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IRA Year-Round Planning

November 25, 2014

The previous blog gave year-end tax planning for IRAs.  Here are some considerations for any time of the year.

  • If you plan on making charitable bequests, you should consider leaving some of your IRA or retirement funds to the charities.  This way, those funds would escape all income and estate taxes.  IRA funds left to individuals are subject to required minimum distribution rules and will be subject to income tax when distributed; and the IRA and other retirement accounts are also subject to estate tax depending upon the size of the overall estate.
  • An estate tax-planning strategy with a large IRA is to convert it to a Roth IRA and pay the income taxes. This will remove the income tax payments from your assets so your taxable estate would be that much lower.  Also, future earnings on those funds would not end up in your estate, future earnings on the Roth IRA would never be subject to taxation and you would not have to follow the RMD rules.
  • IRA and other retirement plan distributions pass outside of your probated estate but will still be included in your total estate assets to determine whether those accounts are subject to estate tax.  Further, your will determines who pays the estate tax (if applicable) on amounts passing outside of your estate.  Check with your attorney or estate planner about this.
  • IRA and retirement plan beneficiary designations are similar to a substitute will for those funds.  When you have estate planning done make sure your adviser asks about these forms and the amounts in your retirement accounts; and if they don’t I would question whether they are truly competent estate planners.
  • Now is a good time to review your beneficiary designations and update them if necessary.  If you have grandchildren and named your children as beneficiaries, consider adding “per stirpes” after each child’s name. This way, if unfortunately a child predeceases you, their shares would go to their children and not their siblings.
  • I posted a warning to IRA beneficiaries on July 24, 2012 and that should be relooked at when they inherit IRA accounts.
  • Now is a good time to review your asset allocation and how you invested the funds in your IRA and other retirement accounts. People with tax free bonds and stocks should consider reallocating the bonds to taxable bonds in the IRA and own the stocks in their individual name.   Likewise, if you are trading stocks or options and receive substantial short term gains, you should consider doing this in your tax sheltered IRA.  Check out my Asset Location blog posted on October 4, 2012.

IRAs are one of the most widely owned accounts but the rules are not so simple.  The above is a start to becoming more empowered with handling this in the best manner possible.

IRA Year-End Planning

November 20, 2014

Those over age of 70½ have to take required minimum distributions (RMD) by December 31st unless this is the year they reach age 70½.  Then, they have until April 1st of next year.  Generally, it is better to take the distribution this year otherwise, you’ll have to take two distributions next year.  Also, some states have annual exclusions that will be lost if the first available year is skipped.

This is just one of the IRA rules. There are many more and most are not as simple as this.  Here are some year-end strategies that might benefit you.

  • If you have multiple accounts, distributions do not need to be made from each account.  You can total all your account balances (using last year’s Dec 31 balances) and take the distribution from any account you want.  Just make sure you notify the custodians that you will satisfy your RMD from other accounts.
  • To calculate your RMD you can go on line and search for RMD calculators, go to and download publication 590 and use Table III in Appendix C, or email me and I’ll send you the current IRS table.
  • When you take a distribution, you must designate whether or not you want tax withheld.  If you do not have tax withheld, any balance due because of the distribution will be payable when you file your tax return and might be subjected to underestimated penalties.
  • People are permitted to make a distribution and repay it within sixty days without tax or penalty. One strategy for those that underpaid their estimated taxes for 2014 is to take a distribution, have all or most of the money paid as withholding tax either to the IRS and/or your state; and then repay those funds from other sources within sixty days. These withholding tax payments will be allocated by the taxing authorities as if they were made on time throughout the year and you’ll avoid penalty.
  • If you are in a low tax bracket this year, you might want to consider rolling over your traditional IRA to a Roth IRA. Once in the Roth IRA for five years, any distributions will always be tax-free and the RMD rules will not apply.  All earnings in the Roth IRA will be income tax-free.
  • If you have large balances in an IRA and an equally large business loss, you might want to consider taking a taxable distribution that will be sheltered by the losses. If you do not, the business losses might not be fully absorbed by other income, and will expire when you die, while IRA distributions will be taxed to the recipients when made.
  • If you are still working and are not a more than 5-percent owner, you are not required to take RMD from your employer’s 401k plan that you participate in.

