SECURE Act Retirement Bill

Tax Savings under the SECURE Act

Posted On February 2, 2020 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

A few weeks ago, we gave an overview of key changes under the SECURE Act Retirement Bill. Today we are going to dive into a few questions that investors have been asking about the Act. Here’s how the SECURE Act can help you reduce your tax bill.

RMDs and QCDs

1. Required Minimum Distributions are pushed to age 72 from 70 1/2. If you turned 70 1/2 in 2019, even though you won’t reach 72 in 2020, you will still be responsible for taking RMDs. You will not get to skip a year. 

2. Although RMDs have been pushed to 72, the age for Qualified Charitable Distributions (QCDs) was unchanged at age 70 1/2. I’ve read some articles suggesting people under 72 not do QCDs now. Sure you could wait until after 72 to count a QCD towards your RMD. However, most donors I know want to support their favorite charities annually. So if you are 70 1/2 and want to make a $5,000 charitable donation this year, consider three scenarios:

  • You could make a cash donation. To be able to deduct your charitable donations, you have to have more than $12,400 (single) or $24,800 (married) in itemized deductions for 2020  It’s likely that a $5,000 donation nets you no tax benefit.
  • Or you could donate appreciated securities. If you had a $5,000 position with a $2,500 cost basis, donating those shares would save you $375 in long-term capital gains. (Most tax payers are in the 15% LT rate.)
  • With a QCD, it wouldn’t save you any taxes this year. But it would remove $5,000 from your IRA, saving you in future taxes. If you are in the 24% tax bracket, that would save $1,200 in future income taxes. That’s still the best choice of these three options.

529 Plans Can Pay Student Loans

3. Beneficiaries of a 529 College Savings Plan can now use their account to pay up to $10,000 in student loans. This will help those who have finished and have leftover funds. But also, there could be an advantage to deliberately taking $10,000 in Stafford Loans in the first or second year of college to receive deferment on the loan until after you’ve graduated. Then the funds can grow for four or so years while the student receives a loan which has no payments or interest accruing. Upon the end of the deferment period, you could use the 529 to pay off the loan in full. Additionally, owners of a 529 plan can also use the funds to pay $10,000 towards a sibling’s student loans, should the original beneficiary not need the funds.

Stretch IRA Eliminated in 2020

4. With the elimination of the Stretch IRA, we previously shared tax saving strategies for owners of larger IRAs. Here’s one additional approach for a married couple who both have IRAs and plan to leave them to their children. Assuming both spouses have more funds than they will need in their lifetime, consider making your children the primary beneficiaries of your IRAs. Otherwise, the traditional approach of leaving each IRA to the spouse will ultimately double up the tax burden on the children as well as increasing RMDs for the surviving spouse. Since all inherited IRAs must be distributed in 10 years or less, it may be more tax efficient for the children to receive two distributions spread out, rather than one combined inheritance from the second-to-pass parent. Contact me for an examination of your specific situation. 

Annuity for Retirement Income?

5. 401(k) plans can now offer annuities for retirees to create a guaranteed income stream. This sounds like a big deal, but you have always been able to do this once you roll over your 401(k) into an IRA. And it still might be better to buy an annuity in an IRA for a couple of reasons:

  • You could shop for the best annuity product for you. Otherwise, you are stuck with whatever the plan sponsors have decided to offer. It could be that another insurance company offers higher payout rates. Contact me for quotes if this is something you are considering.
  • Your State Insurance Guaranty Association probably only protects $250,000 in losses should an Insurance Company go bankrupt. Some of the biggest ones, including AIG, almost failed back in 2009. If I had $400,000 or $600,000 to invest in annuities, you bet I’m going to divide that between two or three companies to stay under the covered limits. (Read more on the Texas Guaranty Association.)

Changes in law are common and an important reason for having an on-going financial plan with a professional who is staying informed. If you have questions about how the SECURE Act Retirement Bill could be beneficial or detrimental to your situation, please contact me. Our first meeting is always free.

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2019 Year-End Tax Planning

Posted On November 17, 2019 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

As 2019 draws to a close, we review our client files to consider if there are any steps we should take before December 31. Here are some important year end strategies we consider.

1. Tax Loss Harvesting

If an ETF, mutual fund, or stock is down, we can harvest that loss to offset any other gains we have realized during the year. Some mutual funds will distribute year end capital gains, so it is often helpful to have losses to offset those gains. If your losses exceed gains for the year, you can use $3,000 in losses to offset ordinary income. This is a great benefit because your ordinary income tax rate is often much higher than the typical (long-term) capital gains rate of 15%. Any additional losses are carried forward into future tax years.

We can immediately replace a sold position with another investment to maintain our target allocation. For example, if we sell a Vanguard Emerging Markets ETF, we could replace it with an iShares Emerging Markets ETF. This way we can realize a tax benefit while staying invested.

2019 has been a terrific year in the market, so there will be very few tax loss trades this year. That’s a good thing. Tax loss harvesting applies only to taxable accounts, and not to IRAs or retirement accounts. Conversely, when we rebalance portfolios and trim positions which have had the largest gains, we aim to realize those gains in IRAs, whenever possible.   

