiving low or negative returns early in retirement while withdrawing from a portfolio for income needs.  This is a very well-studied concept and the effects are sequential risk are outstanding.  Think of it this way – a well portfolio may have significant average returns over a 30 year period (much of what history has shown us).  However, a portfolio that has poor returns early on may be on a catastrophic path to zero, compared a portfolio that has the same average return but poor returns in the middle or end of its timeline.  In a nutshell you can think of it this way; when you are withdrawing from a portfolio the timing of returns matters way more than your average return.

Unknown Longevity:

We talk about this a lot. It is really hard to make a plan when you don’t know how long somebody is going to live for. Pfau sums this up quite well when he reminds us half the population is going to outlive their statistical life expectancy, and that the statistic is only increasing as medical and scientific procedures become more effective at prolonging life. Appropriate income planning tends to be a great hedge to this significant unknown.

Spending Shocks:

It is really important retirees maintain a preservation of liquidity in the event of an unknown large expense. We all know the possibilities of emergency medical or long term care expenses, a divorce, a family emergency, or an act of god are real.  Think of the risk like this, a retiree might have a great pension that meets all of their day to day retirement needs and more, but if they don’t have a nest egg on the side any spending shock could derail what seemed to be an ideal retirement.

Compounding Inflation:

This is a personal favorite of mine. Not that I like the effects of compounding inflation, but that to this day every analysis that we do gives me a little shock when we visualize the effects of compounding expenses. I get it when Einstein called it the “eighth wonder of the world” – for me, it is amazing to look at no matter how many times I have seen it before. Combine compounding inflation with some of the other risks mentioned above (specifically sequential risk and a constrained portfolio) and the let’s just say the risks compound upon themselves.

Declining Cognitive Abilities:

We all know that as we age simple concepts or tasks become more difficult to understand or do. Apply this to managing a distribution portfolio along with day to day finances and you or your surviving spouse become vulnerable. You simply (but potentially catastrophically) may not be able to manage your finances, but more than that you likely you will be exposed to (or worse become a victim of) fraud or theft. Knowing this and having a plan is place is a very important part of retirement planning.

If you are interested in learning more about how we manage and hedge this risks in retirement please reach out to the office and just ask!

[1] Pfau, Wade D. “Overview of Retirement Income Planning.” The Retirement Researcher’s Guide Series, Reverse Mortgages, How to Use Reverse Mortgages to Secure Your Retirement.

Using a HELOC to Lower Your Health Insurance Premiums

By Justin Fundalinski, MBA | May 24, 2017

health insuranceWith the House passing a bill to replace the Affordable Care Act (better known as ObamaCare), an excellent cost savings strategy for retirees under the age of 65 could be lost. However, there is a long road for the new health care bill before anything is finalized (or even approved by the Senate for that matter). The strategy discussed this month uses the rules set forth by the Affordable Care Act to maximize the Premium Tax Credit (a tax credit to that is used to offset healthcare premiums for those who purchase health insurance in the “Health Insurance Marketplace.”)

What Exactly Is The Premium Tax Credit?

To answer this I defer to the IRS’s definition[1]:

“The premium tax credit is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange, beginning in 2014. The size of your premium tax credit is based on a sliding scale. Those who have a lower income get a larger credit to help cover the cost of their insurance. When you enroll in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the premium tax credit, or APTC). Or, you can choose to get all of the benefit of the credit when you file your tax return for the year.”

As a take away from this little except, notice that it says nothing about assets. It is entirely based on income.

How Much Can The Premium Tax Credit Benefit Someone?

How much you can get from this tax credit can be very substantial, but it all depends on your income and household size. Of course, the more income you have or the smaller the household the less the credit you can get.   Unfortunately, there is very little aggregated data to give a nice consolidated summary of how much the credit is, but I have a few examples.  In Colorado:

  • At a maximum, a family of two can save just over $1,400 monthly on healthcare premiums.
  • At a maximum, a single individual can save over $700 monthly on healthcare premiums.

These amounts are nothing to squawk at!

How Do I Get Premium Tax Credit?

