Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
The private school tax break in the middle-class tax bill
Clients may be eligible for tax breaks of more than $30,000 per child attending private school under the GOP tax proposal, according to the New York Times. The bill includes provisions that would simplify the tax breaks for college education savings by increasing the amount of qualified withdrawals from 529 college savings plan in exchange for scrapping the Coverdell account. Parents who contribute to the plan can expect tax-free growth on savings as well as tax-exempt withdrawals for qualified education-related expenses. They are also eligible for a state tax break in 35 states, according to a plan consultant.
Roths for the rest of us
Clients can direct their retirement contributions to a Roth account if their employer offers such a feature in their retirement plan, according to Morningstar. They pay taxes on the contributions but won't owe any tax when they withdraw the funds in retirement. The report from Morningstar includes insight into the legal ways to own and fund a Roth account without converting assets from traditional retirement plans.
Despite what you've heard, annuities aren't all bad
More advisors are not recommending annuities to their clients because of the many disadvantages, including the unfavorable tax treatment of the distributions, according to this article on CNBC. "Variable annuities are a perfect machine for converting capital gains to ordinary income," an expert says. However, the products aren't totally useless, as they provide guaranteed income and allow annuity holders to take advantage of market rally with protection from volatility.
How to roll a 401(k) into an IRA while your clients are still working
Working clients can roll over their 401(k) funds into an IRA while still employed through an option called in-service distribution, according to a guest contributor with TheStreet. While workers gain greater control of their savings and broader investment diversification in an IRA, the transfer would prevent them from benefitting from net unrealized appreciation. Under NUA, highly appreciated company stock is subject to long-term capital gains tax rates, which are lower compared with the ordinary income tax.
Your DIY retirement plan could be saved by a second opinion
Clients who created their retirement plan without professional help should consider consulting an advisor for second opinion, an expert on Kiplinger writes. A couple who opted to plan on their own put all their retirement savings in a traditional IRA, which would be taxed at a higher rate when they retire and make 85% of their Social Security benefits taxable, an expert says. "A DIY spreadsheet can be a great start to a retirement plan. But without some advice from an experienced specialist, it also could lead to an unhappy ending."