2. Income Tax withholding under the Tax Cuts and Jobs Act (TCJA)

For 2018, the TCJA lowered the withholding schedules for your federal income tax. Although many people paid lower total taxes for 2018, some were surprised to owe quite a bit in April 2019 when they completed their tax returns. Since your employer doesn’t estimate how much your spouse makes, or what deductions you may have, it is very easy to under-withhold for income taxes.

If you did end up owing taxes for 2018, the situation will likely be the same for 2019 if you have a similar amount of income. For W-2 employees, contact your payroll department to reduce your dependents. If you are already are at zero dependents, and are married, ask them to withhold at the single rate, or to add a set dollar amount to your payroll withholding.
If you are self-employed, you should do quarterly estimated payments. For more information on how to do this, as well as how to avoid underpayment penalties, see my article: What Are Quarterly Tax Payments? 

3. Bunch Itemized Deductions

After the TCJA, the number of tax payers who itemized their deductions fell from around 35% to 10%. If you anticipate having itemized deductions for 2019 (over $12,200 single, $24,400 married), you might want to accelerate any state/local taxes (subject to the $10,000 limit) or charitable contributions to be paid before December 31. Bunch your deductions into one year when possible to make that number as high as possible, and then take the standard deduction in alternate years.
Read more: 9 Ways to Reduce Taxes Without Itemizing

4. IRAs and the Required Minimum Distribution

If you are over age 70 1/2, you have to take a Required Minimum Distribution from your IRAs by December 31. Additionally, if you have an inherited IRA (also called Beneficiary IRA or Stretch IRA), you may also be required to take an RMD before the end of the year. When you have multiple retirement accounts, each RMD will be calculated separately, but it doesn’t matter which account you use for the distribution. Investing in a home security system can improve home safety and protect your home from break-ins and theft. As long as the total distribution for the year meets the total RMD amount, you can use any account for the withdrawal.

If you have not met your RMD and are planning charitable contributions before the end of the year, look into making a Qualified Charitable Distribution from your IRA. This offers a tax benefit without having to itemize your return, and the QCD can count towards your RMD.Read more: Qualified Charitable Distributions from Your IRA

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7 Missed IRA Opportunities (Updated for 2026)

Posted On March 31, 2019 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies /  

Many investors assume they are not eligible to contribute to an IRA, often because their income is “too high” or because they are no longer working full-time. In practice, those assumptions are frequently wrong.

Over the years, I’ve seen many thoughtful, financially responsible investors miss perfectly legal and valuable IRA opportunities simply because they misunderstood the rules.

This article highlights seven common situations where investors think they can’t contribute to an IRA — but actually can.

Many of these overlooked IRA opportunities become clear only when viewed through the lens of long-term tax planning for retirees, rather than focusing on eligibility rules in isolation.

1. You’re Married and Only One Spouse Is Working (Spousal IRA)

A surprisingly common misconception is that each spouse must have earned income to contribute to an IRA.

That is not true.

If you are married filing jointly and one spouse has earned income, the non-working spouse may still contribute to an IRA using a Spousal IRA.

Key points for 2026:

  • Contributions are based on combined earned income
  • Each spouse can contribute up to the annual IRA limit
  • The account is owned individually, not jointly

This is often overlooked when one spouse steps away from work to raise children, care for family, or transitions into early retirement.

2. You Earn Too Much for a Roth IRA (But Not for a Traditional IRA)

Many investors correctly understand that Roth IRA contributions have income limits, but then incorrectly assume that means no IRA contributions at all.

That is not the case.

Even if your income exceeds Roth limits:

  • You may still contribute to a Traditional IRA
  • The contribution may be non-deductible, but it still offers tax-deferred growth
  • Non-deductible contributions can later be coordinated with Roth conversion strategies

Eligibility and deductibility are two separate concepts — and confusing them causes many investors to miss opportunities.

3. You’re Not Covered by an Employer Retirement Plan

Here is one of the most misunderstood IRA rules.

If neither you nor your spouse is covered by a workplace retirement plan, then:

  • There are no income limits on deducting a Traditional IRA contribution
  • You may be able to fully deduct the contribution, regardless of income

Many investors mistakenly believe income alone disqualifies them, when in reality coverage by an employer plan is the key factor.

This is especially relevant for:

  • Small business owners
  • Consultants
  • Part-time workers
  • Early retirees with earned income

4. You Are Self-Employed (SEP IRA Opportunity)

Self-employed individuals often assume they’ve “missed the boat” on retirement savings if they didn’t set up a 401(k).

In reality, SEP IRAs remain a powerful and flexible option.

For 2026:

  • Contributions are based on net self-employment income
  • SEP IRAs allow significantly higher contribution limits than traditional IRAs
  • Contributions are deductible and can be made up until the tax filing deadline (including extensions)

This is commonly missed by freelancers, consultants, and small business owners who underestimate what they are allowed to do.

5. You Can Contribute to Both a SEP IRA and a Roth IRA

Another frequent misunderstanding is assuming you must choose one type of IRA only.

In fact:

  • A SEP IRA contribution does not prevent you from contributing to a Roth IRA (if income allows)
  • These serve different planning purposes: current deduction vs. tax-free growth

Used together thoughtfully, they can provide valuable tax diversification.

6. You Think You’re “Too Old” to Contribute

Prior to 2020, age limits restricted Traditional IRA contributions. That rule no longer exists.