Year-end planning with IRAs and retirement accounts is important and can indicate opportunities to save substantial tax.  Do it now!

Year-End Tax Planning

November 18, 2014

Tax planning should be a year-long process, but many people wait until the end of the year for some last minute planning.  Here are some things you should consider.

  • All planning starts with a projection.  Prepare one now to see where you stand for 2014 and take a look at 2015.  This will indicate whether there is a need for planning
  • If you will be subject to the Alternative Minimum Tax, try to take some steps to either get out of it or take advantage of it. If in it, don’t pay any more state or real estate taxes which will not give you a benefit. Try to pay these taxes at the beginning of January if possible.  If you cannot avoid the AMT, consider accelerating income that will be taxed at the lower AMT bracket such as cashing in old U.S. Savings Bonds, taking a distribution from a tax deferred account, rolling over an IRA into a Roth IRA or accelerating the receipt of income you would normally get in January
  • If you are eligible for traditional or Roth IRA contributions, consider making the contribution sooner rather than later to start the tax-deferred or tax-free income stream
  • If you have a business or receive income subject to self-employment tax, consider opening a 401k or Keogh account on or before December 31, 2014, or a SEP (which can be opened as late as the due date including extensions for your 2014 tax return). Contributions to all three plans do not have to be made until sometime in 2014 (check with tax advisor for the dates)
  • Accelerate as many deductions as possible to get the benefit this year rather than next year.
  • For charity giving, consider donating appreciated stock to either the charity or a donor-advised fund (DAV). You will get a deduction for the full value of the stock and not have to recognize the income.  By using the DAV you can get your deduction this year and have the funds distributed to your charity in the next or later years
  • You can make a gift of appreciated stock to people you are supporting that are in a “0” tax bracket for capital gains, and have them sell the stock immediately, thereby, avoiding any tax. Note that you cannot do this with people subject to the Kiddie tax
  • If you own stock with losses, you can sell them to realize the loss. If you buy them back within 30 days (before or after the sale), you will have a “wash sale” and cannot deduct the loss. A suggestion is to sell them and then immediately buy an ETF that is comparable to the stocks you sell maintaining a similar market risk. After the 30-day period, you can reverse the transactions. An example is to sell individual healthcare stocks, and buy a healthcare ETF
  • If you have realized short-term gains, try to sell stocks with losses to shelter them. The best is to sell stock with long term losses. This will net out with the gains and those losses won’t offset long term gains in a later year
  • If you own mutual funds that will declare year-end capital gain dividends without making an offsetting distribution, consider selling them now!
  • If you want to pass some wealth to others that will be subject someday to estate taxes if retained by you, tax-free gifts of $14,000 per person can be made up until December 31. The $14,000 is doubled if you have a consenting spouse. There is no income tax benefit to this, but it will remove this money and any future earnings and appreciation from your eventual estate
  • If you are planning to pay for a child’s or grandchild’s college education, consider opening and funding a Section 529 plan which income would be tax free if ultimately used for post-secondary education expenses
  • If you were required to make estimated tax payments and did not, you should consider taking an IRA distribution and having the funds applied to withholding tax.  If you do not want to treat this as a taxable distribution, repay the gross amount to the IRA within 60 days designating it as a tax-free rollover
  • Owners of businesses with more than $1 million profits should consider a Captive Insurance Company deduction under IRC§ 831(b)

The above are suggestions you can consider.  Before you do anything, meet with your tax advisor to make sure the planning is effective for your situation.


November 13, 2014

EBITDA is a commonly used acronym for a representation of profits. The letters stand for Earnings before Interest, Taxes, Depreciation and Amortization.

EBITDA indicates the maximum amount of cash flow from a business’ operations that is available to be reinvested in the business, service debt by paying interest and repaying principal and provide a return on investment to the owners. EBITDA is the starting point to determining the value of a business and certainly not the only way.

