OCTOBER 2016

Tax Planning and Retirement

T axes can have a big impact onyour retirement. When manyretirees think about how

much money they might need tosustain their lifestyle in retirement,they often neglect to think abouttaxes. While it’s true that your taxburden will likely be lower in retire-ment than it was when you wereworking, the government doesn’t letyou off the hook completely. That’swhy it’s wise to start your retire-ment tax planning years — if notdecades — in advance. By beingsmart about how you invest andfrom where you’ll draw yourincome in retirement, you’ll be better prepared for a secure future.Here are some tips to get you started. Don’t Forget about Social Security

Social Security is a significantsource of income for many retirees.

But don’t expect this retirement cor-nerstone to come to you tax free.Some people are surprised to learnthat Social Security benefits are tax-able. What portion of your SocialSecurity benefit is subject to taxdepends on your overall income forthe year. People who receive all oftheir retirement income from SocialSecurity usually don’t need to paytaxes on their benefits. But if youhave other sources of income, likewithdrawals from an IRA or 401(k)people, you may have to pay.

Should You Defer Income Taxes?

S hould you pay income taxes now or are you better off delaying incometaxes until after retirement? This is the basic decision when choosing

between a traditional deductible individual retirement account (IRA) and aRoth IRA. With the Roth options, you are paying taxes now so you cantake qualified distributions income-tax free. With the traditional IRA, youare delaying taxes until distributions are taken.

The standard advice is to consider whether your tax bracket will behigher or lower in retirement. If you are likely to be in a higher tax bracket,you’ll usually benefit from the Roth options. If you’re likely to be in alower bracket, you may benefit more from the traditional IRA.

It may be prudent to use tax diversification for your portfolio. With taxdiversification, you invest in a number of investment vehicles with differenttax ramifications. For instance, you might invest in a Roth IRA, from whichqualified distributions can be taken with no tax consequences; a 401(k)plan, wherein you save taxes now and pay ordinary income taxes on qualified distributions; and taxable accounts, in which a maximum capitalgains tax of 20% must be paid on sales of appreciated investments. Duringretirement, you can monitor your tax situation and withdraw money fromthe assets that make the most sense in any particular year. mmm

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U C C E S S

To find out if your Social Securi-ty is taxable, you have to figure out your combined income. Simplyadd up your adjusted gross income,nontaxable interest received, andhalf of your yearly Social Securitybenefit. If you are married and thatnumber falls between $32,000 and$44,000 (between $25,000 and$34,000 for single individuals), youmay pay tax on up to half of yourSocial Security. If it’s more than$44,000 ($34,000 if single), up to 85%of your benefit may be taxable.

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Copyright © 2016. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. Thisnewsletter intends to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete analysis ofthese subjects. Professional advisers should be consulted before implementing any options presented. No party assumes liability for any lossor damage resulting from errors or omissions or reliance on or use of this material.

Patricia Kummer, CFP®

Certified Financial PlannerTM

8871 Ridgeline Boulevard, Suite 100Highlands Ranch, CO 80129

(303) 470-1209 ♦ (877) 767-0763(303) 470-0621 Fax

www.kummerfinancial.com24-hour Market Update Line (303) 683-5800

Consider the Tax Implications of Relocating

Many people plan to pull upstakes in retirement. But before yousell the house and pack the movingvan, make sure you understandhow living in another state (or evenanother country) may affect yourtaxes. Some U.S. states are friendlierto retirees than others. For example,Alaska has no state income tax andno sales tax, though the climate maynot be to everyone’s liking. Nevadais a warm-weather state that alsodoesn’t have an income tax, makingit a popular destination for retirees.Some states offer special perks justfor retirees. Georgia, for example,doesn’t tax Social Security incomeand also exempts $65,000 of retire-ment income for people over the age of 65. Other states have muchhigher tax burdens. Consider Tax-Diversified Investments

When saving money for retire-ment, many people focus on puttingas much as they possibly can intotax-deferred retirement accountslike 401(k) plans. That’s not a badstrategy, but it probably shouldn’tbe your only approach to saving forretirement. That’s because you willhave to pay taxes on your 401(k)plan withdrawals. If all your sav-ings are in a 401(k) plan or similaraccount, you won’t have any choiceabout paying that tax. But if you cansave money in other accounts like aRoth IRA, you will also have anoption for tax-free income in retire-ment. It may even be smart to havesome of your investments in regulartaxable accounts, since income onthese investments is taxed at a lowercapital gains rate.

