Appropriate Balance Financial Services

Below are some highlights of the Act that was passed and how they might affect you or your family. While the summary is not all inclusive, it should give you some tax planning tips to discuss with your Financial Advisor at Appropriate Balance and/or your CPA.

Individual Tax Rates
The marginal tax rates under the previous law are still applicable. However, a new top rate of 39.6% has been enacted for individuals who have income over $400,000, $425,000 for heads of household and $450,000 for married taxpayers.

Capital Gains and Dividends
For most taxpayers, the 15% rate for long term capital gains remains the same. For those in the 10%-15% tax bracket, the rate remains at 0%. However, a 20% rate is applied to individuals whose income exceeds the tax thresholds above.

Medicare Tax
Taxpayers with incomes over $200,000 ($250,000 for married) will be subject to an additional Medicare tax of 3.8% on investment income and 0.9% on wages and self-employment income.

Phase out for Itemized Deductions and Exemptions
Itemized deductions and exemptions will be phased out for individuals above $250,000 adjusted gross income (AGI), $275,000 for heads of household and $300,000 for married couples. Itemized deductions will be reduced by 3% of the amount AGI exceeds the threshold amounts and Exemptions will be reduced by 2% for each $2,500 which exceeds the threshold amounts. The maximum reduction for itemized deductions is 80% of total itemized deductions.

Expiration of Social Security Tax Reduction
The payroll tax for Old Age, Survivors and Disability Insurance Tax (“OASDI”) was temporarily reduced from 6.2% to 4.2% in January of 2011. This reduction expired on 1/1/2013 and the payroll tax deduction will revert back to 6.2%.

Tax-Free IRA Distribution for those over 70 1/2
Tax free distributions of up to $100,000 can be made directly from a retirement plan to a charity for 2012 and 2013. Since 2012 has already passed, there is a special rule where individuals can use distributions made in December and transfer them to charities in January 2013. Also, for individuals who for some reason forgot to take their 2012 required minimum distribution, they can take their distribution in January 2013 and not be penalized.

Estate and Gift Tax Exclusion
The exclusion amount stays at $5 million (indexed for inflation) but the top tax rate is increased from 35% to 40%.

As expressed in the May/June 2012 issue of “Eye on Money,” some 401(k) plans have high fees and expenses. In addition, the investment choices available in these retirement plans are sometimes limited. As a result of TIPRA (Tax Increase Prevention Reconciliation Act), tax laws now permit in-service distributions from your retirement plan while you continue working. This money can be distributed into a self-directed IRA Rollover account.

Not all company-sponsored retirement plans offer In-Service 401(k) withdrawals/rollovers. To find out if your company-sponsored retirement plan offers In-Service 401(k) rollovers, contact your plan administrator or ask for a copy of the Summary Plan Document. There may be some additional requirements such as age (typically after 59 ½) and eligibility (employee must have been a participant in the plan for five years or the funds have to have been in the plan for two years).

In order not to incur a tax liability, the rollover must go directly to your custodian, i.e., Charles Schwab or TD Ameritrade and deposited into your IRA Rollover account. This will enable you to continue to benefit from the tax-deferred growth without an immediate tax liability or penalty. You can maintain your contributions to your 401(k) and receive any employer matching.

Below are some reasons to consider a 401(k) retirement plan in-service rollover to a self-directed IRA Rollover account.

• Flexibility of investment choices
• Diversification of concentrated positions
• Simplify estate planning
• Consolidate retirement accounts
• Receive professional guidance and have your assets managed by ABFS

Another reason to consider an In-Service 401(k) withdrawal is that you can sometimes roll 401(k) money directly into a Roth IRA where future earnings will be tax free.

Please don’t hesitate to give your ABFS advisor a call (425-451-0499) to discuss this investment strategy.

According to the Investment Company Institute, as of 12/31/2011, over $3.1 trillion was held in employer sponsored 401(k) plans, in the U.S. This figure being all the more impressive when you consider the advent of the employer sponsored 401(k) plan was just over 30 years ago. Over the years 401(k) plans have evolved to meet the service demands of plan sponsors and participants. Technology has helped foster the development and evolution of the service features offered by most plans. One such development was daily valuation. Until the late 1980’s, most plans were only valued quarterly; which also meant that participants could only make changes to their investment selections quarterly. The outcry for daily valuation came after the crash of 1987. Many participant investors rushed to capitalize on the 20+% decline in market value in October, 1987; only to later find out that their adjustments couldn’t be facilitated until the end of the year; at which time the market had recovered significantly.

We are on the cusp of another such development, that being in the form of service and fee disclosure. Whether bundled or unbundled, 401(k) plans have several parts, with each part representing a service element that carries its own layer of fees. Given the length and complexity of many plan service agreements, fees can often either be hard to quantify or ‘appear’ to be downright hidden. What services are being offered (and which are not) by the provider and their fiduciary status, is often unclear in service agreements as well. The upcoming Department of Labor (DOL) regulation related to ERISA section 408(b)(2) seeks to clarify these ambiguities. The 408(b)(2) regulation requires service providers to disclose the following in their written agreements:

• Services: What will be provided and what will not
• Cost: Compensation and sources of compensation
• Status: Does the advisor accept fiduciary responsibility (note: if the agreement is silent on fiduciary status, the provider is not accepting fiduciary status)

The last disclosure brings up an interesting point, since a fiduciary is defined as one who legal and ethical responsibility to look after other peoples’ money. With regards to 401(k) plans, fiduciaries should have a singular duty of loyalty, meaning they must serve the best interests of plan participants and beneficiaries. Plan sponsors are fiduciaries. Service providers should accept fiduciary responsibility as well. Though, many do not. ABFS would be glad to review your 401(k) service agreement and do a service and fee analysis, for no cost or obligation.

408(b)(2) is not a panacea; but it is a step in the right direction. It begins to address the shortcomings of information being disclosed from service providers to plan sponsors. In August, regulation 404(a)(5) will take effect; which speaks to information being disclosed from plan sponsors to participants. Check back in the coming weeks for more information.