Individuals and families can get a premium tax credit if their household income is anywhere between 100% and 400% of the federal poverty level. Currently these income levels look like this[2].

  • $11,770 (100%) up to $47,080 (400%) for one individual
  • $15,930 (100%) up to $63,720 (400%) for a family of two
  • $24,250 (100%) up to $97,000 (400%) for a family of four

Clearly you do not need to have a lot of income to be quickly phased out of this credit (and much less to get the maximum credits), however don’t quit reading this article yet. Retirees (or soon to be retirees) that are younger than age 65 have a lot a lot of control over how they generate income and some simple income and withdrawal strategies can avoid what is counted as income for Premium Tax Credit eligibility!

How Can I Manipulate My Income To Get A Premium Tax Credit?

In order to get the Premium Tax Credit, the IRS looks at your Adjusted Gross Income (essentially all your taxable income such as capital gains, taxable Social Security, dividends, earned income, etc…) and adds to it some other items that are not taxable (primarily the big hitters in this category are interest from state and local bonds, and the non-taxable portion of Social Security benefits).  Fortunately, there are lots of income items that are not added to your income. Some of these items being:  income drawn from a Roth IRA account, basis withdrawn from capital assets, as well as proceeds from a loan.

Upon retirement, you have a lot of discretion in how you generate income for yourself. You can draw from different types of accounts/assets and you can delay or not delay your Social Security, pension, or annuity benefits.

Using a HELOC

Now, if you have large Roth IRA accounts or a lot of basis in taxable accounts you could potentially bridge all your income needs for a few years (until you reach age 65 and you are eligible for Medicare), and get a hefty Premium Tax Credit.  However, if you don’t have such resources or it does not make sense from a long term planning perspective to drain those accounts you are not quite out of luck yet!  One of the largest assets that many retirees have is the equity built in their home.   An excellent planning strategy that we have seen is to generate just enough income from withdrawals of qualified assets or Social Security/Pension income to maximize your Premium Tax Credit. Then bridge the rest of your income needs by drawing from a Home Equity Line of Credit (HELOC).  You can save thousands of dollars in medical premiums and pay off the loan at a later date from assets that you would have debited anyways.

Of course, there are many nuances, technicalities, and planning aspects that need to be considered beyond this basic concept.   Not only that, everybody’s situation is very different.   If you are in the market for insurance and wish you could lower your monthly premiums feel free to give us a call.  We can help you navigate through this cost saving strategy.

[1] https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit

[2] https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit

Taxation of Annuities

By Justin Fundalinski, MBA | April 25, 2017

taxation annuitiesAnnuity income can play an important role in retirement planning because if used correctly, it can provide a steady stream of income for the rest of the annuitant’s life. However, while steady and secure income simplifies finances for annuitants (especially as they age), understanding how annuities are taxed becomes a bit more complex (not that you would ever have to figure it out on your own since the insurance companies will always report to you what is taxable, but good to know nonetheless).  In this month’s article I focus on how different annuities are taxed.

How is my annuity IRA going to be taxed?

This is the easy one! All qualified annuity payments (annuities that fall under the umbrella of an IRA, Roth IRA, or other tax deferred retirement account) will be taxed in the exact manner that they would be taxed in any other qualified account type. For example, Traditional IRA annuity income is taxed as ordinary income just as if you took a distribution from your IRA investment account.  Or, Roth IRA annuity income is tax free income just as if you took a distribution from any Roth account.

Is a non-qualified annuity taxed differently?

Non-qualified accounts (or often referred to as “taxable accounts”) are accounts that don’t fall under the qualified retirement account category discussed above. These are accounts like your bank account, or an individual/joint investment account. When an annuity holds onto non-qualified funds the taxation is substantially different than non-qualified funds in other types of accounts.

