The Profit Sharing Council of America reports that 18% of assets in employer-sponsored retirement plans are held in public stock. That’s a segment of the market totaling more than $500 billion.

How the strategy works
When an employee leaves a job or gets ready to retire and decides to roll over retirement assets into an individual retirement account, a common tendency is to include all of the assets. Eventually, when that money is distributed, it will be taxed as ordinary income.

But clients with appreciated company stock may be able to use a more tax-efficient strategy. Under the NUA rule, employer shares of company stock are instead transferred in kind to a regular brokerage account. While this is a taxable event, it is not a sale. Accordingly, the income taxes are applied but only on the cost basis, or purchase price, of the shares, and not on the fair market value of the stock. The difference between the fair market value and the cost basis, the appreciation or “NUA”, is not taxed when the stock is distributed from the employer plan.

Once the stock is transferred, clients can choose to sell it. The NUA is then taxed at the long-term capital gains rate, which is currently 15% — significantly less than ordinary income tax rates in many instances.

Key provisions

• The NUA rule can be applied on just a portion of the company stock holdings. In fact, company shares may be broken up by lots, allowing clients to gain the most advantage by choosing the shares with the lowest cost basis.
• The remaining assets in the plan can be rolled over into an IRA.
• NUA may be used for separate plans.

There are different scenarios along the timeline to retirement where it may be more advantageous to use the NUA rule.

The “net unrealized depreciation” strategy for company stock that has decreased in value
Even depreciated company stock can be used for a tax advantage.

If the company stock is trading below the cost basis, a client may choose to sell and repurchase the shares if there is an expectation that the stock’s value may turn around in the future. If the plan allows the participant to sell and buy back the stocks within the plan, the transaction can reset the cost basis to the new purchase price (depending on how the plan provider tracks cost basis of employer stock shares within the plan). Unlike typical stock transactions resulting in a loss, the wash sale rule does not apply to transactions occurring within ERISA plans.

The hope of the participants, if they continue to work for the company, is for the stock price to increase in the future and that they will be able to take advantage of the appreciation. The lower the cost basis, the greater potential for NUA in the future if the stock rebounds.

Clients also may need to be reminded that strategies such as the NUA rule need to be considered, under guidance from an advisor, in the context of the clients’ overall financial situation and retirement plan. Incurring a tax liability of any kind may have an impact on a tax bracket, total income, deductions, and other tax considerations.

For more information, view our video on NUA or download our investor education piece.

There are some strategies that may be useful for divorced and single individuals as they navigate financial planning.

1. Retirement. Beneficiary planning is important for divorced and single individuals, particularly in cases where there are minor children and guardianship decisions need to be clear.
   • IRAs and most retirement plans have different rules for unmarried individuals. For example, a non-spouse beneficiary cannot treat an IRA as his or her own and defer RMDs.
   • Retirement income planning becomes more important for individuals who do not have a spouse that can “make up the difference” in retirement.
2. Insurance. A sole provider needs adequate life and disability insurance. It is always good to take an inventory of current policies to identify gaps and review beneficiary designations.
   • Life insurance can also be used within an estate planning strategy to provide an equal inheritance among multiple children or heirs.
3. Taxes. Understanding income tax implications is important especially for newly divorced individuals. Clients will need to assess the impact of their new filing status and the possible decrease in deductions and exemptions, as well as potential tax liability for alimony.
   • Large transactions that may occur in divorce, such as the sale of a house, may also create tax issues for individuals.
4. Estate planning. For divorced and single individuals, there are no special deductions. In the case of large estates, careful consideration is needed for planning for liquidity of assets at death.
   • If a client plans to remarry, he or she may want to consider planning strategies involving a Qualified Terminable Interest Property Trust (QTIP) to provide for children from an earlier marriage. The QTIP trust allows each partner to ensure his or her own assets go to a specific designated beneficiary — typically children from a previous marriage
   • As with unmarried couples, it is important to review legal documents such as durable power of attorney, health-care directives, and guardianship plans for minor children.

Fortunately, planning strategies may be used to deal with varying limitations or exclusions.

