In This Issue
Ruminating on Roth
Curt's Quick Comment
Article Headline
From the Financial Presses
Quick Links
Featured Article
As many of you know (if you've heard me speak), I generally think that the Survivor's Benefit Plan (SBP) is a good choice for retiring military members.  One case where I don't think it is a good idea is in the case of a Special Needs Child.  That is because SBP can't be paid to a trust.  There has been legislation proposed in Congress (last introduced in 2012) to remove this restriction.  If you believe in actively engaging your representative, this would be a good issue.  It could really help military families.  
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals
Greetings!

I have to admit, I haven't had a lot of time to watch March Madness...I guess I'll blame it on the other madness...April 15th.  As the tax season comes to a close, it is time to start thinking about tax planning for this year.  The tax code has changed significantly for those who who make in excess of $200,000 and if you fall in that range, it is time to start planning now.
  
My first article relates to tax planning in regards to your retirement.  The promise of tax-free income in retirement is tempting and for that reason many people choose to invest for retirement through Roth accounts.  That may be a good reason to invest through a Roth.  But, before you pull the trigger think about some of the other permutations.
  
My Quick comment addresses record keeping in regards to your securities investments and your taxes.
  
The third article concerns how you can use trusts to influence behavior of beneficiaries...if you so desire.
  
Continuing on the trust theme, the first article from the financial presses that I selected talks about the pros and cons of Living Trusts.  The last article covers Life Insurance and the fact that we all should review our policies every so often.
  
Enjoy your Spring and I'll talk to you in May.


Curt
Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703)542-400 or (800) 928-1820
Ruminating on Roth 

It is the first week of April, so all minds naturally turn to taxes.  And one of the things that often comes up is Roth (both IRA and 401(k)).  The decision on whether to use a Roth versus a Traditional retirement account is never as straight-forward as it seems.  So here are some thoughts that I have when I do the comparison, either for contributions or conversions.

 

Pay Me Now or Pay Me Later

The IRS will eventually get its money from you.  You will either pay taxes when you put the money in (Roth) or when you take the money out (Traditional).  At the first level the math is simple.  If your tax rate is lower now than it will be in the future chose the Roth.  Make the opposite decision if you tax rate will be lower in retirement.  But, determining your tax rate now may be harder than you think.  Will contributing to a deductible Traditional IRA/401(k) now lower your Adjusted Gross Income (AGI) and make you eligible for credits or deductions you wouldn't normally get?  If so, the effective reduction in your taxes will be higher than your marginal rate.  You need to do the second and third level analysis.

 

It Is All About Maximizing Income In Retirement

Distributions from Roth accounts are not considered income for tax purposes.  Distributions from Traditional accounts, on the other hand, are.  If you will not have a Pension in retirement and only have your savings and Social Security then a Roth may make more sense.  That is because if you have "too much" income (and it is not that much), your Social Security Income will be taxable.  However, if the other major portion of your income comes from a Roth account, you won't have that much "income" and your Social Security will not be taxable...more money in your pocket.

 

You Also Want As Much Matching As Possible

If you invest through a Traditional 401(k) it is possible to get $1 of matching for less than $1 of income ($1 of income contributed to a Traditional 401(k) reduces taxes by some amount resulting in less than $1 in income for $1 in matching).  On the other hand, you need earn more than $1 in income to get $1 of matching in a Roth 401(k).  You can think of it this way:  Income - Taxes = $1 = $1 matching.  By the way, employer matching goes into a Traditional 410(k) not a Roth  (Uncle Sam is going to get his cut eventually).

 

You Should Think About Your Legacy Plans.

Roth IRAs do not have Minimum Required Distributions.  All 401(k) and its cousins 403(b) and TSP (including Roth) accounts and Traditional IRAs have Minimum Required Distributions.  Therefore a Roth IRA can be an extremely effective, tax efficient way to pass on assets to the next generation. 

 

There are obviously other factors in the decision (eligibility for Roth IRAs as one example), but these are some of the things I think about when it comes to Roth IRA/401(k)/403(b)/TSP versus Traditional decisions. 