Here are some of the basics of taxation while the funds are inside of the annuity:

  • The annuity grows tax-deferred. Unlike non-qualified accounts that often generate taxable income via interest, capital gains, or dividends, a non-qualified annuity does not subject the owner to taxes until the funds are removed from the account. When the gains are removed they are taxed as ordinary income.
  • There is no step-up in cost basis at death. Unlike other non-qualified accounts that allow beneficiaries a step-up in basis and essentially avoid embedded capital gains on their inheritance, all the deferred earnings in a non-qualified annuity are taxable as ordinary income to the beneficiary. This rule applies to all non-spousal beneficiaries, but depending on the policy a surviving spouse may be able to retain the continued tax-deferred growth.

How is my income from non-qualified annuities taxed?

Income generated from a non-qualified annuity is taxed differently depending on how the income is being received. Income can be received essentially in two different ways; either, a stream of annuity payments, or as withdrawal from the annuity. This usually generates a bit of confusion so I will dive into a little.

Annuitized Payments

 When an annuity is actually “annuitized” you lock in a stream of income payments and you lose the ability to access the cash value of the account.  The keyword here is lock. Once annuitized you cannot withdraw any less or more than what the insurance company sends you and have absolutely no ability to close the account and take your principal back.

The taxation on these payments is fairly straight forward. First, the insurance company will determine something called the “exclusion ratio” which determines the percentage of each payment that will be excluded from income tax (essentially the percentage of premiums that you paid compared to the account value at annuitization).  Any income that is not excluded from tax will be taxed as ordinary income and will not receive any special tax treatment as dividends or capital gains may.  However, if the annuitant lives longer than the actuarial life expectancy  which means all premiums/basis will has been received back) then 100% of the payments become subject to ordinary income taxes. To recap this, initially part of each payment is taxed while part is not, and eventually (if you live long enough) all of it is taxed.


 Withdrawals are a little sticky regarding taxation and some riders called “guaranteed withdrawal benefits” are often confused with annuitization.  So, let’s try to keep it as simple as possible.  All withdrawals from a non-qualified annuity force you to take your gains first, and then your premiums are returned to you.  So for example, if you put $50,000 into an annuity and it doubled in value to $100,000 then when you start taking withdrawals from it the first $50,000 withdrawn would be taxed as ordinary income while the last $50,000 would be tax free return of principal.

Guaranteed Withdrawal Benefit

Now, if you have a “guaranteed withdrawal benefit” the insurance company guarantees that you can begin withdrawing a certain percentage of the annuity for the rest of your life. Sounds like annuitization right? Wrong! The rules of “guaranteed withdrawal benefits” blend the rules of withdrawals and annuitization.

Let’s continue the example above.  $50,000 goes in, it grows to $100,000, and now a guaranteed withdrawal benefit of $10,000 per year for life begins. How does this get taxed? First, it gets taxed just like the simple withdrawal scenario did as explained earlier; earnings come out first, then a return of principal. But in this case, the account eventually reaches zero and you are no longer able to withdraw funds from this account. However, with guaranteed withdrawal benefits, once your account reaches zero your annuity technically becomes annuitized. Since all premiums have been received back, 100% of the payments become subject to ordinary income taxes until death. So if you took that all in and are a little confused think of it like this, first you’re taxed, then you’re not, then you are!

As always, this is a 30,000 foot view on the taxation of annuities. There is a lot more details and depth on this topic but these cliff notes should give you a good start on understanding it. If you have any questions please feel free to contact us at the office.

All guarantees are backed by the claims paying ability of the issuing insurer.


IRA Deduction and Contribution Limits

By Justin Fundalinski, MBA | March 20, 2017

IRAThere are some very confusing rules when it comes to whether or not you are able to contribute to Traditional IRAs and Roth IRAs and whether or not your contribution is deductible. In this month’s article I aim to clarify these rules so you will be able to catch your mistakes before the IRS subjects you to a nasty penalty.