If you don’t already havemoney in a Roth IRA, you maywant to consider a Roth IRArollover. This involves movingmoney from your tax-deferred

Tax PlanningContinued from page 1

retirement account to a tax-freeaccount (though you’ll have to payany taxes owed when the rolloverhappens). That’s not the right movefor everyone, however, so talk toyour financial advisor aboutwhether a Roth rollover would beappropriate for your situation. Have a Plan for RMDs

If you have retirement savingsin a 401(k), Roth 401(k), IRA, orsimilar accounts, you are requiredto start making withdrawals whenyou turn age 70½. The amount you must take out every year isbased on your total savings and life expectancy. You need to make

withdrawals whether or not youactually need the money; and ifyour required minimum distribu-tions (RMDs) are particularly high,they may even bump you into ahigher tax bracket. Some peoplemay choose to start making with-drawals from the 401(k) plan earlierthan age 70½ if those withdrawalswill be taxed at a lower rate. If theydon’t yet need the money, they caninvest it elsewhere. In other cases, it may make sense to do a rolloverto a Roth IRA, since it is the onetype of retirement account that isn’t subject to RMDs.

Please call if you’d like to discuss this in more detail. mmm

Last-Minute Tax ReductionsFinance by Patricia Kummer

T axes have been creeping up withthe last several tax law changes.

The next few months may be the last opportunity you have to makeadjustments before the year ends. Solook for opportunities to lower yourtaxable income if you can.

Look for investment losses to offset your gains. If you need to raisecash or rebalance your account, lookfor long-term capital gains, which areless expensive than short-term gains.

Consider funding an IRAaccount. You have up to your tax fil-ing date next April to contribute for2016. Most employees who have a401(k) plan have forgotten theymight also be eligible for an IRA aswell. Check the IRS limits for Adjust-ed Gross Incomes to determine whatyou are eligible for. The income lim-its are higher for a Roth than a Tradi-tional IRA. It is not recommendedthat you fund an after-tax TraditionalIRA. It will be hard to keep your pre- and post-tax contributions separate, and there is no reason to besubject to IRS restrictions when thereis no deduction on after-tax deposits.

Make sure you have maximizedyour 401(k) contributions of $18,000for those under age 50 and $24,000including the catch-up provision.

Self-employed individuals may beeligible for an individual 401(k) planthat needs to be set up before Octo-ber ends. Also, you may be able tofund a SEP (Simplified EmployeePension). These limits can be sub-stantially higher than an IRA, basedon business or consulting income.For higher-income earners, you mayalso be eligible for a profit-sharingcontribution up to 25 percent of yourbusiness profit, depending on yourbusiness structure.

It is crucial to get with your taxor financial advisor immediately tosee what plans and limits you are eligible for.

Consider maximizing yourHealth Savings Accounts for last year if they have not already beenfunded. You may be eligible if youhave a high-deductible health insur-ance plan.

You can fund college savingsplans that are eligible for the stateincome-tax deduction for children or grandchildren.

Plan early every year to takeadvantage of every deduction youare eligible for and make estimatedtax payments on time. Then youwon’t have to pay any more thannecessary. mmm

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inheritance is spent is to establish atrust with a schedule for distribu-tions. One option is to delay a fulldistribution until they reach a cer-tain age, like 25 or 30. Anotherchoice is to give them a series ofpartial distributions at ages thatmake sense to you given what youknow about your child. Anotherstrategy that is becoming increas-ingly popular is the incentive trust.This vehicle makes payouts contin-gent upon your child’s achievementof specific accomplishments — likemaintaining a certain grade pointaverage, graduating from college,marrying, or buying a home.Adult Children

Many of the same kinds of considerations that apply to minors and young adults can alsoinfluence your decisions on howmuch money to leave to your adultchildren. Do they, their spouses, ortheir children have special medicalneeds? Have your adult childrenfallen on hard times or are they irresponsible with money andwould only waste it? How manychildren do they have, and howmuch help will they need to finance their educations?

If your estate is much largerthan you and your spouse’s com-bined estate tax exemptions, youmight want to shrink it with anaggressive campaign of gifts toyour children and grandchildren.On the other hand, any funds you leave to your children mightencumber them with estates equallyas large as yours or larger with thesame tax challenges. In this case,you might want to transfer some of your assets to a generation-skipping trust, which bypasses your children and names yourgrandchildren as the beneficiaries.

Don’t go it alone when mullingover these decisions. Please call ifyou’d like to discuss this in moredetail. mmm

Estate-Planning Considerations for Your Children

I t takes special care to create anestate plan that efficiently dis-tributes your assets and meets

your goals for every person andcause important to you. But no partof the process means more to mostpeople than that which involvestheir children.

To help organize this process, it is useful to think of children inthree categories: minors, youngadults, and fully grown adults withspouses and children of their own.Minor Children

Children from infancy throughhigh school have a different set ofneeds than children of other ages.One is simply to be able to rely on an income for daily needs thatapproximates your income in caseyou’re no longer there for them.Since the parents of young childrenusually don’t have large savings ornet worth, the challenge is to pro-vide an instant estate for which lifeinsurance may be the best answer.

There are a number of rules ofthumb for how much life insuranceto buy — from four to 10 times yourannual income. The right amountshould be the result of a thoroughneeds analysis of your entire family,including:

4How much do you alreadyhave saved?

4Will your spouse be able towork full- or part-time? If so,

what will child care cost?

4Will your children go to publicor private elementary and

secondary schools?

4How much will your childrenneed in college funds?

