Phase 2: Wealth Distribution Cont’d

{3 minutes to read} Today, I want to continue the discussion on the second phase of financial planning, and that is Wealth Distribution and Retirement.

We spend a lot of time with our clients, helping them with plans to generate income in the most efficient manner possible, and as we discussed in prior blogs, on the three phases:

• Wealth Accumulation,
• Wealth Distribution, and
• Wealth Preservation.

It’s important to recognize that wealth distribution is a critically important part of your planning and how you take distributions of your assets.

So, I want you to think about wealth distribution and your assets in three different categories. The first, we call Qualified Assets or Plans, which are IRAs, SEPs, 401(k), defined benefit pensions, and profit-sharing plans.

The second is Non-Qualified Assets. These are accounts that are in your name personally. Things like a brokerage account, a bank account, or stocks and bonds, mutual funds that are titled in your or your spouse’s name..

Lastly, the third group I’m going to call Tax-Favored Assets such as Roth IRAs and life insurance.

It’s our philosophy that there should be an order by which you take distributions of these assets. The reason that we have established an order is so that you maximize the next phase of your financial plan, which is wealth preservation.

We recommend our clients spend and consume the qualified assets first. That may seem counterintuitive to many of you, but the reason is that those assets are not treated very well at death from a tax perspective. Number one, they do not get any step-up in basis at death (the higher market value of the asset at the time of inheritance for tax purposes) meaning that if there’s a million dollars in your IRA, your beneficiary will have to pay income tax on the million dollars when they use it.

With qualified assets, you do not have the ability to take any tax-loss selling (selling stocks at a loss in order to reduce capital gains). This means if the value of the stocks they may have in the account goes down, they cannot get a tax deduction that they would normally get if the same stocks were in a regular account instead of a qualified plan/IRA. Without the stepped-up basis, or the tax loss selling, all distributions are taxable as ordinary income. We want to spend those assets first, because we would rather leave a million dollars to our kids with non-qualified assets, since those assets get that stepped-up basis.

So we recommend that you come up with a program or a plan laid out, that shows the income that we can pull out of the qualified assets first, then the non-qualified assets that get a step-up in basis and finally, if we’ve spent those assets down, the last group of assets — the Roth IRAs and the life insurance — which are received, income tax free.

By spending down the qualified and non-qualified assets, we’re growing the tax-free assets, thereby allowing for the most efficient distribution and the most effective maximization of the third phase of your financial plan, which is the wealth preservation, the estate planning portion.

If you’d like to learn more about how we do that and generate for you, your own plan for wealth distribution, let us know.

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS. Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.

This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.American Portfolios Financial Services, Inc.(APFS) and American Portfolios Advisors, Inc.(APA) are not affiliated with any other named business entities mentioned.