Let’s get the basics out of the way:

  • For 2017, the maximum amount of contributions (without penalty) that an individual can make is $5,500 ($6,500 if you’re age 50 or older).
  • You can only contribute an amount equal to or less than your earned compensation (as long as that amount does not exceed the maximum allowed contribution). Compensation includes wages, salaries, and commissions, self-employment income, taxable alimony, jury fees, and more. However, other sources of income such as pension, annuity, Social Security, IRA distributions, rental, interest, dividend, capital gain, child support, and more do not count as earned income.
  • You can contribute to a Traditional IRA (without penalty) only until you are age 70½. Roth IRA’s on the other hand are not subject to this age restriction.
  • Traditional IRA contributions may be Don’t just assume that they are. If you or your spouse has a retirement plan at work (defined contribution plan, IRA based plan, or defined benefit plan) there are some rules in play that reduce the deductibility.
  • Roth IRA contributions are never deductible. However, don’t just assume you can always make a Roth contribution because there are rules that restrict the amount of Roth contributions you can make based on your income.

What if you don’t have earned compensation?

Just because you don’t have earned compensation does not mean you are totally out of luck and cannot contribute to an IRA. If you are married and filing jointly an IRA contribution can be made to your IRA based off of your spouses earned compensation.

What if you are covered by a Retirement Plan at work?

When you are covered by a retirement plan at work you can always contribute to a Traditional IRA; however, you may not be able to deduct the contributions on your taxes.  Whether or not you can deduct your contribution depends entirely on your Modified Adjusted Gross Income  (MAGI) and your filing status.

  • Single or Head of Household with MAGI of $62,000 or less can take a full deduction. If MAGI is above $72,000 then there is no deduction. Anywhere in-between you get a partial deduction.
  • Married filing jointly or qualifying widow(er) with MAGI of $99,000 or less can take a full deduction. If MAGI is above $119,000 then there is no deduction. Anywhere in-between you get a partial deduction.
  • Married filing separately with MAGI of 10,000 or less can take a full deduction. If MAGI is above $10,000 then there is no deduction. Ouch!

What if your spouse is covered by a retirement plan at work but you are not?

You guessed it, there is a completely different set of restrictions on how much you can deduct of your contribution if your spouse is covered by a retirement plan at work but you are not.

  • Married filing jointly with a spouse covered by a plan at work and MAGI of $186,000 or less can take a full deduction. If MAGI is above $196,000 then there is no deduction. Anywhere in-between you get a partial deduction.
  • Married filing separately with a spouse covered by a plan at work and MAGI of $10,000 or less can take a full deduction. If MAGI is above $10,000 then there is no deduction. Anywhere in-between you get a partial deduction. Ouch again!

If you are putting the puzzle pieces together as you read this you can see that it is very possible that you may not be able to deduct your Traditional IRA contribution while your spouse can (or vice versa). Talk about muddy waters!

What are the restrictions on Roth IRA contributions?

As I noted earlier, you can never deduct Roth contributions and there are rules that restrict how much of a contribution you can make. Again, it comes down to MAGI and filing status.

  • Single, head of household, or married filing separately with MAGI of $118,000 or less can make a full contribution. If MAGI is above $133,000 then no contribution can be made. Anywhere in-between you can make a partial contribution.
  • Married filing jointly or qualifying widow(er) with MAGI of $186,000 or less can make a full contribution. If MAGI is above $196,000 then no contribution can be made. Anywhere in-between you can make a partial contribution.
  • Married filing separately with MAGI of $10,000 or less can make a full contribution. If MAGI is above $10,000 then no contribution can be made. Ouch Ouch Ouch!

There are plenty more rules that come into play but these cover the majority of the rules that can get you in trouble.  As always, we are here to help with all of your retirement questions so feel free to reach out to us at the office anytime.



Creating and Filling Your Tax Void

By Justin Fundalinski, MBA | February 26, 2017

tax void

Considering the reader base of this newsletter, I assume most reading this are attempting to be  good savers for retirement and are patting themselves on the back each year for peeling off portions of their earned income to save into 401(k)s and IRA’s, all while reducing their current year’s tax bill.  I commend you for your discipline and urge you to look even deeper into the future.  As we all know the only thing guaranteed in life is death and taxes. While we can’t help you with death (perhaps my wife could as a Board Certified Palliative and Hospice Nurse Practitioner), I do think we can help reduce the tax liability you are creating for yourself in the future when defer those taxes by saving into accounts like 401(k)s and Traditional IRAs.

