Bach, Jacobs & Byrne, P.A.

Cash-value life insurance policies are tax-deferred, meaning that the cash value component of such an insurance policy will not be taxed as it grows. Because the money is growing faster, the interest earned on that money is applied to a higher amount.

Most people are likely to be in a higher tax bracket at the peak of their earning years rather than retirement age. At this peak, such a person is likely in a higher income bracket, paying the corresponding income tax. At the age of retirement, when one may not be bringing home regular paychecks, the taxpayer may qualify to be in a lower income tax bracket.

Individuals may use cash value account funds to take out loans or withdraw tax-free funds. Some individuals may withdraw funds to pay their insurance premiums or purchase a plan with a higher death benefit to leave to their beneficiaries. Beneficiaries do not pay income tax on any life insurance money they inherit, but they may be subject to federal estate or gift taxes under particular circumstances. Unlike an estate, which goes through a lengthy probate process, beneficiaries may receive a life insurance payout within several weeks.

However, then cash value of a policy is generally considered an available asset for Medicaid qualification. It is important to consult with an elder law firm that understands Medicaid law prior to incorporating cash value life insurance into estate planning.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

What is cash value life insurance?

Cash-value life insurance is a type of permanent life insurance featuring cash value savings.

Because it is permanent life insurance, it lasts the holder’s lifetime. The policyholder of cash value life insurance may use the cash value for various purposes, such as using it as a source of loans or cash to pay policy premiums.

Cash-value life insurance usually has a higher premium than term life insurance because of the cash-value component. Most policies require policyholders to pay a fixed-level premium payment, a portion of which is allocated toward the insurance cost, with the remaining amount deposited in a cash-value account. Policyholders may earn interest on the funds in their cash-value account, which increases over time. Your beneficiaries will receive an income-tax-free sum once you have passed away.

However, then cash value of a policy is generally considered an available asset for Medicaid qualification. It is important to consult with an elder law firm that understands Medicaid law prior to incorporating cash value life insurance into estate planning.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

When utilizing a 401(k) plan for your retirement savings, you may be given the option to choose between a traditional or Roth account, but it does not always have to be one or the other. Instead, you may be able to split your savings between the two.

Why splitting savings may benefit tax saving and retirement planning goals:

A traditional 401(k) holds pre-taxed savings taxed as income when withdrawals are made in retirement. On the other hand, Roth 401(k) savings are already taxed; as long as you’ve had the Roth account for five years, the money withdrawn in retirement is tax-free.

Younger individuals with many income-earning years ahead may decide to put their savings into a Roth 401(k). Older individuals, who do not have as much time for their money to grow, may not reap the same benefits. However, putting some money into a Roth 401(k) may be worth considering especially when a taxpayer is still more than five years away from retirement; there is no minimum contribution requirement, so one can save as little as 1% of savings in this type of account to trigger the five-year clock.

Benefits of tax diversification:

• Shifting the tax load when paying into accounts
• Flexibility when withdrawing in retirement

Sophisticated tax strategies

Roth and Traditional 401(k)s both have RMDs. However, Roth account withdrawals are tax-free. Closer to retirement age, individuals seeking to avoid RMDs can roll over both types of accounts to a Roth IRA; these accounts do not require RMDs until the account owner dies. Additionally, it is still possible to keep a traditional 401(k) and roll over a Roth 401(k) to a Roth IRA to maintain some level of tax diversification.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

Many large companies offer their employees a 401(k)-retirement plan; a decision that may come with this benefit is whether to choose a traditional 401(k) or a Roth 401(k).

Here are some reasons why choosing a Roth 401(k) may be beneficial.

Save now and enjoy later.

Roth 401(k)s use after-tax funds, meaning you will not pay income tax on account withdrawals in your retirement years. This means that taking an immediate hit to your income today could lead to greater wealth in your retirement years. Younger individuals who have substantial time for their money to grow and expect their income to grow throughout the duration of their careers may choose to use this type of savings account.