The earnings are the bottom line on the statement of operations – the net income. The other components are deductions that are added back to determine an adjusted profit or cash flow from revenues, i.e. EBITDA. Interest is the amount paid to lenders. Note that each owner would have different capital and debt configurations so the add-back sort of creates a uniform playing field. One owner could decide to have no debt while another would want as much as possible making interest payments a function of an ownership decision regarding leverage and not an operational issue. Taxes are paid on profits and are not a measure of operations. Further, taxes are not always consistently applied and depend upon management decisions about debt and level of aggressiveness toward tax elections and credits and possibly the business’ physical location. Depreciation and amortization are not cash expenditures but the systematic writing off of current and prior capital expenditures.

EBITDA gives the starting point to determine the real cash flow from operations and is applied to the following items:

  • Funding growth in accounts receivable and inventory in excess of the account payable
  • Acquiring capital assets such as machinery, equipment, technology and possibly new facilities or leasehold improvements
  • Applying the funds to decrease leverage, i.e. reliance on lenders, and building up the equity capital in the business
  • Accumulating funds for future anticipated needs and to fuel growth
  • Interest on loans
  • Loan principal repayment
  • Income taxes
  • And finally, payments to owners or investors

Valuing a business or providing for the future involves judgments about the continuance of the present mode of operations, anticipated changes and growth, future conditions and projections of liquidity and cash needs. It is, at its best, a best guess at that moment of time and because of that, needs to be considered on the side of caution. So use EBITDA when you start but don’t confuse it with the ending point.

How Leverage Works

November 11, 2014

A widespread method in investing is using borrowed money.  Most people buying a house put up anywhere from 10% to 25% and borrow the balance.  That leverage is substantial – 75% to 90%.  People also do this all the time with businesses.  A previous blog explained leveraged buyouts (May 29, 2012).  Today, I will show you how the numbers work.

Let’s assume a business is for sale for $1,000,000 and earns $200,000 pretax per year.  A buyer putting up the entire $1,000,000 will get a 20% return on investment (ROI).

Using that same business, a buyer that borrows $500,000 and pays an interest rate of 10% will have the $200,000 reduced by the $50,000 interest.  He now makes $150,000.  He invested $500,000 from his own funds so his ROI is 30% ($150,000 / $500,000).  Not too shabby.

To go even further, let’s assume he borrows $750,000 also at 10%.  He will now make $125,000 on his $250,000 investment for a 50% ROI. This is how leverage works.  You use other people’s money to offset using your own funds and you increase your ROI.  The amount invested is called “equity.”

If you’re buying the business to work in it and have all the funds, it probably would not pay to leverage your investment unless the ROI on your remaining funds would exceed the interest you would pay for the loan.  However, if you are in the business of investing in businesses and leverage permits you to increase your portfolio of businesses, you can become quite rich using other people’s money.  

There are risks.  The greater the leverage, the less likely you can recover from a business downturn or temporary setback since your equity could be wiped out or the interest payments could exceed the profits. Large leverage leaves little room to maneuver.  Another danger comes from success that is too quick.  Rapidly growing businesses need cash and lines of credit to absorb sharp increases in accounts receivable and inventory.  Growth is a good problem to have, but it needs funding and that needs planning to have it available when needed.

If you will only be buying one business, then you should consider less borrowing; but if you buy businesses as a business, leverage might work very nicely.

Creating a Legacy

November 6, 2014

Recently, a client asked about establishing a private foundation for periodic donations to charities for specific purposes after her death.  My first reaction was to answer her question along with explaining other alternatives.  On second thought I responded with a very easy, low-cost plan that I am sharing with you today.

Before I start, let me state that there are many ways to give charity – before and after death.  Based upon individual circumstances, what might work perfectly for one client might not be effective for another.  I am not explaining every way to handle charity-giving, but my partner, Raymond Russolillo, does this regularly in his charity blogs that I highly recommend at

My suggested method involves using a donor advised fund that I explained in a blog on Aug 14, 2014.