What Is the Tax Void?

We have coined another term in the office called the “tax void.”  As eloquently as possible, it is defined as the period of time between retirement and age 70[1] when retirees have the most discretion over where their income sources are coming from and thus they have the most control of their tax liability.  By “where” I mean what type of account they are debiting from(qualified or non-qualified, taxable or not taxable, etc…) as well as whether or not they are deferring  income from Social Security, Pension, and/or annuities.

As an extreme example, if somebody could delay taking withdrawals from 401(k), Traditional IRAs, or other similar tax deferred retirement accounts as well as defer their taxable income sources like Social Security and pension income, then they would enjoy a temporary luxury of not having to pay any taxes between retirement and age 70. While most people don’t have the ability to have such complete discretion, most people do have some discretion and such discretion can create a tax void (although maybe not as deep as the one made in my extreme example). However, simply avoiding paying taxes during this time period is the worst choice a retiree can make because of how short sighted it is (more on that soon).

Creating a Bigger Tax Void

Creating the opportunity to have a large tax void is probably the most difficult step in this type of tax planning, but it essentially comes down to one thing – tax diversification of retirement savings.  Tax diversification simply means how one is allocated between different types of accounts based on how withdrawals will be taxed when they take distributions from the account.

For Example:

All income from a Traditional IRA will be fully taxed as ordinary income; however, income from a non-qualified account is taxed based on how much gain was taken (as well as taxes at capital gains rates), and funds from a Roth IRA or 401k are not taxed at all.  Unfortunately, because everybody does such a good job of avoiding taxes today by saving into their 401(k) and/or Traditional IRA, the vast majority of people tend not have much in the way of tax diversification later. If it makes sense from a long term tax perspective, saving into other types of accounts such as Roth IRA’s or Non-Qualified (Taxable) accounts will enhance your tax diversification when you retire and provide the opportunity for a greater tax void.

Filling the Tax Void

As most know, we are taxed in a tiered fashion. The first chunk of taxable income is taxed at 10%, the second chunk of taxable income is taxed at 15%, the third at 25%, and so on. As I mentioned earlier, simply avoiding paying taxes during a tax void is a bad idea. Knowing which of these tiers (or tax brackets) will be filled up entirely by income that is not discretionary once you reach age 70 is very important when it comes to filling your tax void appropriately.

For Example:

If you know that your Social Security and Pension income will fill up your 10% and 15% brackets fully at age 70 then you also know that all of your Required Minimum Distributions (forced distributions for tax deferred retirement accounts) will be taxed at least at 25%. Now if you know that all of your withdrawals or Required Minimum Distributions from your Traditional IRA’s or 401(k)s is going to be taxed at least at 25%, it’s probably a great idea to get any money out of those accounts at a lower tax rate whenever possible. When is it possible? During the tax void!

Roth Conversion strategies combined with other withdrawal strategies make this very achievable. The effect is that you will have less money in tax deferred retirement account, causing you to have smaller Required Minimum Distributions. This in turn causes you to have less income taxed at higher rates as well as more overall tax diversification.


Trust me when I say that while there seems to be a lot of moving parts here this is only a 30,000 foot view of the amount of detail that must be accounted for when trying to create and fill a tax void. If you are looking for ways to ultimately decrease unnecessary Required Minimum Distributions and the associated taxes, or are just simply looking to minimize taxes in retirement please reach out to the office for additional information.

[1] Why age 70? Age 70 is the longest you can delay your Social Security benefit. At age 70½ Required Minimum Distributions on tax deferred retirement accounts begin.

Estimated Taxes

By Justin Fundalinski, MBA | January 20, 2017

Estimated Taxes

By the time you are reading this article it is too late to make any estimated tax payments for 2016. However, now is the right time to start thinking about estimated tax payments for next year.  As many of our readers rely on various income sources in retirement, tax withholding is not as cut and dry as it was when employers took care of it all. Estimated taxes become an important thing to consider in retirement.

Do I need to pay estimated taxes?