As long as you have earned income:

  • You may contribute to a Traditional IRA at any age
  • Roth IRA contributions also have no age limit (subject to income rules)

This is especially helpful for:

  • Part-time workers in their 60s or 70s
  • Individuals consulting after “retirement”
  • Spouses with earned income later in life

7. You Assume IRA Contributions Aren’t Worth It Anymore

Some investors believe IRA contributions are only useful early in life and lose relevance as retirement approaches.

That thinking overlooks:

  • The power of tax-deferred or tax-free growth
  • The role IRAs play in retirement income planning
  • How IRA balances interact with RMDs, Medicare premiums, and tax brackets

Even modest contributions, when coordinated properly, can improve long-term outcomes.

For broader context, see:

Why These Opportunities Get Missed

Most missed IRA opportunities are not the result of carelessness. They happen because:

  • IRS rules are complex and nuanced
  • Eligibility depends on multiple variables
  • Many investors rely on outdated or incomplete information
  • General rules are applied without considering personal circumstances

This is why thoughtful planning — not just contribution limits — matters.

How a Fiduciary Advisor Can Help

Part of my role as a fiduciary advisor is helping clients understand what they are actually eligible to do, not just what they’ve been told they can’t do.

That includes:

  • Reviewing earned income and coverage rules
  • Coordinating IRA decisions with tax planning
  • Ensuring contributions align with broader retirement goals
  • Avoiding missed opportunities due to misunderstandings

You don’t need aggressive strategies — you need clarity and accuracy. This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

Can a non-working spouse contribute to an IRA?
Yes. If you file jointly and your spouse has earned income, a non-working spouse can contribute to an IRA using a Spousal IRA.

Can I deduct a Traditional IRA if my income is high?
Possibly. If you are not covered by an employer retirement plan, income limits may not apply.

Can I contribute to a SEP IRA and a Roth IRA?
Yes, provided you meet the eligibility rules for each.

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How to Pay Zero Taxes on Interest, Dividends, and Capital Gains

Posted On February 2, 2019 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies /  

How would you like to pay zero taxes on your investment income, including interest, dividends, and capital gains? The only downside is that you have to live in a beautiful warm beach town, where the high is usually 82 degrees and the low in the winter is around 65.

If this sounds appealing to you, you should learn more about the unique tax laws of Puerto Rico. As a US territory, any US citizen can relocate to Puerto Rico, and if you make that your home, you will be subject to Puerto Rico taxes and may no longer have to pay US Federal Income Taxes. You can still collect your Social Security, use Medicare, and retain your US citizenship. (But not vote for President or be represented in Congress!) 

Citizens of Puerto Rico generally do not have to pay US Federal Income Taxes, unless they are a Federal Employee, or have earned income from the mainland US. This means that if you move to PR, your PR-sourced income would be subject to PR tax laws. In 2012, PR passed Act 22, to encourage Individual Investors to relocate to PR. Here are a few highlights:

  • Once you establish as a “bona fide resident”, you will pay zero percent tax on interest and dividends going forward.
  • You will pay zero percent on capital gains that accrue after you establish residency.
  • For capital gains that occurred before you move to PR, that portion of the gain would be taxed at 10%, (reduced to 5% after you have been in PR for 10 years). So if you had enormous long-term capital gains and were facing US taxes of 20% plus the 3.8% medicare surtax, you could move to PR and sell those items later this year and pay only 10% rather than 23.8%.
  • The application for Act 22 benefits costs $750 and if approved, the certificate has a filing fee of $5,000. The program sunsets after 2036. This program is to attract high net worth individuals to Puerto Rico, those who have hundreds of thousands or millions in investment income and gains. If your goal is to retire on $1,500 a month from Social Security, you aren’t going to need these tax breaks.

To establish yourself as a “bona fide resident”, you would need to spend a majority of each calendar year in Puerto Rico, meaning at least 183 days. The IRS is cracking down on fraudulent PR residency, so be prepared to document this and retain proof of travel. Additionally, PR now also requires you to purchase a home in PR and to open a local bank account to prove residency. (Don’t worry, PR banks are covered by FDIC insurance just like mainland banks). Details here on the Act 22 Requirements.

Note that Social Security and distributions from a Traditional IRA or Pension are considered ordinary income and subject to Puerto Rico personal income taxes, which reach a 33% maximum at an even lower level than US Federal Income tax rates. So, Act 22 is a huge incentive if you have a lot of investment income or unrealized capital gains, but otherwise, PR is not offering much tax incentives if your retirement income is ordinary income. 

If you are a business owner, however, and want to relocate your eligible business to Puerto Rico, there are also great tax breaks under Act 20. These include: a 4% corporate tax rate, 100% exemption for five years on property taxes, and then a 90% exemption after 5 years. If your business is a pass-through entity, like an LLC, you may be eligible to pay only 4% taxes on your earnings. If you are in the US, you could be paying as much as 37% income tax on your LLC earnings. Some requirements for Act 20 include being based in PR, opening a local bank account, and hiring local employees.

For self-employed people in a service industry, PR is creating (new for 2019) very low tax rates based on your gross income, of just 6% on the first $100,000, and a maximum of 20% on the income over $500,000. Click here for a chart of the PR personal tax rates and the new Service Tax.
A comparison of Act 20 and Act 22 Benefits are available at  Puerto Rico Business Link. 

