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DHJJ Financial Advisors offers insight on a variety of topics. From current market events to our perspective on timeless financial topics, you will find that our articles provide information that will help you to navigate your own financial landscape.

Net Unrealized Appreciation - A Tax Saving Opportunity

Net Unrealized Appreciation - A Tax Saving Opportunity

Net unrealized appreciation (NUA) is a favorable tax planning opportunity that can often save a taxpayer tens of thousands of dollars.  However, this tax planning opportunity is often underused because most people are unaware of its existence.  In order to utilize this tax planning opportunity, an employee must own company stock in his or her 401(k) account.  Other company-sponsored retirement plans may also apply when discussing NUA, but the primary type of account is the 401(k) so this is what we will address here. 

For many employees that participate in a company-sponsored 401(k) plan, when they retire or terminate employment with the company, they would choose to “rollover” the entire balance of their 401(k) account into a self-managed IRA.  However, when the employee owns company stock in their 401(k), they should analyze whether this is the best thing to do.  Net unrealized appreciation (NUA) is simply the difference between the cost basis (what you paid for the stock) and the current fair market value of the employer stock in your 401(k) account.  The IRS allows for this net unrealized appreciation to be treated as a capital gain, which is taxed at lower tax rates than ordinary income tax rates.  The larger the appreciation of the employer stock in your 401(k) account, the bigger the opportunity to save more in taxes by utilizing this strategy.  For example, if you retire with $750,000 of employer stock in your 401(k) account and this stock only has a cost basis of $150,000, you would have net unrealized appreciation of $600,000 in this stock.

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Qualified Charitable Distributions: A Strategic Way to Distribute Your Required Minimum Distribution

Qualified Charitable Distributions: A Strategic Way to Distribute Your Required Minimum Distribution

The IRS requires you to take a minimum amount from your IRAs and Employer Sponsored Plans once you turn 70 ½ (Roth IRAs are not included). These required withdrawals are called Required Minimum Distributions (RMD) and are taxable in the year that they are withdrawn from your retirement account. For several years, taxpayers have been able to direct all or a portion of their RMD from an IRA account to a qualified charity up to a maximum of $100,000 per year. The ability to utilize this strategy, known as a qualified charitable distribution (QCD), was made permanent in 2015.

How Does a Qualified Charitable Distribution Work?

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Asset Allocation vs. Asset Location: Two Different Investment Strategies

Asset Allocation vs. Asset Location: Two Different Investment Strategies

Two Different Investment Strategies

When hearing the terms asset allocation and asset location, many of us conclude that these are synonyms. These terms are actually two separate investment strategies that can be used in tandem to create a well-balanced portfolio capable of reducing risk and minimizing tax.

Asset Allocation

Asset allocation is the more commonly known term and is the strategy of diversifying a portfolio across different asset categories to reduce overall portfolio risk. There are many investment categories and sub-categories, with the most common categories being stocks and bonds. Which investment categories to use and how much of the total portfolio to put into each investment category is a decision that is dependent on the investor’s situation and risk preferences. Finding the proper asset allocation that will match an investor’s tolerance for volatility is a crucial decision that will help maximize risk-adjusted investment returns.

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How Does the Illinois Estate Tax Affect You?

How Does the Illinois Estate Tax Affect You?

Given recent increases to the Illinois personal and corporate income tax rates, it is important to review how your family may be impacted by another Illinois tax that does not receive as much media attention: the Illinois estate tax. Illinois is one of eighteen states to have its own estate tax separate from the federal estate tax. Estates that are exempt from the federal estate tax may still owe Illinois estate tax.

What is the Illinois estate tax?

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Changes that May Warrant an Insurance Review

Changes that May Warrant an Insurance Review

Life happens, but more specifically, change happens in our lives that affects the building blocks of our well-being.  A few of the building blocks that drive our risk protection needs include lifestyle, health, and income.  While it’s ideal to review your insurance situation annually, it is especially important as these building blocks change.

When Should I Consider an Insurance Review?

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ABLE Accounts: What You Need to Know

ABLE Accounts:  What You Need to Know

Achieving a Better Life Experience Act of 2014, or the ABLE Act of 2014, encourages and assists individuals with disabilities and their families in saving private funds in a tax-advantaged savings account.  These funds can be used to pay for education, health care, transportation, housing and other expenses. Here are some of the most frequently asked questions about ABLE accounts:

 

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Financial Planning Checklist for 2017

Financial Planning Checklist for 2017

Have you thought about how much money you need to retire?  Or if you have enough insurance—or even the right kind? Or if there is anything more you can do to save taxes throughout your lifetime?  These are just a few questions you can answer by doing a comprehensive financial plan.

According to a national survey conducted in 2016 by the Certified Financial Planner Board of Standards, Inc., more than 52% of American households are unsure if they will have enough money in retirement.  Only 35% have used a financial planning professional to assess their situation and create a plan for the future.  Financial planning can benefit people of any income level by answering some of these “unknowns”.  Here are seven financial planning areas to think about in 2017.

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Individual Retirement Account (IRA) Contributions

Individual Retirement Account (IRA) Contributions

In an era where pensions are few and far between and future Social Security benefits are in question, it’s important for individuals and their families to save for their own retirement.  A great and simple way to save for your retirement (with potential tax savings) is through an Individual Retirement Account (IRA).  IRA contributions for tax year 2016 are due by April 18, 2017 (this year’s “tax day” as opposed to April 15).

TRADITIONAL vs ROTH IRA

For eligible taxpayers, the traditional IRA offers a current tax savings opportunity in the form of a tax deduction for the amount of your contribution. Future withdrawals of traditional IRA principal and earnings are taxed at ordinary income tax rates. Roth IRA contributions are not deductible, but qualified withdrawals are tax free. Roth IRAs offer the advantage of tax-free growth.