1. Retirement. Beneficiary designations are critical for unmarried couples because they cannot take advantage of rules governing spousal default on retirement assets. Identifying beneficiaries also allows individuals to avoid the probate process, which typically does not consider unmarried partners as heirs if no will exists.
   • Social Security does not provide survivor benefits for unmarried partners. In addition, many defined-benefit pension plans do not provide automatic benefits to a non-spouse partner. These considerations should be taken into account when planning for retirement.
   • IRA rules only allow a spousal beneficiary to transfer ownership of an inherited IRA into his or her name. This rule may prevent a non-spouse beneficiary from delaying or reducing required minimum distributions after the death of the account owner and limits the ability of next generation beneficiaries to extend the life of the IRA with a stretch strategy.
2. Insurance. Adequate life insurance is critical, especially if one partner is financially dependent on the other. For estate tax purposes, the unlimited marital deduction does not apply to unmarried couples. Still, clients in this category may consider an Irrevocable Life Insurance Trust (ILIT) in order for the beneficiary to avoid estate taxes.
   • Health insurance may also present a tax challenge. In some cases, employer-provided health insurance may be taxable if provided to a “non-family” member.
   • A partner who loses his or her job may also need to consider that COBRA benefits are only eligible for “qualified” beneficiaries such as the employee’s spouse, former spouse, or dependent child.
3. Taxes. There may be disadvantages as well as advantages for unmarried couples when calculating income taxes. There may be issues around which partners can claim certain deductions. But there may also be an opportunity to shift taxable assets to the partner in the lower tax bracket.
   • Clients may benefit from creating separate paper trails. For example, separate bank accounts could be established to record each partner’s ‘basis’” for tax purposes.
4. Estate planning. There is no unlimited marital deduction for estate tax purposes for unmarried couples.
   • Gift taxes may apply. For example, adding a partner to a real estate deed may result in a taxable gift upon the death of the other partner. Also, unmarried couples may not use a split gift strategy.
   • Many legal protections and privileges are only available to a surviving spouse. For unmarried couples, the preparation of legal documents, especially those that clearly define asset ownership, are essential. These include, but are not limited to, health care proxy/directives, durable power of attorney, wills, and trusts.
   • Couples may choose to set up a revocable trust to be used to transfer assets at death. Simple wills may be challenged by other family members during the probate process.
   • Unmarried couples may also want to consider a Domestic Partnership Agreement, which can specify the division of assets in the absence of legal divorce proceedings. Other documents such as Qualified Domestic Relations Orders may be used to split retirement plan assets.

Some of these challenges may include the following:

• Unmarried couples are not afforded automatic protections such as legal and property rights, medical decision-making, and wealth transfer.
• Certain tax provisions are only available to married couples, such as unlimited gifts between spouses and an unlimited estate tax exemption.
• Children from previous marriages may present special considerations for financial planning.
• Marital status may also have an impact on retirement planning.

Challenges
Non-traditional families face unique planning challenges that require thoughtful solutions. Advisors who remain well informed about the unique needs of non-traditional households may be better positioned to compete for business.

In the near term, reducing taxable income is the main strategy to consider, and clients may not realize there is still time. Ask these questions:

• Have they taken full advantage of contributions to individual retirement accounts?
• Are they taking advantage of catch-up contributions allowed after age 50?
• For small business owners, have they funded their SEP-IRA?

While there may be limited actions that can be taken and applied to the 2011 tax year, it makes sense to plan ahead for the AMT in 2012 before next tax season. Especially since the current exemption levels will change for 2012 unless Congress takes action. In fact, according to the Tax Policy Center, if Congress does not act, more than 31 million taxpayers are likely to be subject to AMT in 2012.

Still, there are strategies that clients may employ to try to avoid AMT for the 2012 tax year.

Clients may consider:

• Municipal bonds, which may help to minimize taxable income
• Consulting with a tax professional before exercising certain stock options (ISOs), which may increase the chance of being subject to AMT
• Deferring certain deductions such as those for property taxes or medical payments in a year when the client will not owe AMT
• Delaying large capital gains, which may reduce the AMT exemption amount for taxpayers (although, with the prospects of the maximum, long-term capital gain tax rate increasing to 20% next year and even higher for those subject to the new 3.8% Medicare surtax on investment income, some clients may wish to accelerate capital gains in 2012)
• Accelerating income with a Roth IRA conversion (For taxpayers subject to AMT, additional incremental dollars of ordinary income up to a limit are taxed at a maximum rate of 28%.)

  Download our Understanding the AMT investor education piece for more information.

Capital gains, if any, are taxable for federal and, in most cases, state purposes. Income from federally tax exempt funds may be subject to state and local taxes. Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. The fund may invest significantly in particular segments of the tax-exempt debt market, making it more vulnerable to fluctuations in the values of the securities it holds than a fund that invests more broadly.

]]> http://www.putnamwealthmanagement.com/too-late-to-avoid-amt/feed 0 http://www.putnamwealthmanagement.com/time-to-talk-about-charitable-contributions http://www.putnamwealthmanagement.com/time-to-talk-about-charitable-contributions#comments Mon, 02 Apr 2012 17:58:55 +0000 Bill Cass http://www.putnamwealthmanagement.com/?p=934 Continue reading »]]> It is never too early in the year to talk to your clients about making donations to charity. In fact, the tax benefits may never be better than those available in 2012.