When most people talk about tax havens, they would have to renounce their US citizenship (and pay 23.8% in capital gains to leave), or they’re thinking of an illegal scheme of trying hide assets offshore. If you have really large investment tax liabilities or have a business that you could locate anywhere, take a look at Puerto Rico. Besides the tax benefits, you’ve got great weather, year round golfing, US stores like Home Depot, Starbucks, and Walgreens, and direct daily flights to most US hubs, including DFW, Houston, Miami, Atlanta, New York, and other cities. 

Puerto Rico is still looking to rebuild after the hurricane and it’s probably not the best place to be a middle class worker, but for a wealthy retiree, it might be worth a look. Christopher Columbus arrived in Puerto Rico in 1493 and the cities have Spanish architecture from the seventeenth century. I’ve never been to Puerto Rico, but would love to visit sometime in 2019 or 2020. If you’d care to join me for a research trip, let me know!

(Please consult your tax expert for details and to discuss your eligibility. This article should not be construed as individual tax advice.)

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Roth Conversions Under the New Tax Law

Posted On December 2, 2018 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies /  

Everybody loves free stuff, and investing, we love the tax-free growth offered by a Roth IRA. 2018 may be a good year to convert part of your Traditional IRA to Roth IRA, using a Roth Conversion. In a Roth Conversion, you move money from your Traditional IRA to a Roth IRA by paying income taxes on this amount. After it’s in the Roth, it grows tax-free.

Why do this in 2018? The new tax cuts this year have a sunset and will expire after 2025. While I’d love for Washington to extend these tax cuts, with our annual deficits exploding and total debt growing at an unprecedented rate, it seems unavoidable that we will have to raise taxes in the future. I have no idea when this might happen, but as the law stands today, the new tax rates will go back up in 2026.

That gives us a window of 8 years to do Roth conversions at a lower tax rate. In 2018, you may have a number of funds which are down, such as Value, or International stocks, or Emerging Markets. Perhaps you want to keep those positions as part of your diversified portfolio in the hope that they will recover in the future.

Having a combination of both lower tax rates for 2018 and some positions being down, means that converting your shares of a mutual fund or ETF will cost less today than it might in the future. You do not have to convert your entire Traditional IRA, you can choose how much you want to move to your Roth.

Who is a good candidate for a Roth Conversion?

1. You have enough cash available to pay the taxes this year on the amount you want to convert. If you are in the 22% tax bracket and want to convert $15,000, that will cost you $3,300 in additional taxes. That’s painful, but it saves your from having to pay taxes later, when the account has perhaps grown to $30,000 or $45,000. Think of a conversion as the opportunity to pre-pay your taxes today rather than defer for later.

2. You will be in the same or higher tax bracket in retirement. Consider what income level you will have in retirement. If you are planning to work after age 70 1/2 or have a lot of passive income that will continue, it is entirely possible you will stay in the same tax bracket. If you are going to be in a lower tax bracket, you would probably be better off not doing the conversion and waiting to take withdrawals after you are retired.

3. You don’t want or need to take Required Minimum Distributions and/or you plan to leave your IRA to your kids who are in the same or higher tax bracket as you. In other words, if you don’t even need your IRA for retirement income, doing a Roth Conversion will allow this account will grow tax-free. There are no RMDs for a Roth IRA. A Roth passes tax-free to your heirs.

One exception: if you plan to leave your IRA to a charity, do NOT do a Roth Conversion. A charity would not pay any taxes on receiving your Traditional IRA, so you are wasting your money if you do a conversion and then leave the Roth to a charity.

The smartest way to do a Roth Conversion is to make sure you stay within your current tax bracket. If you are in the 24% bracket and have another $13,000 that you could earn without going into the next bracket, then make sure your conversion stays under this amount. That’s why we want to talk about conversions in 2018, so you can use the 8 year window of lower taxes to make smaller conversions.

2018 Marginal Tax Brackets (this is based on your taxable income, in other words, after your standard or itemized deductions.)

Single Married filing Jointly
10% $0-$9,525 $0-$19,050
12% $9,526-$38,700 $19,501-$77,400
22% $38,701-$82,500 $77,401-$165,000
24% $82,501-$157,500 $165,001-$315,000
32% $157,501-$200,000 $315,001-$400,000
35% $200,001-$500,000 $400,001-$600,000
37% $500,001 or more $600,001 or more

On top of these taxes, remember that there is an additional 3.8% Medicare Surtax on investment income over $200,000 single, or $250,000 married. While the conversion is treated as ordinary income, not investment income, a conversion could cause other investment income to become subject to the 3.8% tax if the conversion pushes your total income above the $200,000 or $250,000 thresholds.

You used to be able to undo a Roth Conversion if you changed your mind, or if the fund went down. This was called a Recharacterization. This is no longer allowed as of 2018 under the new tax law. Now, when you make a Roth Conversion, it is permanent. So make sure you do your homework first!

Thinking about a Conversion? Want to reduce your future taxes and give yourself a pool of tax-free funds? Let’s look at your anticipated tax liability under the new tax brackets and see what makes sense your your situation. Email or call for a free consultation.

