Is This the Perfect Time for Your Roth IRA Conversion?

You may have a traditional IRA you’ve been thinking about converting into a Roth, but either you never got around to doing it or the timing was wrong because the conversion would have created extra taxable income and a higher tax bill. Guess what? In either case, luck might now be on your side and this could be the right time to make lemonade with a sweet lemon.

If the impact of COVID-19 on your business and finances has resulted in decreased revenue and income, converting a traditional IRA into a Roth IRA now could make conversions an affordable tax cost for this year while also giving you an advantage against the higher tax rates most analysts are expecting to see in the next few years. Before we explore those details, here’s some necessary background.

Roth IRAs offer two advantages … Qualified withdrawals receive tax-free treatment, and they offer an exemption from the Required Minimum Distribution (RMD) rules. Let’s take a closer look at each of these advantages.

Tax-free Withdrawals

Roth IRAs are free of federal income tax, and usually exempt from state income tax as well. In order for a withdrawal to be qualified for tax-free status, the owner of the Roth must have had the IRA for over five years and must either be 59½ years old, become disabled, or deceased. The five-year clock begins on the first day of the tax year in which the initial contribution to the Roth was made. This initial contribution may be either a regular annual contribution or a conversion from a traditional IRA.

Required Minimum Distribution (RMD) Exemption

As you know, at age 72 the holder of a traditional IRA must begin taking RMDs, and these are at least partially taxable if not fully taxable depending on the owner’s circumstances. However, with a Roth IRA, distribution is not required at any age, and the account can remain untouched for the rest of his or her life if desired, even as this asset continues to grow. Because this account can be left undisturbed, it can be a wonderful legacy the owner can leave to heirs.

Should the owner die and leave the Roth IRA to a spousal beneficiary, the surviving spouse inherits the account as though it was his or her own Roth IRA account. This means the account can continue to remain untouched for the rest of his or her life as well, earning tax-free income and gains.

The account can then be passed on to a new spouse, or to a non-spousal beneficiary or beneficiaries. If the Roth IRA goes to a nonspousal beneficiary, the nonspousal beneficiary can leave the account undisturbed for about 10 years after the death of the prior owner. At the end of the 10-year period, the Roth IRA must be terminated with all funds withdrawn.

Consider if This is the Perfect Time for You

There are three reasons why this may be the perfect time for you to convert your traditional IRA into a Roth IRA.

1. Tax Rates are Low. The Tax Cuts and Jobs Act (TCJA) reduced tax rates for 2018 – 2025, but higher rates are likely to return in 2026. There is also much discussion about the potential for increased taxes to help the economy recover because of the COVID-19 health crisis. Shifting your account from a traditional IRA into a Roth IRA now, before new potential taxes are established, means you could preserve more of your wealth by paying lower taxes now rather than higher taxes later.

2. Your Income was Reduced This Year. If it’s likely that your 2020 income will be less this year because of the effect of the health crisis, your federal income tax rate could be lower than usual. If this is the case, you may have a lower tax bill, so it might make sense to switch from a traditional IRA to a Roth IRA now when your tax rate is temporarily lower.

3. Lower Balance in your IRA. Another unpleasantry is that your IRA may have suffered a loss in value because of stock market declines. Depending on how your traditional IRA was invested, your IRA account may have a lower balance. However, a lower balance may translate into a lower tax bill should you convert from a traditional to a Roth IRA. Transferring the money into a Roth IRA now will allow the money to grow tax-free when the market picks up.

This is a good time to take a moment and consider if transferring your traditional IRA into a Roth IRA is an opportune move for you before the year ends. If it is, you could preserve your wealth by mitigating it from the taxation your account might otherwise experience in the future.

As always, consult with your tax advisor for a carefully considered decision on which course is best for you and your unique circumstances.

We hope this blog post about potentially reducing your tax responsibilities by taking advantage of current financial circumstances was helpful and provided some ideas for a discussion with your tax advisor. If you would like to have a conversation with us about your portfolio’s performance, your plans for retirement or other topics that could benefit you and your family financially, please contact us. Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

This article is for general educational purposes only. Nothing should be construed as individual tax advice. Please consult a tax advisor to see if this information is right for your situation.