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Estate Planning Basics and Avoiding Probate with a Living Trust

Estate Planning Basics and Avoiding Probate with a Living Trust

One of the most important parts of the financial planning process is estate planning.  Many people mistakenly believe that estate planning is only necessary for the wealthy.  In reality, a basic estate plan is essential for everyone in order reduce uncertainty, eliminate unnecessary costs, and reduce stress for loved ones after a death.

Estate Planning Basics

The first step in the estate planning process is creating a list of your assets. Take a look at (1) what assets you have, and (2) review how your assets are titled.  Once you have this foundation laid out, ask yourself what you want to happen to your assets after you are no longer here. 

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Roth IRA Conversions - 10 More Questions that Go Beyond the Basics

Roth IRA Conversions - 10 More Questions that Go Beyond the Basics

Last month we covered the basics of a Roth IRA conversion.  (If you missed it, Read it Here). This month we'll discuss a few more mechanics of converting along with conversion strategies to maximize tax savings. Let's get to the Q&A...

1.      First, can you provide clarity on the timing of the conversion and when it’s income for tax purposes?

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Trust Planning Opportunity and the 65 Day Rule

Trust Planning Opportunity and the 65 Day Rule

It’s not too late to take advantage of planning opportunities for certain trusts for 2016 tax filings. Irrevocable Trusts that do not require the trustee make distributions of income and principal to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 6, 2017.

Similar to individuals, trusts are taxed via a graduated tax rate. Trusts reach the highest tax rate of 39.6% at $12,400 of taxable income compared to single individuals who reach the 39.6% tax rate at $415,050. The additional 3.8% Medicare surtax applies to investment income for trusts and individuals at these taxable income levels as well. Distributing income from the trust to a beneficiary who is not in the highest tax bracket can pull income from a high tax rate environment to a lower tax rate environment.

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10 Roth IRA Conversion Questions and Answers

10 Roth IRA Conversion Questions and Answers

Converting traditional IRA (Individual Retirement Account) funds to a Roth IRA can be a powerful tax savings opportunity. Here are some frequently asked questions on the topic:

1. What is the main difference between traditional IRA and Roth IRA? 

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Don't Forget that the 60-day IRA Rollover Rule Has Changed

Don't Forget that the 60-day IRA Rollover Rule Has Changed

Beginning in 2015, taxpayers can only make one 60-day “indirect” IRA-to-IRA rollover per 12-month period (not based on a calendar year) regardless of the number of IRAs that you own.  Prior to 2015, many taxpayers followed Proposed Treasury Regulation Section 1.408-4(b)(4)(ii), published in 1981, and IRS Publication 590-A (“Contributions to Individual Retirement Arrangements (IRAs)”) which interpreted the limitation of one 60-day IRA rollover per 12-month period as applying on an IRA-by-IRA basis, meaning that a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual.  However, a tax court case in 2014 trumped these interpretations by ruling that you could not make a non-taxable 60-day (“indirect”) rollover from one IRA to another if you had already made a similar rollover from any of your IRAs in the preceding 12-month period (Bobrow v. Commissioner, T.C. Memo 2014-21).  As a result of this Tax Court ruling, followed up by guidance from the IRS in Announcement 2014-32 (issued on November 10, 2014), it is now crystal clear that the new rule applies in the aggregate to all IRAs.   

“Direct” IRA-to-IRA Transfer Exception

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529 Plans: Common Questions and Answers – And Potential Tax Savings

529 Plans: Common Questions and Answers – And Potential Tax Savings

What is a 529 Plan?

These plans are named after Section 529 of the federal tax code. The 529 plans are a great vehicle to save money and let it grow tax-free. The requirements for guaranteeing the tax free growth are simple – use the money in the 529 plan for qualified education expenses.

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Estate Planning: Take Advantage of Potential Valuation Discounts

Estate Planning: Take Advantage of Potential Valuation Discounts

Have you considered making gifts or selling interests of your family limited partnership as part of your overall estate plan? If you are considering making these types of transfers to family members and/or trusts for the benefit of family members, this could be the ideal time to act in order to take advantage of potential valuation discounts currently available. The IRS is speculated to issue new guidance this fall that could negatively impact the way in which these interests are valued from an estate and gift perspective.

Estate Planning Tools

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Trust Planning Opportunity and the 65 Day Rule

Trust Planning Opportunity and the 65 Day Rule

For whom: Trustees and their beneficiaries

It’s not too late to take advantage of planning opportunities for certain trusts for 2015 tax filings. Irrevocable Trusts that do not require the trustee to make distributions of income to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and then elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 5, 2016.

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Long-Term Care Insurance: Yes or No?

Long-Term Care Insurance: Yes or No?

According to Genworth Financial, a major issuer of long-term care insurance policies, a private room in a nursing home averages $92,378 ($253/day) in 2016 while a home health aide, who works under the supervision of a registered nurse or therapist to assist with daily routines such as bathing, grooming, dressing, and medication reminders, averages $46,332 ($127/day) in 2016. As astronomical as these costs appear now, they are only going to get larger as baby boomers age and the demand for this care grows. Over the past 5 years (2012-2016), the annual cost for a private room in a nursing home has averaged a 4% increase per year. Based on a current annual average cost of $92,378 in 2016, a 3-year stay in a private room of a nursing home would cost a whopping $277,134, assuming that prices don’t continue rising. Contrary to popular belief, Medicare and other forms of health insurance do not cover these health care expenses because long-term care is not considered a medical expense. Therefore, unless you are confident that you can pay for this care yourself, you may want to consider purchasing some form of long-term care insurance (LTCI).

 

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