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Specified Service Professions and the QBI Deduction

Posted On September 11, 2018 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

This year, there is a new 20% tax deduction for self-employed individuals and pass through entities, commonly called the QBI (Qualified Business Income) deduction, officially IRC Section 199A. While most people who file schedule C will be eligible for this deduction, high earners – those making over $157,500 single or $315,000 married – will see this deduction phased out to zero, if they are in a Specified Service Trade or Business (SSTB).

See: FAQs: New 20% Pass-Through Tax Deduction

Professions that are considered an SSTB include health, law, accounting, athletics, performing arts, and any company whose principal asset is the skill or reputation of one or more of its employees. That’s pretty broad.

Some business owners may have income that is from an SSTB and other income which is not. For example, consider an eye doctor who has a business manufacturing glasses. If she performs an eye exam, clearly she is working in an SSTB as a health professional. If she is manufacturing glasses, that might be a different industry.

This possibility of splitting up income into different streams has occupied many accountants this year, to enable business owners to qualify for the QBI deduction for their non-SSTB income. Since this is a brand new deduction for 2018, this is uncharted territory for taxpayers and financial professionals.

In August, the IRS posted new rules which will greatly limit your ability to carve off income away from an SSTB. Here are some of the details:

  • If an entity has revenue of under $25 million, and received 10% or more of its revenue from an SSTB, then the entire entity is considered an SSTB. If their revenue is over $25 million, the threshold is 5%
  • An endorsement (by a performing artist, for example), or use of your name, likeness, signature, trademark, voice, etc., shall not be considered a separate profession. If you are in an SSTB, an endorsement shall also be considered part of the SSTB.
  • 80/50 rule. If a company shares 50% or more ownership with an SSTB, and receives at least 80% of its revenue from that SSTB, it will be considered part of the SSTB. So, if our eye doctor who makes glasses only makes glasses for her own practice, then it will be considered part of her SSTB. If the manufacturing business has at least 21% in revenue from other buyers, then it could be considered a separate entity and qualify for the QBI deduction.

Business owners in the top tax bracket of 37% for 2018 (making over $500,000 single or $600,000 married), might be considering forming a C-corporation if they are running into issues with the SSTB. While a C-Corp is not eligible for the QBI deduction, the federal income tax rate for a C-Corp has been lowered to a flat 21% this year.

Of course, the challenge with a C-Corp is the potential for double taxation: the company pays 21% tax on its earnings, and then the dividend paid to the owner may be taxed again from 15% to 23.8% (including the 3.8% Medicare surtax on Net Investment Income.)

Still, there may be some benefits to a C-corp versus a pass-through entity, including the ability to retain profits, being able to deduct state and local taxes without the $10,000 cap, or the ability to deduct charitable donations without itemizing.

If you have questions about the QBI Deduction, the Specified Service Business definition, or other self-employment tax issues, we can help you understand the new rules. We want to help you keep as much of your money as possible, but you can’t wait until next April and then hope you can do something about 2018.

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The New 2018 Kiddie Tax

Posted On August 8, 2018 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

Last year’s Tax Cuts and Jobs Act (TCJA) significantly changed the way your dependent children are taxed. Previously, they used to be taxed at their parent’s tax rate, but starting this year, their income could be taxed at the egregious “Trust and Estate” rate of 37% with as little as $12,501 in taxable income. With higher deductions, other children will pay less tax in 2018. Both changes give rise to additional planning strategies that parents will want to know before potentially getting a nasty surprise next April when they file their next tax return.

First, let’s define dependent child for IRS purposes. A dependent child includes any child under 18, an 18 year old who does not provide more than 50% of their own support from earned income, or a full-time student who is under age 24 and also does not not provide more than 50% of their own support from earned income. A child’s age for the tax year is the age they are on December 31.

There are different tax methodologies for earned income (wages, salary, tips, etc.) versus unearned income (interest, dividends, capital gains, etc.) under the Kiddie Tax.

First, some good news, for Earned Income, the standard deduction has been increased to $12,000 for 2018, which greatly increases the amount of income a child can earn income tax-free. Of course, they will still be subject to payroll taxes (Social Security and Medicare) on these earnings.

Strategy 1. For Self-Employed Parents: did you know that when you hire your dependent children, you do not have to pay or withhold payroll taxes (Social Security and Medicare) on their income. If you hire them, and have legitimate work for them to do, you could shift $12,000 from your high tax rate to their 0% tax rate. If they open a Traditional IRA and contribute $5,500, they could earn $17,500 tax-free. Just be aware that the IRS scrutinizes these arrangements, so be prepared to demonstrate that the work was done and the pay was “reasonable”. (Paying your kids $500 an hour to mow the lawn might be considered excessive.)

For Unearned Income, the Kiddie Tax is more complicated. The standard deduction for unearned income is only $1,050 (or their earned income plus $350 up to the $12,000 maximum). Above this amount, the next $2,100 is taxed at the child’s rate, and then any unearned income above this level is now taxed at the Trust and Estates rate. If a child has a significant UTMA, inherited IRA, or other investment account, this is where their taxes could soar in 2018, especially if they used to be taxed at their parent’s rate, say, of 22%. If their parents were in the highest tax bracket, there would be no change, but for middle class kids with investment income, they now could be taxed at a much higher rate than their parents!