Curt's Quick Comment
Have you ever heard people say, "You need to save tax related documents for "X" years."?  Generally what they say is true.  BUT, remember the clock doesn't start for your investment statements until you sell the associated security.  So, you may need to hold onto those old account statements for a bunch of years (This should eventually get better as the Feds are phasing in a requirement for brokers to track and report basis).  
Incentive Trusts:
Setting Guidelines for Your Heirs 

An incentive trust is an estate planning tool that allows the trust grantor to reward heirs for desired behavior. It also allows the grantor to impose appropriate penalties for undesirable activities.

 

Some common themes contained in incentive trusts:

 

         Education: Incentive trusts have been used to provide extra support to those heirs who pursue advanced degrees, focus on designated fields of study, or attend specified institutions. Some trusts are designed to reward instances of outstanding scholarship and academic achievement. Some permit withholding support from those who fail to meet minimum levels of accomplishment.

         Moral and family values: Some trusts are intended to promote family life by providing income support payments to heirs who choose to stay at home with children. Some trusts offer beneficiaries bonuses for childbearing, foster care, or adoption. Some withhold benefits from those heirs who might be convicted of a crime or fail a prescribed drug or alcohol screening test.

         Business and vocational choices: Entrepreneurs can use trusts to provide incentives to those heirs who commit to helping carry on a family business. Trusts can be designed to encourage or discourage career choices specified by the trust creator. Trusts can also be used to offer focused financial support to those beneficiaries who opt to follow paths that are personally and socially rewarding yet generally less lucrative.

         Charitable and religious opportunities: Some trusts are designed to encourage religious behavior by requiring specific observances. Some trusts provide funds for dues or other costs associated with religious participation. Some subsidize those heirs who choose missionary work or other religious vocations. Some provide matching funds for heirs' contributions to favored organizations.

 

Incentive trusts can provide many of the same benefits as other trust structures. For example, by placing assets in a properly designed trust, you can move them out of your estate in order to manage tax liabilities more efficiently. You can also ensure that assets will be managed professionally and held in safe custody through a stable financial institution.

 

Key Limitations

 

Just as you have broad discretion as a parent or guardian, you have great latitude when you create an incentive trust. But there are limits. The trust cannot, of course, require blatantly illegal activity; neither can it provide incentives for actions that might be deemed contrary to public policy -- violating the unwritten laws of the community. For example, a trust generally cannot provide incentives for a beneficiary to divorce an unpopular mate, nor can it be used to undercut existing voluntary separation, child support, or other domestic arrangements generally permitted by law in your state.

 

Incentive trusts may be subject to what is called the rule of perpetuities, a legal concept that says trusts must be liquidated at some definite interval after their creation. This rule is enforced in many, but not all, states. It applies to trusts that are created in the state where the rule is enforced (you may generally create a trust in any state, not just the state in which you reside). As a consequence, you'll want to be sure that any trust you do create can last for as long as needed to achieve your goals.

 

Certain types of incentive trusts may also be subject to the generation skipping transfer (GST) tax. Where an incentive trust fits the complex definition of a GST, the rules limit the aggregate amounts that can be placed in the trust without incurring a tax of about half of the value in the trust. In some trust scenarios, life insurance can augment the amounts permitted under GST rules.

 

Creating an effective incentive trust involves complex legal, tax, and investment management choices. This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific trust option. For this reason, be sure to seek advice from knowledgeable legal and financial professionals.

 

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

 

2013 S&P Capital IQ Financial Communications. All rights reserved.
From the Financial Presses
 

Straight Talk on Living Trusts

Ask two financial experts about the benefits of using a revocable living trust and you might well get precisely opposite reactions, especially on a regional basis. One might say that it's the greatest thing since sliced bread, while the other could argue that it should be avoided like the plague. The truth probably lies somewhere in between...(For more click here)

 

Dust Off Life Insurance Policies

When was the last time you reviewed your life insurance policies? If you're like most people, you've probably stashed your policies in a drawer, filing cabinet, or safe deposit box where they've been gathering dust. But you should review your policies periodically to see whether they still meet your needs. Depending on the outcome, you might adjust your coverage....(Read more here)

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
 
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
Military Professionals have unique financial benefits and unique financial needs.  If you think you would like some help developing your Financial Strategy please give us a call at (703) 542-4000 for a free initial consultation or for more information go to our website at .www.CLSheldon.com .