Tax Planning for Your Business During COVID-19

While every year is different, this year is more different than most. Nations around the world are still dealing with the effects of COVID-19, and it appears this will be a continuing experience for some time to come.

Something that has not changed is the importance of considering money-saving strategies that may minimize this year’s tax bill. A mid-year tax plan review gives you sufficient time to employ one or more of these four tax-limiting strategies.

1. Net Operating Losses (NOL)

Acting in your favor, the CARES Act has temporarily limited the Tax Cuts and Jobs Act (TCJA) of 2017 by removing restrictions on NOLs. Under the authority of this new law, you are permitted to retroactively move losses you suffered between 2018 – 2020 back as much as five years, meaning you could shift a 2018 business loss as far back as 2013. Because 2017 tax rates were higher then and in previous years, moving a NOL retroactively could prove beneficial to your bottom line and increase your cash flow, which is a much better option than taking a loss in 2020.

2. Excess Business Losses

The CARES Act also provided another tax-saving opportunity for businesses by retroactively eliminating the limits imposed on Excess Business Losses (EBLs) by the Tax Cuts and Jobs Act. Starting in 2018, the TCJA mandated that sole proprietorships and business organizations like S corporations or partnerships could no longer deduct business losses in excess of $250,000, or $500,000 for married joint filers. Excess losses are now temporarily re-categorized as NOLs and subject to those limitations. With this retroactive law adjustment, you should consider asking your accountant if you were subject to limited losses in 2018 or 2019. If a tax return for those years has already been filed, it could be an advantage to submit an amended return that now qualifies you for a refund.

3. Business Interest Expense

Another potential gift made available by the CARES Act involves changes to the limits imposed on deducting business interest expenses. Here, too, a provision in the Tax Cuts and Jobs Act was rolled back. In this instance the limit on deducting business interest expenses, set at 30% of Adjusted Taxable Income (ATI), has been reset to 50% of ATI for 2019 and 2020, though separate rules apply to business partnerships. There may be a tax refund waiting for you.

4. Real Estate Qualified Improvement Property (QIP) Depreciation

Finally, another CARES Act adjustment that could be a tax benefit for your business is the accelerated depreciation for real estate QIP that’s been operational after 2017. Real estate is considered QIP if the interior of a nonresidential building has been improved after the building was first made available for operations. This benefit, however, does not apply if the improvement was for enlarging the building, or if an elevator or escalator was installed, nor does it include changes made to the internal structural framework.

Assuming your property is eligible, you are entitled to claim a 100% first-year bonus depreciation on the expenditures if the improvements occurred between 2018 – 2022. You also have the choice of depreciating the expenditures over a 15-year period by employing the straight-line method.

Should this be the case and your tax advisor recommends amending your 2018 or 2019 return to claim the 100% first-year bonus depreciation, the adjustment may result in a NOL that can be shifted to a previous tax year for the recovery of taxes paid in that year. Another tactic that might serve you is to file a change in the accounting method instead of amending the returns.

The information in this blog post is intended to suggest possible tax-saving strategies that could benefit you and your company financially during the relaxation of Tax Cuts and Jobs Act rules, but in all cases you should seek the advice of your tax advisor for the specific particulars relating to your unique business circumstances.

Thank you for reading this blog post about possible ways to decrease your taxes and increase your cash flow during the unusual circumstances created by COVID-19. We welcome the opportunity to review your tax situation with our specialists, and also recommend consulting with us about the potential opportunities of pursuing a tax-advantaged investment policy. As always, Synergy Financial Management is primarily focused on building your wealth and preserving your estate. We look forward to serving you.

Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

This article is for general educational purposes only. Nothing should be construed as individual tax advice. Please consult a tax advisor to see if this information is right for your situation.

Mid-Year Tax Planning in the Year of COVID-19

2020 is a year like no other.

In the last six months our nation has seen the passage of three major pieces of legislation that made tax planning opportunities available and provided financial relief during extreme economic uncertainty. The COVID-19 pandemic is likely to change business practices at all levels and force the closure of many local businesses. In addition, 2020 is a national election year with the possibility of a presidential change.

All of these unusual conditions make this year’s mid-year tax planning novel and extremely important for correctly positioning your finances and reducing your tax liabilities.