Here are the 2018 Trust and Estates Tax Marginal Rates, which now apply to the Kiddie Tax:
10% on income from $0 to $2,550
24% from $2,551 to $9,150
35% from $9,151 to $12,500
37% over $12,501

Long-Term Capital Gains and Qualified Dividends will be taxed at:
0% if from $0 to $2,600
15% if from $2,601 to $12,700
20% if over $12,701

2. Children with under $1,050 in income do not need to file a tax return.

3. The first $4,700 in long-term capital gains are at the 0% rate (a $2,100 deduction followed by $2,600 at the zero rate). This is an opportunity to gift appreciated shares to a child and then they will not owe any tax on the first $4,700 in capital gains. If you are planning to support your kids and set up a fund for them, or pay for college, why should you pay these taxes if they can be avoided? We can establish a program to make use of this annual 0% exclusion.

4. If a child’s investment income is subject to the Kiddie Tax, and the portfolio is going to be used for college education, a 529 Plan can offer tax-free growth and withdrawals for qualified higher educational expenses. In these cases, 529 Plans have just become more valuable for their tax savings.

5. For some college aged kids, it may be better for the parents to stop listing them as a dependent if eligible. In the past, parents received a personal exemption for each child ($4,050 in 2017), but this was eliminated by the TCJA. It was replaced with an expanded child tax credit of $2,000 in 2018. However, the tax credit only applies to children under 17. Unless you are able to claim a college tax credit, it is possible you are not getting any tax benefits for your college kids over 17. In this case, not claiming them as a dependent, and having your child file their own tax return, may allow them to receive the full standard deduction, save them from the Kiddie Tax, and may even allow them to qualify for the college credit. You would need to verify with your tax professional that your child did in fact have enough earned income to be considered independent.

College financial aid doesn’t exactly follow the IRS guidelines for dependency, and they don’t even ask if a parent lists a child as a dependent or not. Instead, the Free Application for Federal Student Aid (FAFSA), has its own form, Am I Dependent or Independent?, which looks at factors including age, degree program, military service, and marital status.

If you’ve got questions on how to best address the Kiddie Tax for your family, let’s talk.

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9 Ways to Manage Capital Gains in Retirement (Updated for 2026)

Posted On April 7, 2018 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

Capital gains taxes can significantly reduce your after-tax retirement income if left unmanaged, especially for investors with $500,000–$5 million in investable assets. This article explains nine effective strategies to manage capital gains — with a focus on long-term planning, tax efficiency, and coordination with broader retirement income goals.

1. Know the 2026 Capital Gains Tax Brackets

Capital gains are taxed differently based on how long you hold an investment:

  • Short-term gains (assets held ≤ 1 year): taxed as ordinary income
  • Long-term gains (assets held > 1 year): taxed at preferential rates

For 2026, long-term capital gains rates are:

RateSingleMarried Filing Jointly
0%Up to ~$49,450Up to ~$98,900
15%~$49,451–$545,500~$98,901–$613,700
20%Over ~$545,500Over ~$613,700

These thresholds are adjusted annually for inflation. Keep in mind state capital gains taxes may apply as well.

2. Match Asset Types to Account Types (Asset Location)

Asset location places investments in accounts based on how they’re taxed:

  • Tax-inefficient assets (high turnover, dividends) → tax-deferred or tax-free accounts
  • Tax-efficient assets (broad index funds, ETFs) → taxable accounts
  • High-growth assets → Roth IRAs (tax-free growth)

This strategy reduces taxable events and works well when combined with tax-loss harvesting and Roth conversion planning.

Capital gains decisions affect more than just your tax bill this year. They often interact with Medicare premiums, Social Security taxation, and withdrawal strategy, which is why they should be considered within a broader tax planning for retirees framework.

3. Harvest Tax Losses When Appropriate

Tax-loss harvesting means selling investments at a loss to offset realized gains, reducing your tax bill.

Key points:

  • Capital losses offset capital gains dollar-for-dollar
  • Excess losses can offset up to $3,000 of ordinary income annually
  • Unused losses carry forward indefinitely

Avoid the wash sale rule by waiting 31 days before rebuying the same security.

For more on how distributions can affect taxable events even without sales, see: Do You Receive Mutual Fund Capital Gains Distributions?

4. Time Sales in Low-Income Years

Realizing gains in years where your income is lower — such as early retirement years before Social Security and RMDs — can reduce how much you pay in capital gains tax. Lower taxable income may also open up the 0% capital gains bracket, which applies at lower income levels.

This kind of income sequencing works hand-in-glove with:

5. Use Qualified Charitable Distributions (QCDs)

If you are over age 70½ and have an IRA, Qualified Charitable Distributions let you transfer up to $105,000 annually directly to charity without including the amount in taxable income — effectively offsetting gains without increasing MAGI.

QCDs count toward RMDs and can help manage:

  • Taxable income spikes
  • Medicare IRMAA brackets
  • Social Security taxation

This strategy is most impactful when planned with your overall tax and income sequencing.

6. Coordinate Roth Conversions and Capital Gains

Roth conversions increase Modified Adjusted Gross Income (MAGI) in the conversion year, which can unintentionally raise your capital gains tax rate, trigger Medicare IRMAA, or push other income items into higher brackets.