4How much will your spouseneed for retirement, and how

much of that will he/she be able toaccumulate on his/her own?

After you determine how muchlife insurance to buy, you need tothink about who will raise yourchildren if you and your spouseboth die before they become adults.This calls for naming a guardian inboth of your wills. If you don’t havea will, a state court will appoint aguardian for you, and it may not besomeone you or your spouse wouldhave wanted for this role. In addi-tion, parents might also wish to designate a person to manage thechildren’s assets. It can be the sameperson as the guardian; but desig-nating an unrelated third party whocan be charged with thinking onlyof your children’s welfare appealsto some people.

Among the other major deci-sions you have to make is whetherand how to split your assets be-tween your surviving spouse andyour children, and if you leavesome assets directly to your chil-dren, how to determine the splitamong them. Often, it may makesense to leave all or most of yourassets to your spouse and, for assetsyou bequeath to your children,divide them evenly. But this mightoverlook such considerations aschildren with special medical needsor abilities.Young Adults

Once children reach the age of majority, a new set of considera-tions enters the picture. By this age,your children no longer require aguardian and are legally capable ofspending their money any way theywant — and therein lies a potentialproblem. You may leave $250,000for college but instead, your chil-dren decide to skip college.

One way to control how the

Get Organizedfor Taxes

Big Life Changes?

P lan Ahead. Now is the besttime to save for goals that can

benefit you during tax season andbeyond, such as extra mortgagepayments, college savings plans,charitable giving, or a boost in contributions to your qualifiedretirement plan.

Make a List. To serve as anongoing reminder, make a list ofapplicable tax deductions and con-sider keeping it in plain sight onyour refrigerator or office bulletinboard.

Stay Organized. Keep track ofdeductible expenses, donations, andcash gifts in a designated tax deduc-tion basket, file folder, or onlinestorage system, where you can placeeverything that may be eligible as a deduction.

Do a Midyear FinancialReview. Incorporate tax planning as part of your midyear financialreview; accounting for incomechanges, unanticipated quarterlybonuses, investment gains and losses, or changes in family status.

Don’t Go It Alone. Go to a professional who knows all thecomplex technicalities of tax plan-ning; they can spot oversights, help-ing to maximize your refund andreduce your risk of audit. mmm

A s your income changes andgoals and circumstances shift,you need to update your

financial plan accordingly. Here arefive times when you may need tomake big changes:

When You Get Married — Onceyou get married, you also need tomarry your finances. The processshould ideally start before you getmarried as you review your debtsand income and talk about yourgoals as a couple. Together, youshould make sure you’re on the samepage and working together to get to where you want to be.

When You Have Children —Having a baby means big changes toyour life, including your finances.Child care issues can have a majorimpact on your finances. Otherissues to consider include updatingyour insurance to include newdependents, setting up a college savings account, and ensuring youhave adequate life insurance. It’s also absolutely crucial that you havea will and other estate-planning documents so that your loved ones,including your children, are protected.  

When You Change Jobs — Toensure that your career shifts resultin steps up on the financial ladder,you’ll want to review your financialplan. Making decisions about yourretirement savings is paramount

(such as whether you’ll roll yourmoney over to a new employer’splan or an IRA), but you’ll also prob-ably want to think about issues likeinsurance, other benefits, and taxes.

When You Get Divorced — Ifyour marriage ends, a financialcheckup is a must. Your income willprobably be changing, which maynecessitate changes in your budget.You will also need to think aboutchanging the beneficiaries on yourretirement and insurance plans,developing a new savings strategy,and more.

When You Retire — When youstop working, that doesn’t mean yourfinancial plan is off the hook. As youprepare for this major life change,you’ll need to make sure you are prepared financially for life after full-time work.

This includes creating a retire-ment budget that fits your lifestyleand a plan for drawing down yoursavings in a responsible way. You’llalso want to think about issues suchas where you will live, end-of-lifecare, and estate planning.

If you’ve experienced a big lifechange recently and need financialguidance, please call. mmm

What’s New at Kummer FinancialW e hope your fall is off to a

good start. As this is thelast newsletter for the year, wewant to thank you again for sup-porting us and wishing us well onour 30th year in business. It wasgreat to see many of you at ourcelebration and throughout theyear at your meetings. Thank youfor your continued loyalty. Weappreciate your referrals, and wealways welcome the opportunityto help those you know. Please do

not hesitate to let us know of anychanges in your world so we cankeep your plan current.

Thank you for attending our workshops that are offeredquarterly and keeping currentwith our Dynamic AllocationStrategies. Remember there is aClient Only section on our web-site www.kummerfinancial.comfor information pertaining to ournew allocations and our recentevents. Please check that out by

clicking Client Center, then KFSClient Access Only. Contact usfor the passcode.

Be sure and stay current withour economic updates posted to our website and Facebook.Watch for the Newsflash for current events and the weeklyupdates to our Market Hotline.Check out our team section underthe Company tab, and welcome Nick D'Onofrio and Audrea Sullivan to our team.