These three significant legislative Acts may have an effect on the taxes you pay this year.

1. The Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act). Passed in December 2019, this Act provided an extension of tax benefits that had either expired or were about to expire.

2. The Setting Every Community Up for Retirement Enhancement (SECURE) Act. Also passed in December 2019, the SECURE Act significantly changed many tax-saving retirement rules.

3. The Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act became legal on March 27, 2020 and provided immediate economic relief as well as a variety of tax saving opportunities.

It’s also worth noting that if President Trump loses his office after this year’s election, there is a strong likelihood of considerable changes to tax law.

Five Income Tax Opportunities for Individuals

1. Reexamine Your Tax Withholding or Estimated Payments. It may be possible to improve your cash flow by adjusting the withholding on your W-4 so you are not overpaying.

2. Consider Amending Your 2018 or 2019 Returns. Normally permitted only if an error or omission is discovered, amending your returns is now possible because the three major Acts each contain provisions allowing retroactive amendment. This could put tax money, which you’ve already paid, back in your pocket.

3. Benefit from Lower Tax Rates on Your Investment Income. When you hold an investment for more than one year, you usually receive preferential tax rates on your capital gains. For most investments, those rates are now 0%, 15%, and 20%, and are based on your taxable income. When possible, reduce your taxable income so you are eligible for the 0% rate. If you find your income still too high, consider gifting some of your investments, such as appreciated stock, to your children or grandchildren. These individuals are likely to be in the 0% or 15% capital gains tax bracket. Should they sell the investments after a year of ownership, any capital gains will also have the lower tax rates applied. Be mindful of the “Kiddie Tax” which may limit the benefits of this strategy.

4. Beef-Up Your Retirement Plans. If COVID-19 has affected your cash flow, you’re in luck because the CARES Act permits several provisions for limited retirement fund distributions taken before December 31, 2020. This is also a good time to consider transferring your funds from a traditional IRA to a Roth IRA, should tax rates become higher after the national election.

5. Analyze Your Deduction Strategy. Itemizing your income tax deductions could be right for you if your personal expenses are significant. Do some calculations and compare your itemized deductions against the standard deduction to make a wise decision. The 2020 standard deduction for joint filers is $28,400, for heads of household it’s $18,650, and single taxpayers are entitled to a standard deduction of $12,400. If you’re considering itemizing your deductions, keep in mind that the Tax Cuts and Jobs Act (TCJA) of 2017 suspended or reduced a number of itemized deductions, so make sure the deductions you’re planning to take are still allowed.

Next month’s blog post will review several tax planning strategies for small businesses which may also help you reduce your tax bill in 2020.

Finding ways to reduce your taxes is always rewarding because taxes are the largest predator to your wealth. If you would like to review your tax situation with our specialists and wish to explore the possibilities of a tax-advantaged investment policy, please contact us for a conversation. Our primary focus at Synergy Financial Management is building and preserving your wealth.

Thank you!



Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

Crafting Your Portfolio

Your portfolio’s design is a reflection of your investment philosophy. Before you can begin to craft your portfolio, you must have clear investment goals and objectives. You must also have completed your investment policy statement, defining how you plan to identify and select the investments in your portfolio, as well as the actions you intend to take to achieve your required rate of return.

Two general investment strategies can be used:

1. Strategic decisions contemplate the investor’s investment horizon, risk profile, required returns and cash flow needs, available assets, tax brackets, inflation rates, and the average returns of different asset classes.

2. Tactical decisions are made by investors who believe one asset class will perform better than another, such as expecting stocks to outperform bonds, or international equities to outperform domestic equities.

Together, strategic and tactical decisions will result in a mix, or a weighting, of asset classes that are believed to maximize returns for the investor’s acceptable level of risk. These asset classes are also sector-weighted against an index that will be used to measure the portfolio’s performance, and/or with a bias toward a sector expected to outperform other sectors.

When examining securities, investors try to identify securities that appear to be mispriced. There are many methods for gauging the desirability of the security, but all these methods fall into one of two main classifications: technical analysis, and fundamental analysis.