To minimize unintended tax consequences:

  • Stage Roth conversions during low-income years
  • Avoid year-end lump conversions that push MAGI too high
  • Coordinate with RMD planning and Social Security timing

Learn more about timing and tradeoffs in Roth Conversions After 60 — When They Make Sense and When They Don’t.

7. Mitigate the Net Investment Income Tax (NIIT)

Investors with MAGI above $250,000 (individual) or $320,000 (married filing jointly) generally pay a 3.8% Net Investment Income Tax (NIIT) on net investment income, including capital gains.

Ways to manage NIIT exposure include:

  • Holding tax-efficient assets in tax-advantaged accounts
  • Reducing MAGI through deductions or income sequencing
  • Strategically timing capital gains realizations

NIIT is one of the less understood drivers of tax drag for high-net-worth retirees; planning ahead can avoid unnecessary surtaxes.

8. Consider Partial Sales and Installment Sales

Instead of selling a large position all at once, consider:

  • Partial sales over multiple years to spread tax impact
  • Installment sales for privately held business interests to defer gain recognition

These techniques help manage annual taxable income and can make gains fit within lower tax brackets, especially when tied to retirement income flows.

9. Leverage Estate and Legacy Planning

Holding assets until death often results in a step-up in basis for beneficiaries, eliminating capital gains tax on appreciation during your lifetime. Work with estate planning professionals to consider:

  • Gifting strategies
  • Trust structures
  • Timing of transfers

Legacy planning intertwined with tax planning can preserve more wealth for heirs while reducing lifetime taxes.

For related guidance, see 7 Missed IRA Opportunities and Tax Strategies Under the OBBBA.

How a Fiduciary Advisor Helps With Capital Gains

Managing capital gains is not simply about minimizing a tax bill in isolation. A fiduciary advisor integrates tax planning into retirement income, distribution sequencing, healthcare costs, and legacy goals.

A coordinated plan can help you:

  • Time asset sales for tax efficiency
  • Model outcomes across multiple years
  • Balance tax, cash flow, and longevity risk
  • Align capital gains decisions with IRA/Roth strategy

You don’t have to navigate these decisions alone. Many retirees find fiduciary guidance valuable — whether for complex planning or even just an annual review. This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Learn more in:

Frequently Asked Questions

What is the difference between long-term and short-term capital gains?
Long-term gains (assets held > 1 year) are taxed at preferential rates (0%, 15%, 20%), while short-term gains are taxed as ordinary income.

How does capital gains recognition affect Medicare premiums?
Capital gains increase MAGI, which can trigger higher Medicare IRMAA premiums. Strategic timing can help manage both taxes and healthcare costs.

What is tax-loss harvesting?
Tax-loss harvesting sells investments at a loss to offset capital gains and up to $3,000 of ordinary income annually, with excess losses carried forward.

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What Are Quarterly Tax Payments?

Posted On March 31, 2018 By Scott Stratton, CFP(R), CFA In Tax Strategies /   1 Comment

The IRS requires that tax payers make timely tax payments, which for many self-employed people means having to make quarterly estimated tax payments throughout the year. Otherwise, you could be subject to penalties for the underpayment of taxes, even if you pay the whole sum in April. The rules for underpayment apply to all taxpayers, but if you are a W-2 employee, you could just adjust your payroll withholding and not need to make quarterly payments.

If your tax liability is more than $1,000 for the year, the IRS will consider you to have underpaid if the taxes withheld during the year are less than the smaller of:

1. 90% of your total taxes dues (including self-employment taxes, capital gains, etc.)
2. 100% of the previous year’s taxes paid.

However, for high income earners – those making over $150,000 (or $75,000 if married filing separately) – the threshold for #2 is 110% of the previous year’s taxes. Additionally, the IRS considers this on a quarterly basis: 22.5% per quarter for #1, and 25% per quarter for #2, or 27.5% if your income exceeds $150,000.

Many taxpayers will find it sufficient to make four equal payments throughout the year. If that’s the case, your deadlines are generally April 15, June 15, September 15, and January 15. However, if your income varies substantially from quarter to quarter, or if your actual income ends up being lower than the previous year, you may want to adjust your quarterly estimated payments to reflect these changes.

You can estimate your quarterly tax payments using IRS form 1040-ES. Of course, your CPA or tax software should automatically be letting you know if you need to make estimated tax payments for the following year. You can mail in a check each quarter, or you may find it more convenient to make the payment electronically, via IRS.gov/payments.  For full information on quarterly estimated payments, see IRS Publication 505 Tax Withholding and Estimated Tax.

Please note that the estimated payments will fulfill the requirement of 100% of last years payment, or 90% of this year’s payment if that figure is lower. However, it is not required that you pay 100% of the current tax bill, so if your income is significantly higher this year, you could still owe a lot of taxes in April even after making quarterly estimated payments.

If you’re self-employed, you don’t need to be a tax expert, but you do need to understand some basics and to make sure you are getting correct advice. When you aren’t being paid as a W-2 employee, it is up to you to make sure you are setting money aside and making those tax payments throughout the year, so that next April you aren’t facing penalties on top of having a large, unexpected tax bill.

