Download Sample Memo to Client

Sample Memo to Client:
Cracking Into the Nest Egg
Dear Friends of Our Firm,
As you near retirement, you will undoubtedly face some difficult financial choices,
particularly if you’re planning to draw from several different sources of cash when you
stop working. Which types of investments should you tap into and in what order? It can
make a big tax difference to you over the next few years and to for your heirs in the
future.
For those of you in that situation, we suggest using the following step-by-step approach
to “cracking into your nest egg.” Specifically, here is a list of seven techniques to follow
in descending order (use the first technique first, the second next and so on).
1. If you’ve retired early, avoid selling stock. Typically, if you have elected to
receive Social Security benefits at the earliest possible time (age 62 for most people),
you should not sell appreciated securities in taxable accounts, if at all possible. By
avoiding those gains, you can keep your adjusted gross income (AGI) lower, which in
turn, can reduce the tax you might owe on the Social Security benefits. Social
Security benefits are taxable only if they exceed an annual AGI base.
Also, if you don’t sell appreciated securities, you may end up owning them after your
death. As a result, your heirs will be entitled to a step-up in basis in those assets. That
means no income tax would be due on the investment appreciation during your
lifetime.
2. Take IRA distributions later rather than sooner. Generally, you should
postpone taking IRA withdrawals until after you reach the required start date of age
70½. The benefits of waiting until 70½ include:
• The IRA will continue compounding on a tax-deferred basis.
• Your AGI won’t increase, which can trim tax on the Social Security benefits.
• You can leave a greater amount of the IRA to your heirs.
3. Take unrealized capital losses in taxable accounts. If you postpone IRA
withdrawals until after age 70½, you may need to access money from taxable
accounts. In that case, the first step should be to sell stocks and mutual funds that
carry unrealized capital losses. Such losses can produce a $3,000 annual deduction
against ordinary income that is taxed at a high tax rate.
Any excess losses can be carried forward to future years. However, if you pass away
with stock “losers” in your taxable accounts, the unrealized capital loss won’t provide
any tax benefit.
4. Bank on CDs for income. Next, you should use up income-producing assets, such
as bank CDs. That way, you can reduce tax bills these investments generate and allow
tax-advantaged assets to remain in effect.
5. Cash in Savings Bonds after the CDs. When you redeem U.S. Savings Bonds,
they trigger all the deferred income tax due on the bonds. By waiting to redeem those
bonds as long as possible, you benefit from ongoing build-up of interest without any
tax erosion.
6. Realize capital gains late in life. While the basis for appreciated stock is stepped
up after death, U.S. Savings Bonds generate income that is treated as income “in
respect of a decedent.” This means the income will be taxed after death. So you might
as well cash them before taking gains on appreciated stocks.
7. Finally, break open your IRAs as a last resort. If you have a substantial amount
of appreciated securities, you can withdraw money from an IRA before taking gains
in a taxable account. As long as the stocks in taxable accounts produce low dividends,
the annual tax burden won’t be that great.
Of course, your personal situation may differ slightly. We can help you fill in any “gaps.”
The key point to remember is this: The funds you have set aside to see you through
retirement generally should be used during your retirement—and not before.
Very truly yours,
P.S. We would be happy to assist you with any of these steps or help you draw up a
comprehensive tax plan that fits your needs. Don’t hesitate to give us a call.