Technical analysis involves the study of a security’s prices in an attempt to predict future value. Past prices are examined to identify recurring trends or patterns in price movements. Then, knowing the history of the price movements, recent prices are analyzed to identify emerging trends or patterns similar to past ones. This matching of current trends or patterns with previous ones is done with the conviction that these trends or patterns repeat, and thus results may be predictable and helpful with limiting risk.

Fundamental analysis asserts that the true value, or intrinsic value, of a financial asset equals the present value of all cash flows the asset owner expects to receive. The fundamental analyst attempts to forecast the timing and size of these cash flows, and convert them to their equivalent present value using a discount factor and dividend discount model. Once the true value of the asset has been determined, it is compared to the current market price to see if the asset is fairly priced or not.

Assets valued at less than their current market price are considered overpriced, while those with the true value greater than their current market price are considered underpriced. If an asset is overpriced, investors must determine if they are willing to pay the higher price, or wait for the asset to fall closer to its true value for purchasing. If underpriced. The asset may be a good investment, pending additional analysis.

At Synergy Financial Management, we employ four investment strategies which are unique to our firm; we work closely with each investor, selecting a proportionate combination of the four that best serves our individual client’s unique interests. Discussion with our client establishes the best combination of these four strategies, whether Active Strategy, Semi-Passive Strategy, Conservative Strategy, or the Alternative Investment Strategy.

We’ll discuss each of these more formally in our next articles, but for now it’s important to remember the following:

1. Technical analysis focuses on prices and patterns to predict future value.

2. Fundamental analysis focuses on aspects of the economy and industry conditions to determine an asset’s value.

3. Whenever you are preparing to invest, you must consider your time horizon, whether it is short term, medium, or long-term.

4. Always calculate the effect of taxes on your investment decisions before you invest.

5. Determine if the intended investment is sufficiently liquid or not. If you want to convert your assets into cash, is the penalty too high?

6. Also consider if you need the advice of an attorney because of any potential legal or regulatory constraints.

7. Be sure you understand the cost of management or participation fees that make the value of your investment questionable.

8. Reflect on whether or not the investment fits with your Investment Policy Statement and your intentions for being diversified in specific asset classes.

9. Decide if the investment increases or reduces your portfolio’s level of risk.

10. Make sure the intended investment presents a good opportunity for the attainment of your required rate of return.

We hope this article about crafting your portfolio gave you some insights on how to proceed or how to evaluate your portfolio’s current performance. As your professional financial advisor, Synergy Financial Management can help you analyze risk before adding assets to your portfolio and can guide you with diversifying your vulnerability to risk. We enjoy working with you to maximize your portfolio’s rate of return while minimizing your exposure.

Please give us a call so we can discuss how our services can help you accelerate your growth while securing your wealth.

Thank you!



Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

Top Tax Planning Opportunities for 2019, Part 5

Top Tax Tip #9: Choose Your Filing Status to Skirt the 3.8% NIIT

Since married people can file either jointly or separately, this important financial decision might best be made, in part, on their vulnerability to the 3.8% NIIT (net investment income tax) they might have to pay.

As a reminder, the amount of unearned income subject to the 3.8% NIIT is the lesser of either the net investment income (NII) or the excess over an applicable threshold amount (ATA) of the modified adjusted gross income (MAGI).

Included in the NII is gross income from interest, dividends, annuities, royalties, and a trade or business considered a passive activity. Excluded from the NII are qualified retirement plans, wages and salaries, and self-employment income. Remember, too, that the ATA is $125,000 for married taxpayers that file separately, and $250,000 for married taxpayers that choose to file jointly.

While initially it may appear that the effect of the 3.8% NIIT would make no difference because of the similarity of ATA for filing separately or jointly, a closer analysis shows individual circumstances could sway the decision one way or the other.

Should one spouse have most of the NII and the other have less, filing separately might save significantly on the 3.8% NIIT tax.

Deciding whether to file separately or jointly also depends on the 0.9% Additional Medicare Tax as either one, or both, or neither of the spouses may be subject to this additional tax. Your tax accountant should do the calculations necessary to help you arrive at a conclusion that demonstrates the best tax-saving decision for you.

Example: Robert and Linda are married and Robert has $300,000 of salary income but no NII. Linda has $30,000 of NII but no other income. If they file separately, neither taxpayer will have to pay the 3.8% NIIT because Robert has no NII and Linda’s MAGI falls below her ATA. By filing jointly, they will have to pay the 3.8% NIIT.