The IRS wants you to pay your taxes throughout the year as you go. Unfortunately, you can’t just pay what you owe in April.  So, how do you know if you need to make quarterly estimates?  Well the IRS sets out some guidelines:

  • If you owe less than $1,000 in taxes (after subtracting out your federal income tax withholding from the total amount of tax you owe) then you’re in the clear. But if you expect to owe more than $1,000 then you need to watch out more carefully.
  • If your federal income tax withholding amounts to at least 90% of the tax you will owe this year then you are in the clear. For example if your tax bill will be $20,000 and you pay more than $18,000 throughout the year then you are in the clear. If not, then there is one more way out of avoiding estimated taxes (or penalties for that matter).
  • If your federal income tax withholding amounts to at least 100% of the tax owed on your previous year’s return then you are in the clear (or 110% in the cases that your adjusted gross income is in excess of $150,000 for joint filers and $75,000 for single filers)

If none of these guidelines clear you of your duty to pay quarterly estimated taxes then it is important you make your payments timely to the IRS throughout the year or pay a penalty come April.

What if I don’t know what my income will be?

Unfortunately, the IRS calculates its default penalty by assuming that income is earned evenly throughout the year.  For those who have income from self-employment, rental properties, S Corps, Trusts, or capital gains from divestments it is often hard to know when or how much taxable income you will receive let alone when you will receive it. So, there are a couple of routes you can take:

  • Plan to pay 100% of your previous year’s taxes (or 110% in some cases as explained earlier). This is your safest approach but it may force you to pay taxes to the IRS that will later be returned to you. Sometimes you might not want the IRS banking your money for you for the better part of a year.
  • Sway from the default penalty/estimated payment calculation and implement what is called the Annualized Installment Method. This installment method is helpful for those who have erratic income (or capital gains). Tax payers can use this method to make estimated tax payments based on their income as it is earned rather than evenly throughout the year.  This method involves more in in-depth calculations and should be handled by a qualified professional.

If you have any questions regarding estimated tax payments please feel free to contact the office at any time.

Trump Taxes

By Justin Fundalinski, MBA | December 20, 2016


Now that the election is over we have to start considering what could happen as President-elect Donald Trump implements (or tries to implement) the center piece of his economic plans – tax reduction.  Please note that this article is based on Trump’s statements during his campaign, is focused on individual taxes (not business), and many items are likely to change.

Income Taxes:

Tax brackets may be consolidated into only three brackets compared to the current seven brackets.   We cannot give Trump credit for this concept as it mirrors the House GOP’s Tax Reform Blueprint released in June of 2016. Notably, while the Blueprint does specify the income levels that fall within each bracket, Trump’s plan does not (yet) — so how this impacts tax payers is really unknown. However, based on my review of the Tax Reform Blueprint it could mean marginally lower tax rates for those with taxable income up to about $230k with the margin getting larger for those with income greater than this (assuming that the standard deduction is also increased – as proposed).

The standard deduction is also supposed to be increased to $15,000 for single individuals and $30,000 those married filing jointly.  Comparing this to the assumed 2017 respective figures of $6,350 and $12,700 this increased deduction will decrease the amount of taxable income as well as reduced the need for many filers to itemize their deductions.

Estate and Gift Taxes:

Trump proposed to repeal the federal estate and gift tax.  Currently, there is a credit in place that essentially negates any estate and gift taxes unless the amount transferred exceeds $5.49 million (in 2017) or double that for married couples.   Clearly this repeal only impacts those with estates exceeding $5.49 million.  This is likely going to get a lot of opposition from Democrats as they have discussed increasing estate taxation as well as eliminating basis step-ups inherited assets.

Alternative Minimum Tax:

Trump also proposed to eliminate the alternative minimum tax (AMT). Currently the AMT is a secondary method of calculating your taxes. Depending which method causes the higher tax liability is the method used to calculate your taxes. According to the tax policy center, people with incomes less than $200,000 are generally not affected by AMT, while those with incomes between $200k and $1MM take the brunt of the tax.