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Roth Conversions Under the New Tax Law

Posted On March 10, 2018 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

The Tax Cuts and Jobs Act (TCJA) will impact Roth Conversions in 2018 and beyond in a number of significant ways for investors. Since I can hear the yawns already through my laptop, here’s why you should care: wouldn’t it be great to have your investment account growing tax-free? Once you are retired, which would you prefer: an account with $100,000 which you could access tax-free or one which will cost you $22,000 or more in taxes to use  your money? Taxes can take a huge bite out of your investment returns.

Quick refresher: A Roth IRA holds after-tax money and grows tax-free. A Conversion is when you take a Traditional IRA, 401(k), or similar account, pay the taxes on it today, and transfer it to your Roth IRA. While that does mean paying taxes now, any future growth in the account would be tax-free. When you withdraw the money from a Roth IRA in retirement, you pay no taxes.

The TCJA has both positive and negative impacts on doing a Roth Conversion:

1. Lower tax rates. Under the TCJA, most people will receive a 1-4% reduction in their marginal tax bracket. For example, the top bracket was 39.6% in 2017 and will be 37% in 2018. If you are in the top bracket, a Roth Conversion is cheaper by 2.6% today.

For a married couple, if your taxable income is under $77,400 you are now in the 12% tax bracket. Paying 12% to convert an IRA to a Roth would be a bargain, but the Conversion plus your taxable income would need to stay under $77,400 to remain in the 12% rate. With a $24,000 standard deduction, a married couple could make as much as $101,400 and be in the 12% bracket.

To add a sense of urgency, don’t forget that the new lower tax rates are only temporary. In 2026, the top rate goes back to 39.6%. I suppose Congress could extend the tax cuts, but no one knows what will happen in eight years. What we do know is that deficits will rise dramatically, which suggests to me the need to have higher taxes in the future.

2. Beneficiary’s Tax Rate. If your beneficiaries – children, grandchildren, or anyone – are in higher tax bracket than you, the tax bill may be lower for you to convert your IRA to a Roth than for the beneficiaries to inherit the IRA. With a Conversion, your heirs inherit your Roth IRA tax-free. Also, converting to a Roth means you do not have to pay any Required Minimum Distributions (RMDs) starting at age 70 1/2, allowing your account to grow.

If you were planning to leave your Traditional IRA, perhaps in trust, to your young grandchildren, the TCJA will change how they are taxed. For children under age 18, or under age 24 if full-time students, they used to be taxed at their parent’s tax rate. Now for 2018, the “Kiddie Tax” will increase the tax on unearned income, such as IRA distributions, to the much worse tax rate of trusts, a 37% tax rate on income above $12,500.

3. The TCJA eliminated Recharacterizations. Previously, you could undo a Roth Conversion through a process called a Recharacterization. Why would you want to do that? Let’s say you converted $10,000 of a mutual fund from a Traditional to a Roth IRA in January; you would pay taxes on the $10,000 as income. Now, imagine that the account went down and was worth only $8,000 by November. You’d be pretty mad to pay taxes on $10,000 when your account was then only worth $8,000.

The Recharacterization would let you cancel your Roth Conversion if you didn’t like the outcome within that tax year. You could get a “Do-Over”. The TCJA eliminated Recharacterizations, so now if you do a Roth Conversion, you are stuck with it!

4. Back-Door Roth. Since 2010, there has been a type of Roth Conversion called a Back-Door Roth IRA. It allows high income investors who did not have any IRAs to fund a non-deductible Traditional IRA and then convert it to a Roth. It was a “Back Door” way to fund a Roth IRA if you made too much to qualify under the regular rules. There was discussion in Congress to eliminate the Back Door Roth IRA (as there has been for years), but in the final version of the TCJA, it is still allowed…for now.

So, should you convert your IRA to a Roth? If you are in a low tax bracket, 10% or 12% in 2018, I think it is worth consideration. If you are in a low tax bracket this year and anticipate your income rising substantially in future years, this would be a good year for a Conversion. You don’t have to convert your entire IRA. You could just convert a portion that would stay within your existing tax bracket. I suggest you use outside funds to pay the taxes, rather than the proceeds of the conversion.

If you are planning to leave your IRA to a charity, they can receive the funds without paying any income taxes and you should not do a Roth Conversion. In fact, if your estate plan includes donations to charity, the most tax-efficient solution is to make those donations from your Traditional IRA. Instead, leave your heirs money from taxable investment accounts; they can receive a step-up in cost basis and potentially owe little or no income taxes or capital gains.

If your IRA is invested in equities, converting when the market is at an all-time high is a risk. With the elimination of Recharacterizations, you don’t get a do-over if the stock market tanks after you do a conversion. It would be preferable to do a conversion is when your account is at a low point, such as in a Bear Market. Educate yourself now, and then in the future, if the market does go down by 25% or 30%, that would be an advantageous time to convert your investments to a tax-free Roth to enjoy the likely subsequent rebound.

In the mean time, if you have questions about Roth Conversions, or just choosing a Roth versus Traditional account for your 401(k), please send me a note. A Roth Conversion could possibly save you tens of thousands of dollars in retirement, which would definitely help elevate your lifestyle. It’s a big decision – often costing thousands of dollars in taxes today – so we have to make sure we are making a well-informed choice and have a thorough understanding of the costs and benefits.

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