Continuing the calculation by including the effect of the 0.9% Additional Medicare Tax, if Robert and Linda file jointly, they will not be subject to the 0.9% tax because their ATA is too low. However, by filing separately, Linda will not be affected by the 0.9% tax but it will apply to part of Robert’s income.

In addition, when contemplating which filing status is best for skirting the NIIT, the other considerations of how this affects the regular income tax brackets could result in the taxpayers paying more in regular income taxes because the filing status is affected by that choice.

Your tax consultant will need to do a series of calculations to determine whether it is better for you to file jointly or separately so a determination can be made about which filing is most tax beneficial for your particular circumstances.

Top Tax Tip #10: Saving Employment Taxes Through S-Election

Should you be in the position of paying employment taxes, you might find that a portion of your income might not be eligible for employment taxes, thus saving you additional cost.

Most businesses choose the S-election for their corporation to avoid the double tax inherent with being a C corporation. However, being an S corporation has additional advantages. As well, other business types, such as sole proprietorships, partnerships, limited partnerships, limited liability companies, limited liability partnerships, and limited liability limited partnerships can also make an S-election.

As an employer, there are several taxes that must be accommodated. That includes the Social Security Tax, the Medicare Hospital Insurance Tax, and the Additional Medicare Tax. With an S-election, a business owner may be able to save on these taxes because earnings can be separated into two categories, wages and distributions. While wages do incur employment taxes, distributions do not. This is a benefit to the business owner of a business organization operating under an S-election.

As you might expect, there are a variety of considerations that would need analysis. Even the courts are sometimes unclear on determinations. What is clear is that the wages paid to a business owner/employee must be “reasonable”, which means not too low with the obvious intention of avoiding taxation. Should that be the case, the IRS could adjust the figures higher to a more appropriate designation.

If you think this might be a strategy worth investigating, be sure to engage an experienced professional who can guide you with the subtleties and give you a reasonable expectation of a positive outcome for your circumstances. A good first step would be a careful examination about your business organization’s eligibility for an S-election, and an assessment about the amount of potential savings that could be available to your circumstances should you decide to make this decision.

Closing Thoughts

The strategies presented in this report represent outlines of information that could be especially helpful to you in the 2019 tax year. To determine which of these would be most beneficial, or to examine other wealth saving tax strategies, contact us for a more insightful review.

Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

Top Tax Planning Opportunities for 2019, Part 4

Top Tax Tip #7. Intra-Family Loans

For families with estates that would otherwise have to pay the wealth transfer tax, intra-family loans have the capacity, when interest rates are low, to provide substantial tax-free transfers. The key to taking advantage of this benefit is when parents loan money to their children at a low interest rate and the children then invest the loaned money at a higher rate. In effect, the difference between the loaned rate and the new income constitutes a tax-free transfer of wealth to the children.

The minimum interest rate is defined as the applicable federal rate (AFR) for the month in which the loan takes place. If the loan is for three years or less, the short-term AFR is used; for loans with a length of 3 to 9 years, the midterm AFR is the right choice; and if the loan has a term that’s more than nine years, the long-term AFR is appropriate.

In January 2019 the semiannual AFRs were:

Short-term AFR 2.72%

Midterm AFR 2.89%

Long-term AFR 33.15%

Here’s a good example:

A father loans his son $1,000,000 in January 2019 with a 12-year, interest-only balloon note. The interest rate is 3.15%. The son invests the money and produces a 10% after-tax return. By the end of the 12-year period, the son’s investment has grown to $3,138,428. The amount due after 12 years is $1,450,878… but the difference of $1,687,550 is the amount of wealth that was transferred tax-free.

An intra-family loan can also be used to reduce interest payments on a mortgage. For example, a parent has a child with a $400,000 30-year mortgage at a 7% interest rate that permits prepayment. The monthly mortgage payment is $2,600. The parent loans the child $400,000 to pay off the mortgage, and the new loan has a 20-year term with interest at 3.15%, which is the required rate of the long-term AFR. This new intra-family loan reduces the monthly payment to $2,200 and decreases the loan term by 10 years, a significant advantage.