Here are the steps:

  • Open a donor advised fund (DAF) with the minimum required amount.  Based upon where it is opened, this would be about $5,000 to $10,000.  In some instances, the DAF can be opened after your death, but I suggest opening it while you are able
  • If possible, use appreciated long-term stocks and you will get a current tax deduction (subject to how you file) for the full value of the shares and not be taxed on the gain; or you can fund the DAF with cash
  • The money in the DAF can sit there and be invested in a bundled investment fund
  • The DAF can be used during lifetime, but in this situation, that is not the purpose the client wants to accomplish
  • The DAF can be in your name or in the name of the person you want to honor with the future charitable gifts
  • Your will or trust agreement will provide for a charitable bequest to be made to the DAF
  • If you want, you can designate the DAF as the beneficiary of your IRA or retirement plan
  • You would select people that are authorized to make the suggestions for the distribution of the funds.  This would include you initially and those you will trust to follow your wishes and instructions after your death.  Note that any entity you establish will need a trustee or someone empowered to act in accordance with the terms of the agreement.  This designation for your DAF is not materially dissimilar to that
  • You would provide your designated person with an instruction letter or can include all instructions in your will or a trust agreement that will become effective or operable upon your death or settlement of your estate
  • Your DAF will remain open as long as there is a successor donor and a balance in the account
  • There is no cost to setting up the DAF
  • The DAF will charge an ongoing management fee that should be offset by some of the earnings on your fund balance
  • No tax returns or any reporting are required and no annual professional fees are payable
  • DAF activity can be handled and tracked online or by postal mail
  • No provision is permitted to be made in the DAF for compensation to the donor adviser.  A suggestion is to permit in your instructions that the donor advisor can make a certain amount of contributions from your fund to their own charities

The above is a simple plan that will work, accomplish what you want, be operable after your death and enable you to leave an extremely low cost legacy.

This advice, like all tax advice, is generic and you should meet with a knowledgeable professional who can completely review the applicability to your situation before taking action.

Financial Statement Reports

November 4, 2014

The most frequently prepared reports by CPAs are audits, reviews and compilations.  Here are descriptions and differences of each.  Puja Shastri, CPA, from our audit staff assisted in the preparation of this blog.


An audit of financial statements (which is sometimes referred to by the general public as a certified report) is the highest level of financial statement attest reporting and only independent CPAs can perform this service.  The purpose of an audit is to provide reasonable assurance that the financial statements are free of material misstatement.

An audit includes examining on a test basis documentation supporting the amounts and the notes in the financial statements; assessing the accounting principles used and significant estimates made by management; as well as evaluating the overall financial statement presentation.  During the audit, the CPA obtains third party evidence; performs analytical and ratio analysis; and makes inquiries of management to determine if the information contained in the financial statements is free from material misstatement

The procedures are performed using Generally Accepted Auditing Standards (GAAS) and the report states whether the financial statements have been prepared under Generally Accepted Accounting Principles (GAAP) or another accounting framework.

Auditors are responsible to assess the risk of material misstatement, whether due to fraud or error and management has a duty to design policies and procedures to help prevent fraud and to perform periodic internal reviews to ensure that transactions are recorded properly by their staff.

Users place the highest reliance on audited statements.


Review reports provide limited assurance that the financial statements are free of material misstatements.

A review consists of principally inquiries of company personnel and analytical procedures applied to financial data.  It is substantially less in scope than an audit performed in accordance with GAAS.

During a review, the CPA will perform some analytical procedures and ratio analysis and ask questions of management about items contained in the financial statements that appear to be different than expected and to determine whether they became aware of any material modifications that should be made to the financial statements in order for them to be in conformity with the appropriate accounting reporting framework.  Review reports will contain a complete set of notes to financial statements, as do audited reports.  The auditor must be independent.


Compilation reports provide no assurance that the financial statements are free of material misstatements.  A compilation consists of presenting in the form of financial statements information that was submitted by management.  During a compilation, the CPA will “read” the financial statements to determine if they appear to be free from obvious material misstatement.  Financial statements which have been compiled may or may not have to include notes to financial statements.  If notes to financial statements are not included, that fact should be specified in the compilation report. The person or firm issuing the compilation does not have to be independent but if they aren’t, their lack of independence must be stated in the report.

Other financial statement and reporting and attestation services

Besides the traditional services described above, CPAs also may be asked to prepare prospective and forecasted statements, organizational budgets, personal financial statements, or other reports such as for construction bonds, letters of credit, third party guarantees and SEC and FINRA regulation compliance and forensic audits and special engagements designed to uncover or inhibit fraud.

Additional information

The basic financial statement services have been briefly described.  If you would like additional information, consult with your accountant or you are welcome to call Ed (732 964-9329) or Puja (732 828-1614).


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