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Bet You Didnt Read About These Changes

9 May, 2015



New Year’s Day sure turned out to be a political cliff.  (Good thing I watched college football all day!)  First the Senate passed a fiscal cliff bill around 2:00 a.m.  That went to the Republican-controlled House where it looked like everything would fall apart.  But late New Year’s night the House did vote to approve the Senate bill and President Obama has signed it into law.   Now we can all get ready for the next GOP-led hostage situations the next couple of months:  1) raising the debt ceiling and 2) dealing with the budget deficit.

I’m sure you’re familiar with some of the major (and permanent) elements of this deal:  higher taxes on the wealthy, a fix to the Alternative Minimum Tax, a tax rate of 40% for estates over $5 million and fixes on a host of other important issues.  But I bet you didn’t know about the following two nuggets included in the new law…I noticed them in an article written by Investment News’ Mark Schoeff, Jr.  I think they’re really good ideas:

   *  Convert your qualified plan to a Roth.   I didn’t see this coming.   Before this fiscal cliff deal, you could only roll over your 401(k) or 403(b) if you left your job, turned 59 1/2 or retired.  Now, you’ll be able to roll your dough, any time, directly to a Roth if there is a Roth 401(k)available through your employer’s plan.  Check with your benefits office so see if this is an option and when you might be able to take advantage of this.  (In case you’ve forgotten, money inside a Roth can be withdrawn or passed on to heirs tax-free.)     Now, you’ve always been able to get a 401(k) moved to a Roth, but you’ve had to meet those previously mentioned circumstances and then roll it over to a Traditional IRA first.   So this change in the law will allow folks to save some time (and that all-important paperwork) in their quest to get a bucket of tax-free dough.   In all cases, of course, converting to a Roth means you’ll have to pay income taxes on the amount converted.  I’m sure lawmakers are hoping conversions will increase and tax coffers will fill up.   It’s not clear if you’ll be able to convert your current/former employer account in stages in order to spread out your tax liability.  I’ll keep an eye on this since 401(k) and 403(b) plans will probably have to wait for clarification on the logistics of all this.  

   *  Capital gains and dividends stay at 15% for most of America.   Substantial tax hikes on both of these was a major concern of investors everywhere, particularly middle-income retirees who depend on dividends for retirement income.  But the fiscal cliff deal ended up with two rates for dividends and capital gains taxes.  For married heterosexual couples filing jointly and incomes under $450,000, the tax on capital gains/dividends will remain at 15%.   For couples with incomes over 450K, it’ll go up to 20%.  The income threshold for single taxpayers is $400,000.  That seems like a reasonable compromise, and is a heck of a lot lower than the 39.6 rate during the Clinton Administration. 

So, these are just a couple of items I figured you hadn’t heard about in all the reporting about the fiscal cliff deal negotiations.  I sure hope the intransient members of the House get their prescriptions refilled soon.   Maybe that will help bring back the word “compromise” to Congress.   I hope you had a great holiday but let’s get back to work.  Until next time, here’s to good planning!    

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