Of course, for this to be a valid loan in the eyes of the IRS, the family must obey all loan formalities such that this loan would be the same if the parties were unrelated.

Mortgage loans could be especially helpful for family by providing benefits for both the parents and the children. Children are likely to benefit from the following:

1. A lower interest rate for the loan

2. Probably more flexibility with the terms

3. Avoiding fees like ordination and other transaction costs

4. Able to borrow with a poor credit rating

5. Borrowing with a low interest rate even with a poor credit rating

6. The possibility of not having to make a down-payment

The lending parents may also have some benefits, such as:

1. Helping their children reduce costs

2. Retaining interest payment funds in the family

3. Creating returns for an income stream that might exceed the returns on CDs or bonds

If you think an intra-family loan could help your children and also be a benefit for your own financial circumstances, consider having a discussion with a financial planner who can look at your particular situation and give advice that precisely fits your circumstances.

Top Tax Tip #8. Opportunity Zones

The Tax Cuts and Jobs Act (TCJA) of 2017 was created to offer tax benefits to investors willing to invest in a qualified opportunity zone. A qualified opportunity zone is a lower income area that’s been designated by the government for the employment of capital that could help a community with funds that might otherwise be unavailable because of the asset holder’s reluctance to incur a capital gains tax.

The TCJA offers three incentives for allowing the shift of capital gains earned through the sale or exchange of property into a qualified investment in a low income community:

1. The deferral of gain recognition earned on the original investment: When an investor chooses to reinvest the capital gains achieved from another investment, any gain from that investment will not be included as income until the earlier of either the date in which the investment is concluded, or December 31, 2026. This incentive has no restrictions on the amount of gain that can be deferred.

For example, an investor sells stock with a basis of $300,000 and has a $100,000 capital gain. Rather than paying tax on the $100,000 gain, the investor uses the $100,000 as an investment in a qualified opportunity zone and can now defer all gains made.

2. A basis step-up for the original investment: An investor’s basis in the original investment begins at zero per the opportunity zone rules. When the investment is held for a minimum of five years, this basis increases by 10% of the deferred gain. If the investment continues for a total of seven years, the basis increases by 15%.

For example, an investor chooses to invest $100,000 of capital gains, and keeps the money in the opportunity zone investment for over five years. This reduces the gain to $90,000 and decreases the cost of the taxes on those gains. If the investment is held for seven years or more, the gains would be reduced $85,000 with even greater tax relief.

3. The permanent exclusion of gain on investments made in the opportunity zone: If an investment in an opportunity zone was held for a minimum of 10 years, there will be no gain eligible for taxation when the opportunity zone investment is finally sold.

Of course there are specific qualification requirements that must be met. Here are a couple of the key items:

1. The capital gains must be invested within 180 days of a sale or exchange that created the capital gains.

2. The capital gains cannot be the result of a sale or exchange with a related person.

3. If the gain came from an “offsetting-positions” transaction, gain deferral is not allowed.

If you would like to defer the taxation of your capital gains, investing in a qualified opportunity zone could be the right strategy for you and also benefit a low income area with your choice.

We always welcome hearing from you, and if you think one of these two strategies, or any of the other six strategies mentioned in previous months is a good opportunity for you, please give us a call so we can review how we can help you save tax costs, preserve your wealth, and accelerate the value of your estate. Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

Top Tax Planning Opportunities for 2019, Part 3

Here are two more great ideas you might be able to use when thinking about how to save money on your taxes this year. One or both of these ideas might result in some huge tax savings so you can apply the savings to other investments that would further increase the value of your portfolio. Take a look, and if either of these ideas seem appealing, schedule a visit with your financial planner.

Top Tax Tip #5. Family Limited Partnership (FLP)

Establishing a family limited partnership (FLP) can be very helpful with improving tax efficiency by shifting wealth to future generations. A family limited partnership allows the elder members of the family to share their assets with the family’s children while at the same time keeping control over the underlying assets in the hands of the senior family members. By transferring the elders’ assets to the children, the older family members’ estate may also benefit from a substantially reduced transfer tax.

In this arrangement, the senior family members create the FLP in the role of general partners. The children or grandchildren serve the partnership as limited partners. In the beginning, the parents hold both general and limited partner interests. The general partners keep full control over the FLP and may gift as many of the limited partner units as they wish to their children or grandchildren, reducing their taxable estate through this process.