Under pressure to solve the federal budget deficit, leaders on Capitol Hill are eyeing a range of tax reform proposals. In addition, many of the laws that created the current, historically low tax rates are set to expire at the end of the year. Unless the Bush-era tax cuts are extended, income phaseouts on itemized deductions will return in 2013. As a result, the new year will usher in a tax landscape where many itemized deductions could be eliminated or reduced.

Lawmakers have already been scrutinizing the deduction for charitable giving, especially for high-net-worth donors. And President Obama has included limits on itemized deductions for high earners in his budget proposal.

Among the provisions: Limits on itemized deductions would be reduced to a maximum of 28% for families with income over $250,000 or single taxpayers earning more than $200,000.

Additionally, it’s reasonable that the estate tax could be more onerous in the future as the federal government looks to generate more tax revenue, so removing assets from estates now may have advantages.

Accelerating charitable contributions may also be a useful strategy for clients wishing to benefit from the existing tax rates.

Discussing the changing tax environment around charitable giving is a good opportunity to reach out to high-net-worth clients. You may also want to consider collaborating with a local charity to hold a joint event that could bring together high-net-worth donors to provide more information about the charity and the current tax landscape. At this event, you can also make the case for charitable contributions, and give donors an opportunity to connect with a financial advisor.

]]> http://www.putnamwealthmanagement.com/time-to-talk-about-charitable-contributions/feed 0 http://www.putnamwealthmanagement.com/new-money-market-fund-regulations-could-reshape-the-industry http://www.putnamwealthmanagement.com/new-money-market-fund-regulations-could-reshape-the-industry#comments Mon, 26 Mar 2012 14:13:24 +0000 Chris Hennessey http://www.putnamwealthmanagement.com/?p=924 Continue reading »]]> Since the 2008 financial crisis, regulators at the Securities and Exchange Commission have been seeking ways to make money market funds safer. But their most recent proposals have some in the financial industry worried that future changes will undermine money market funds’ appeal.

According to Investor’s Business Daily, ”the rules expected to be formally proposed by the SEC could include several changes:

• A floating NAV, which means money market funds would fluctuate in value like any other mutual fund
• A capital buffer, which would require a fund sponsor, such as a mutual fund company or bank, to hold reserves that could be used to shore up a troubled money market fund in a crisis
• Redemption restrictions, which would require funds to withhold a certain amount, say 3% for 30 days, when an investor tries to pull all of his money out of a fund.”



The potential changes are aimed at preventing a future crisis in the asset class. When Lehman Brothers filed for bankruptcy in 2008, the Reserve Primary Fund, the nation’s oldest money market and a big investor in Lehman Brothers short-term debt, “broke the buck” when the net asset value of its shares dipped below the $1.00 mark. Soon after, the U.S. Treasury decided to step in and guarantee all money market fund assets to prevent a run by spooked investors.

While these changes may help prevent a repeat incident, critics of the proposed legislation say it weakens the basic appeal of money market funds — namely, their price stability and daily liquidity.

In order for the reforms to be formally released for comment, the SEC needs approval from at least three of its five commissioners. But Reuters reports that three of those commissioners have “expressed some doubts about the need for more reforms, with at least some of them unlikely to even agree to propose a rule, let alone vote to implement one.”

Although the debate over the nature of new regulations is ongoing, it’s possible that money market funds as investors know them today may soon be a thing of the past.

]]> http://www.putnamwealthmanagement.com/new-money-market-fund-regulations-could-reshape-the-industry/feed 0 http://www.putnamwealthmanagement.com/time-for-an-ira-checkup-2 http://www.putnamwealthmanagement.com/time-for-an-ira-checkup-2#comments Thu, 15 Mar 2012 19:10:33 +0000 Putnam Investments http://www.putnamwealthmanagement.com/?p=905 Continue reading »]]> Considering the many ways that an IRA can be used to help reduce taxable income, tax season is a good time for an IRA checkup — especially since investors have until April 15 to fund contributions for last year. Additionally, with many people holding numerous jobs throughout their career, your clients may have several IRAs held at different institutions. In fact, the Department of Labor estimates that the average worker born in the later years of the baby boom held 11 jobs from age 18 to 44. These types of checkups can help you gather your share of the $2 trillion in assets flowing into IRA rollovers over the next five years.

Consider offering your clients an IRA checkup to determine what they own and whether they are on track to meet their retirement income savings goal. You may also recommend consolidating accounts so they are all held under one IRA. This also presents a good time to review beneficiary designations on your clients’ IRAs and other retirement accounts. Failing to name beneficiaries or having outdated designations can have serious implications. Utilize Putnam’s IRA worksheet to facilitate these reviews with clients.

