Figuring Your Net Worth

“How much am I worth?”  It’s a vital question in estate and retirement planning.  Most people are aware that, in figuring net worth, you subtract debts (e.g., mortgages, personal loans) from the value of your assets.  But you also may want to consider the after-tax value of your assets.  After all, not all assets are the same on an after-tax basis, even if the pre-tax value is the same.

Savings accounts and CDs—A CD worth $100,000 is worth $100,000.  Any income earned on the investment is taxed at ordinary income rates, but the value of the CD itself, because it is purchased with after-tax dollars, stays the same.

Stock and mutual fund shares—The value of your shares often includes appreciation that hasn’t been taxed.  If you sell $100,000 worth of stock that you originally purchased several years ago for $75,000, the $25,000 of gain will be taxed at 15% ($3,750) for most taxpayers.  That makes the after-tax value of your stock only $96,250.  Some higher-income taxpayers may pay a 20% capital gains tax, plus a 3.8% net-investment income tax, leaving even less after taxes.

Retirement accounts—The value of your IRA or 401(k) plan may be worth considerably less on an after-tax basis.  A withdrawal from an IRA is subject to ordinary income tax at rates up to 37%.  If you withdraw $10,000 from an IRA and you’re in the 32% tax bracket, you’ll pay $3,200 in income tax, leaving only $6,800.  This doesn’t apply to Roth IRAs, however.  Roth IRAs are funded with after-tax dollars, so there is no income tax on qualified withdrawals.

Financial planners recommend that you calculate your net worth annually, but it’s also a good idea to determine the after-tax value of your assets.  This can be important information when deciding which assets to use for living expenses.  Keep in mind that you can completely avoid the capital gains tax on your appreciated stock by using the shares to make your charitable gifts.  You’ll also be entitled to an income tax deduction for the full value of shares held more than one year, if you itemize.  If you’re age 70½ or older, you can make charitable gifts directly from your IRA and avoid the tax that would otherwise be due.

Older Brides and Grooms Face Important Questions

Prospective brides and grooms in their 60s or older may not have to select china or silverware patterns, but they still have issues to resolve:

How finances will be combined—A couple may decide to keep the bulk of their estates separate to make estate planning easier.  Check with an attorney about state laws governing property rights and the need for a prenuptial agreement.  A special trust (QTIP) allows the surviving spouse to receive income for life, with assets then passing to children or grandchildren from a previous marriage.

Where to live—A single homeowner can exclude up to $250,000 of gain on the sale of a principal residence, as often as every two years, provided he or she has lived in the home at least two of the last five years.  A married couple can exclude up to $500,000.  It may be more tax advantageous to sell one home over the other, depending on the appreciation in the homes.  Or rent the extra home for additional income.  Another attractive option: Fund a charitable remainder trust with the home and then have the trustee sell the house.  You can retain payments for life from the full sale proceeds and will be entitled to a charitable deduction.

Retirement plan beneficiary designations—Under federal law, a surviving spouse is automatically the beneficiary of certain qualified retirement plans (not including IRAs), regardless of the beneficiary designation.  A spousal consent can be signed following the marriage that will permit retirement assets to pass instead to family members.

Wills, trusts, health care directives—Existing wills and estate planning documents may become obsolete upon marriage.  Check with a lawyer about changes needed to protect the newlyweds and other family members.  Determine who should make financial and life-prolonging decisions in the event of disability.  When updating estate planning documents, both spouses should consider including their favorite charities.

Before exchanging vows, senior brides and grooms should consider their estate planning goals.  A trip to the attorney prior to saying “I do” can help achieve their objectives.

Reach IRA Funds Early

Suppose you’re only age 55, but you’d like to start taking some money out of your IRA.  Is there any way to do so without being penalized?

Normally you can’t withdraw IRA funds before age 59½ without incurring a 10% penalty, with certain exceptions (rolling the funds over to another IRA, payment of medical insurance premiums by unemployed individuals, disability, qualified educational expenses and the purchase of a first home up to $10,000).  But the tax code also allows you to make periodic withdrawals, based on your life expectancy under IRS tables, without incurring the penalty.

The key requirements are that your payments must be periodic (quarterly, for example) and that they continue for at least five years.  Depending upon the withdrawal method chosen, it may be possible to build in a cost-of-living increase.  If you stop receiving payments before five years, or take out additional amounts, you will be subject to the 10% penalty on all amounts received.  Once you reach age 59½, you can stop taking distributions, provided you have met the five-year test.  It’s also possible to divide a single IRA into separate accounts and take substantially equal payments from only one account, thereby preserving more of the savings.  You will, however, owe income tax on your IRA distributions, even if you avoid the 10% penalty.  Check with your financial advisor before undertaking any withdrawals prior to age 59½.

Start Tax Planning Now

It’s never too early to begin tax planning—especially when your 2018 income taxes are still fresh in your mind.  Now is an excellent time to make changes that may result in tax savings this year.  Here are a few suggestions for making 2019 a less “taxing” year.

Review your investments—The stock market’s moves in the past year may mean that your portfolio is out of balance.  If you’re in a high tax bracket, it might be wise to invest in municipal bonds that pay tax-free income.  Another idea: Use highly appreciated assets to arrange a charitable gift annuity or charitable remainder trust.  You can retain payments for life on the full value of your assets, enjoy an income tax deduction and have the satisfaction of supporting our future.

Make gifts to family members—Tax laws allow you to give up to $15,000 to as many individuals as you wish, gift-tax free.  Spouses can give up to $30,000.  A gift of income-producing assets made early in the year will shift the income from your upper bracket to potentially lower brackets of other family members.  A charitable suggestion: It’s possible to arrange larger transfers to family members by combining them with life-income gifts such as charitable remainder trusts and charitable gift annuities.

Review all your insurance—Make sure your auto and homeowner’s policies provide adequate protection.  Ask your advisors about the tax breaks for long-term care insurance premiums.  Check your life insurance to see that you have adequate coverage to provide for family members.  If you have life insurance that is no longer needed, consider giving the policy to charity.  You’ll be entitled to a charitable deduction that may reduce 2019 taxes.

Don’t forget your estate plan—Does your will still reflect your wishes for the disposition of your estate?  Ask your attorney about a revocable living trust, a living will and a durable power of attorney.  A winning option: Add a charitable gift in your will, codicil or living trust, to continue the thoughtful gifts made during your lifetime.