In addition, both gift tax and the use of the applicable exclusion amount (previously known as the unified credit) can be circumvented if the annual amount transferred to each child is below the annual exclusion amount, which is $15,000 per donee in 2019. Thus, both parents could donate a maximum of $30,000 per year to each child based on the transfer limits current in 2019.

Ultimately, 99% of the FLP will be transferred to the limited partners with the general partners, or parents (grandparents), retaining only 1% of the total equity in the FLP. Because of the restriction on the amount of funds that can be annually transferred from the general partnership into the limited partnerships, it can take several years for all but 1% of the funds to transfer to the children tax-free. During this time, parents will retain their exclusive control over both the assets and the FLP because they are the exclusive general partners.

It’s important to realize that the limited partner interests have no authority over the FLP or its underlying assets, and no funds can be transferred without the general partners’ permission. Limited partners represent only a minority position and the value of their position has very low marketability. However, because the value of assets change every year, an annual evaluation of the limited partner interests should be conducted annually to avoid transgression of the IRS rules.

Aside from the benefits of decreasing the taxability of the parents’ estate and the tax-free transfer of the assets to the children, an FLP can protect the children’s assets in the FLP from creditors because the children do not control the assets in the FLP; moreover, the parents may choose to not make distributions to a child with debts.

Other benefits include, in part:

1. Providing the continuation of a business after the death of elder members

2. Decreasing the viability of individual owners

3. Allowing family members to unify their assets

4. Making estate ministration more simplified

5. Make family gifting more expeditious

6. Reduce asset management expenses

7. Protect family assets from reckless family members

Consider meeting with your financial planner to discuss the tax-saving opportunities available to your family by establishing a family limited partnership.

Top Tax Tip #6: Tax Aware Investing

Most people invest their funds with the intention of capturing the highest possible pre-tax returns. The strategy behind tax aware investing is to focus instead on the highest possible after-tax returns.

Most investors do not plan their investments with an eye toward protecting their gains from predatory taxes. This practice is beginning to change as investors realize it is not how much they earn that matters compared with how much of their gain they retain. Taxes can significantly impact an investor’s annual returns, diminishing the potential for achieving lifetime financial goals.

Tax-aware investing references the following features, in part:

1. Expanding Investments in Tax-Favored Assets: Investment assets can be taxed at different rates. For example, high income investors pay 40.8% tax on interest, 23.8% on gains made from stock sales, and 0% tax from income derived from tax-exempt bonds. This suggests investors might benefit from shifting their investments to asset classes that favor low taxation. The intention is not simply to reduce taxes but rather to increase after-tax return. Of course, each investor’s circumstances are unique and must be carefully considered to improve the likelihood of the desired outcome.

2. Deferring Asset Gains for Later Distribution in a Lower Tax Bracket: Assuming all factors are equal, usually a portfolio’s turnover ratio attracts less taxes when the ratio is lower than when the turnover ratio is higher. Knowing that a lower turnover ratio is subject to less taxes infers the value of establishing a passive buy-and-hold strategy. This can be accomplished by investing in assets like tax-efficient mutual funds, index funds, ETFs and SPDRs because these assets typically have low turnover ratios. Keep in mind that total turnover is not the most effective measurement of tax efficiency; it’s the net turnover that produces the desired result of asset retention.

3. Reorganizing Portfolio Construction to Benefit from Lower Taxes: When constructing a portfolio that seeks to maximize after-tax return, compared with maximizing the usual pre-tax returns, the intention is to achieve both pretax alpha and after-tax alpha. The core of the portfolio will be most effective if it contains low turnover assets such as tax efficient mutual funds, SPDRs and ETFs, and stocks that are passively managed as all of these assets usually minimize taxes. With this set as the core, the fund manager can create satellite portfolios that focus on beating the market. This strategy could be an advantage because satellite portfolios such as these are usually volatile and likely to produce large capital gains and large capital losses. By using the capital losses to offset the capital gains, the portfolios may show positive pretax and after-tax alpha results.