Childcare Benefits:

A few proposals were made to help parents with child care expenses. First there are proposed rebates to lower-income families (assumedly those who cannot afford child care) that would be implemented through the Earned Income Tax Credit to help pay for some child care. Second, there is a deduction to taxable income for those who can afford child care. It is assumed these reforms would replace the current childcare tax credit which is geared strictly toward those who owe tax as well as those who must use child care in order to go to work.

In my opinion, it appears that the tax benefits for child care will benefit a greater quantity people due to the lower restrictions under Trump’s proposal. However, those who are used to the current tax credit may end up paying more in taxes depending on the income levels, child care expenses and the number of children they have.

Affordable Care Act

While we really have no idea how it will all shake out if and when Trump and congress “repeals and replaces” the Affordable Care Act (ACA, ObamaCare) we do know one thing Trump has harped on several times.  The additional 3.8% Net Investment Income (NII) Tax that is imposed on passive income and capital gains (when income levels exceed certain thresholds) is on the chopping block.  The NII was brought about as a Medicare surtax under the ACA and affects those with a modified adjusted gross income greater than $200k if filing single and $250k if filing married.

In Conclusion

While tax reform appears to be a top priority, rhetoric only goes so far.  Since simple majority votes in Senate can only be taken once the discussion/debate around a bill is complete, it is quite possible opposing parties can and will filibuster.  The only way to overcome this is to obtain 60 votes in congress and the republican majority is not that strong.  As with everything in congress there are concessions to be made.  You give me this, I’ll give you that.  Time will tell what actually happens – stay tuned.

Colorado PERA Options for Medicare Part A

By Justin Fundalinski, MBA | September 20, 2016

PERAWe recently came across a case in which a retired PERA employee worked many of her years during the time when employees did not contribute to Medicare taxes, but also worked some of her years during a time that they did contribute to Medicare taxes. The end result was that she did not earn her 40 quarters of credit to qualify for “free” Medicare Part A insurance (the hospital insurance side of Medicare), but instead fell short by just a few credits.  While PERA has some options available to employees who do not qualify for free Part A, the options are not clear cut from a financial position and we were forced examine them deeply.  It came down to a couple factors and in this month’s newsletter we want to share some of our findings for those who participate in PERACare for retirees currently or for those who may be faced with some of the same options in the future.

Quick Rundown

Insurance for hospital care is pretty much a necessity as a short layover in the hospital could create catastrophic medical bills. Since many PERA employees may not qualify for free Medicare Part A, PERA has included a Part A “replacement” in all of its healthcare packages for retirees over the age of 65.  So, PERA employees have several choices:

  • Opt to pay Medicare Part A premiums.
  • Go back to work in the private sector and earn the credits needed to get premium free Medicare Part A.
  • Use one of the three supplemental PERACare plans that offer replacement Part A.
  • Use one of the three HMO PERACare plans that offer hospital coverage within them.

Paying for Medicare Part A Premiums:

Paying for Part A premiums out of pocket is not the most attractive option.  Depending on how many “credits” or “quarters” you earned by paying Medicare taxes determines your premium. It’s not hard to earn the 40 credits that you need to get free Medicare Part A, but we will touch on that later. The premiums are structured like this:

  • If you have 40 or more credits you get Part A premium-free
  • If you have 30 or more credits but less than 40 you pay a reduced Part A premium currently at $226 per month.
  • If you have less than 30 credits then you pay the full premium currently at $411 per month.

While the premiums are high there are some piece-of-mind benefits.  The top benefit that comes to mind is that you’re enrolled in Part A, so there will not be any penalties if for some reason you opted out of Part A initially and are forced/or want to get Part A later on.  For example, while we don’t think this is a likely event, PERA does not guarantee that they will provide their retired employees with health benefits.  What if that benefit was taken away in the future and replacement Part A recipients are forced to purchase Medicare Part A now having to pay the premiums and a penalty for late enrollment. Or what if the coverage that they do offer becomes subpar and paying for Part A looks more attractive.