Roth 401(k) & Estate Planning

 Roth 401(k)s are also helpful for estate planning; heirs may enjoy Roth 401(k) funds tax-free, just as the account owner would. Individuals who retire can take distributions from their Roth 401(k) account and roll over the funds into a new or existing Roth IRA account. From there, you have the ability to make your heirs the account’s beneficiaries, which preserves the tax-free nature of the funds in the account.

 Note: heirs do not have to pay taxes to the IRS but will have to start taking RMDs.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

What is a Roth 401(k)?

A Roth 401(k) is a type of retirement savings account that is less prevalent than the traditional 401(k) but is growing in popularity. These accounts have features similar to traditional 401(k)s and Roth IRAs.

Like the Roth IRA, employee contributions are made with after-tax dollars. This means that income earned from interest, dividends, or capital gains is saved tax-free in your account. Therefore, where a traditional 401(k) reduces your taxable income, Roth 401(k)s will not.

The Roth 401(k) has no income limit, making them available to everyone regardless of income earned. Additionally, a Roth 401(k) has no required minimum distributions or any other annual withdrawal requirement in retirement (unless you are still working or are not a 5% owner in the company sponsoring your plan).

Like a traditional 401(k), Roth 401(k) has contribution limits, and employees can receive matching contributions from their employers.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

401(k) Contribution Limits for “Highly Compensated Employees.”

If you are a highly compensated employee (“HCE”), you may be subject to certain limitations on the funds you may contribute to your 401(k).

Annually, an HCE may not contribute greater than 2% of their salary to their 401(k) than the average non-HCE contribution. For example, if the average non-HCE employee contributes 4% of their salary to their 401(k), the HCE employee may contribute at most 6% of their salary to their 401(k). Beyond this federally mandated limitation, your employer may have specific caps within your company.

How do you know if you are an HCE?

The IRS considers an individual an HCE if:

EITHER: you owned 5% or greater of a company in the previous year and are taking part in that company’s 401(k) plan, OR: during the previous year, you earned $130,000 or greater with a 401(k) plan in which you actively participate.

Note: if you are a highly compensated employee (“HCE”) whose employer has set up a safe harbor 401(k) plan, these limits may not apply to you.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

Total Limits on 401(k) Employer and Employee Contributions

Total 401(k) contribution limits refer to the maximum contribution amount by both employer and employee.

In 2022, the total contribution limit was $61,000. The total for individuals aged 50+ with catch-up contributions was $67,500.

Although annual limits for individual contributions are cumulative across plans, employer contributions are not; if you hold multiple 401(k) plans, your employer can max out their contributions independently of each other.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.

What is a 401(k) plan?

A 401(k) is an employee-sponsored retirement savings account.

With a 401(k), individuals invest pretax funds directly from their paychecks into an employer-sponsored retirement account. Because 401(k)s hold pre-taxed income, individuals pay taxes upon withdrawal in retirement.

For 2022, 401(k) contribution limits for individuals aged under 50 were $20,500, and $27,000 for individuals aged over 50.

Individual limits are cumulative across 401(k) plans. For example, suppose you are an individual under 50 and leave your current job for a new one during the 2022 calendar year. In that case, your individual 401(k) contributions are limited to $20,500 across both plans at both positions. However, any match or non-match contributions made by your employer do not count towards your individual contribution limit.

401(k)s also allow for individuals to make catch-up contributions. A catch-up contribution is a retirement savings contribution that enables individuals over 50 to make additional contributions to their 401(k). The 2022 catch-up contribution limit was $6,500. Those who make catch-up contributions will have a total annual contribution exceeding the standard contribution limit.

Estate Planning is an important component of financial planning. At Bach, Jacobs & Byrne, P.A., we address tax issues and avoidance as part of estate planning. If you live in Sarasota, Manatee, or Charlotte County, contact Bach, Jacobs and Byrne, P.A. at (941) 906-1231 to evaluate whether your estate plan is tax efficient.