As you discuss 2011 and 2012 IRA contributions with your clients, here are some important figures to keep in mind:

TRADITIONAL IRAs


ROTH IRAs


Lastly, depending on income and filing status, your client may also be eligible for a tax credit of up to $1,000 for contributions to an IRA or employer plan.

For more information, review the 2011 and 2012 tax rates, schedules, and contribution limits charts.

Source: IRS, 2011

]]> http://www.putnamwealthmanagement.com/time-for-an-ira-checkup-2/feed 0 http://www.putnamwealthmanagement.com/use-the-ira-funding-deadline-to-connect-with-small-business-owners-2 http://www.putnamwealthmanagement.com/use-the-ira-funding-deadline-to-connect-with-small-business-owners-2#comments Wed, 07 Mar 2012 13:45:46 +0000 Putnam Investments http://www.putnamwealthmanagement.com/?p=893 Continue reading »]]> Small business owners, including 17 million sole proprietors, represent the vast majority of firms in the U.S. (Small Businss Admin, May 2009) and provide an opportunity for advisors looking to grow their retirement business. In fact, according to the Small Business Administration (Saving for Retirement: A Look at Small Business Owners, March 2010), 9 million self-employed individuals are without retirement plan coverage. SEP IRAs represent an excellent entry point for small employers looking to establish a retirement savings plan. And like Traditional IRAs, investors have until the tax filing deadline to make a prior year contribution. These employers are likely consulting with their accountants now and have a clearer picture of their 2010 income and tax liability. Now is a great time to contact sole proprietors and small business owners to discuss the benefits of funding a SEP IRA contribution including:

Reduced taxes through tax-deductible contributions
Investors may take a federal income tax deduction equal to the amount of their employer contributions, up to a maximum of 25% of compensation paid during the year to employees (20% of net earnings after expenses if the investor is self-employed). Plans meeting certain requirements may qualify for a $500 start-up tax credit.

Improved outlook for retirement through tax-deferred growth of account assets*


Maximized retirement savings through relatively high contribution limits
There is a contribution limit of $49,000 or 25% of compensation for 2011, whichever is less. Self-employed individuals can contribute up to 20% of compensation.

Flexible funding since contributions are discretionary
Employers can decide every year what amount to contribute, which can vary from year to year, or skipped altogether. Keep in mind, however, that SEP IRA contributions must be nondiscriminatory, which means you are generally required to contribute the same salary percentage to each eligible employee’s account.

Attracting and retaining employees by offering a retirement plan benefit
A SEP IRA allows employers to prepare for a financial future while also helping employees prepare for theirs.

For more information on the benefits of a SEP IRA, download our Putnam SEP IRA fact sheet.

*Before-tax and after–tax saving assumes a hypothetical investment of $250 a month, with annual returns of 8% compounded monthly and earnings reinvested. The before–tax illustration does not reflect the effect of taxes, which are due upon withdrawal. The after-tax illustration reflects the effects of an annual 25% federal tax. The value of the tax–deferred account upon withdrawal will depend on the investor’s tax rate. Depending on an investor’s tax rate, the value of the taxable account upon withdrawal may be higher or lower than what is shown. Lower minimum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the
accounts shown. Investors should consider their personal investment horizons and income tax brackets, both current and anticipated, when making an investment decision; these may further affect the results of the comparison. The return is shown for illustrative purposes only and is not intended to predict the return of any investment in your plan, which will fluctuate. Regular investing does not ensure a profit or protect against loss in declining markets. Withdrawals are subject to income tax, and those made before age 591/2 may be subject to an additional 10% tax.

]]> http://www.putnamwealthmanagement.com/use-the-ira-funding-deadline-to-connect-with-small-business-owners-2/feed 0 http://www.putnamwealthmanagement.com/ten-tax-smart-strategies-to-help-clients-prepare-for-higher-taxes http://www.putnamwealthmanagement.com/ten-tax-smart-strategies-to-help-clients-prepare-for-higher-taxes#comments Mon, 27 Feb 2012 20:56:55 +0000 Bill Cass http://www.putnamwealthmanagement.com/?p=885 Continue reading »]]>
With the Bush-era tax rates set to expire this year, and new taxes being levied in 2013 as a result of health-care reform, many clients may face higher taxes next year. There is a small window of opportunity for clients to incorporate a variety of tax-smart strategies into their plan now to take advantage of the current tax environment.

Download our 10 income and estate tax planning strategies investor education piece to learn more.

 

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