Earn The 40 Credits:

Ideally, we would all like to receive Medicare Part A premium free.  Going back to work at a job that pays Medicare taxes is the only way to earn the credits to qualify you for premium-free Part A.  The question is – how long do you have to work and do you even want to go back to work?  It’s not hard to earn credits or quarters.  You can earn a maximum of four per year and in 2016 one credit is earned for each $1,260 of earnings.  So, hypothetically you could earn $5040 in January, never work the rest of the year and still get your four credits for the year. If your already close to the 40 credits you need, earning the additional credits may be an attractive way to get premium-free Part A, but if you have little or no credits this could become a ten year endeavor.

PERAcare’s Supplement Plans/Part A Replacements

For those who don’t qualify for free Medicare Part A, PERA’s supplemental plans function as a replacement to Part A . But don’t let the word “replacement” fool you, this is not a one-to-one identical replacement of the hospital coverage under Medicare Part A.  These Replacement Plans are structured closer to a PPO where you have the in-network and out-of-network providers which many are familiar with, but have a various pros and cons:

  • Replacement Plans can have deductibles similar to Part A and up to over 5 times higher. Just like Part A, these plans deductibles are based on the “benefit period” rather than annually as most are accustomed to with employer sponsored plans.
  • The highest deductibles are for care received “out-of-network,” while original Part A does not have networks or changes based on provider affiliation. So, there might be more flexibility in who you choose to receive care from on traditional Part A.
  • Replacement plans are more like 70/30 plans (insurance pays 70% you pay 30%) and have a maximum out of pocket limit (MOOP) that ranges from $4,500 to $27,000 depending on the plan selected and whether care is received in or out of network. Conversely, Part A does not have a MOOP, the benefits are generally structured based off the number of days that you are in the hospital plus typically 20% of the cost of medical services provides (i.e. surgery). With Part A and there is no cap on the total costs you could pay should you require extensive care for a long period of time.

The benefits of these Supplement/Replacement Part A policies key off of which of the three offered Supplement Plans you enroll in.

PERAcare’s HMO Plan with Hospital Coverage Offerings

There are three HMO offerings through PERAcare that have hospital coverage built into them and replace Part A, but keep in mind not every plan is available in every county of Colorado. These HMO plans have more stringent provider networks than the Supplemental plans described above.  When covered under these plans, your primary physician becomes the quarterback for you in all your healthcare decisions and in order to see a specialist you will need a referral from your primary.  Maybe it’s a hassle, but some find it nice to have a central primary care doctor directing care in a coordinated manner.

Instead of having a deductible and then paying 30% of the costs as described with the Replacement Plans, these HMO plans have fixed dollar amount co-pays. That means instead of you paying the first couple thousand dollars of your care before your coverage kicks in, you pay a fixed rate depending on the service (from $20 per visit up to several hundred dollars for some hospital procedures every time the service is provided).  These plans do offer MOOP’s as low as $2,500 annually; however even with such a low MOOP it would take a lot of visits to doctors or hospitals to reach the maximum.  Finally, the premiums for the HMO plans are very comparable to the Replacement Plans.


In the end we felt that paying Part A was not financially savvy purely because of the premium expense. If going back to work to earn some credits is not in the cards, the only options are to stay within the PERACare umbrella. At face value, the HMO options appeared to be the most cost effective, but we are always worried that premiums, copays, and maximum out of pocket limits could be altered on future policies making it not as attractive. Fortunately, for those covered by PERACare, at every annual enrollment you can swap from the any of the plans offered without underwriting.  So, whether you chose one plan and just don’t like it, you are getting hit with surprise expenses that were not expected, or you know you have an upcoming medical situation that warrants different coverage, you can just sign onto another insurance plan at the next annual open enrollment.  This is a luxury that Medicare recipients do not have with their HMO and Supplemental counterparts.

The ability to move plans without underwriting (especially when coupled with a MOOP) is a benefit that few in retirement enjoy.  The benefits can embolden people in the PERA system to try out different plans and even roll the dice with lower premium plans, while still having the security a MOOP in place for catastrophic events and still maintain the flexibility to move on to a more appropriate plan the following year as their needs change.


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