4. Sensitivity to Income, Gains and Losses Based on Tax Bracket Positions: As discussed previously, shifting gains and losses into deferred or distribution status based on your current or future tax bracket is a tax prevention or tax diminution strategy that could save your tax expenses in a given year. Distributing gains in low tax bracket years and deferring gains during high tax bracket years is a well-recognized practice.

5. Tax Sensitive Asset Location: To minimize total taxes, a savvy investor needs to distribute his or her assets across the range of taxable accounts, tax-deferred accounts like traditional IRAs and 401(k) plans, and tax-exempt accounts such as Roth IRAs and Roth 401(k) accounts. Ranking your assets by their tax efficiency will help clarify which assets need to be shifted into tax-deferred or tax-exempt status so your assets are subject to tax at a lower rate or not subject to taxation at all.

Tax aware investing is rarely a large part of the investment process for most investors who focus, perhaps errantly, on achieving maximum pretax return but then leave themselves potentially open for tax predation. By being more attuned to the value of an investment portfolio after taxes have been assessed is likely to change an investor’s focus more toward preserving the portfolio’s gains rather than surrendering an unnecessary excess to the IRS.

We would welcome hearing from you about the strategies just presented, as the financial services we offer include these and many other tax-saving options. At Synergy, we continually work on your behalf to increase your wealth and reduce your risk. Please contact us for a consultation that could be highly beneficial for your portfolio. Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

Top Tax Planning Opportunities for 2019, Part 2

A number of tax-saving opportunities are available for preserving your wealth, allowing you to accumulate more money for your retirement, your business,, your lifestyle, or for your heirs. Please read the following two tax tips carefully, and if interested, consider having a discussion about them with your financial planner so you can retain as much of your wealth as possible.

Tax Tip #3: Nonqualified Tax Deferred Annuities:

Consider smoothing your income through a deferred annuity. In those years when your income places you in the higher tax brackets, and if you invest in a deferred annuity, you can reduce your taxable income and possibly reduce both your income taxes and your NIIT (net investment income tax).

Deferred annuities are useful tools and are often used to provide or supplement retirement savings. Deferred annuities are not qualified retirement plans but they do receive preferential tax treatment. Earnings on deferred annuities accumulate tax-free until funds are withdrawn.

Deferred annuities can be either fixed or variable. A fixed annuity pays a guaranteed fixed interest rate. Variable annuities offer the annuity owner the choice of several investment options on the rates of return.

Distributions of your annuity payments are subject to an exclusion ratio which divides the distribution into a taxable portion and, separately, a tax-free recovery of basis. Fixed and variable annuities have different exclusion ratio calculations.

Even though the income from annuity payments is taxed as ordinary income when withdrawn, this investment vehicle still offers you the favorable tactic of removing taxable income in your higher tax bracket years and deferring your taxation to when you’re in your lower tax bracket years.

The tax benefits of having a nonqualified tax deferred annuity are:

1. You can have an additional income stream after you retire

2. Your earnings grow tax-deferred until you make withdrawals

3. You’re not required to make minimum distributions at age 70½

When choosing to have a nonqualified tax-deferred annuity as one of your investment and retirement strategies, you should review your options for receiving your annuity’s funds in later years. You have three choices:

1. You can receive your funds in a lump sum payment, but this might result in a hefty tax liability, particularly if it pushes you back into a higher tax bracket

2. You can choose to receive fixed payments for the rest of your life

3. You can also choose to receive a fixed amount for a specific period of time

By choosing one of the fixed payment alternatives, your tax liability will be spread out over time, which may be to your advantage and help keep you in the lower tax brackets so you preserve more of your wealth.

A nonqualified tax-deferred annuity could be just the right device to help you to further reduce your taxes and limit Uncle Sam’s pinch.

Tax Tip #4: Borrow from Your Permanent Life Insurance Policies:

Taxpayers who purchase a life insurance policy when they are in a high tax bracket year can borrow from the policy when they are in a low tax bracket year and need extra funds. This way, income can be shifted so taxable income is preserved from taxation, and if funds are necessary later in life, distributions from the permanent life insurance policy can be tapped at a lesser tax rate if the holder is in a lower tax bracket.

A permanent life insurance policy is necessary for this strategy because a permanent policy accrues cash value. The holder of a permanent life insurance policy who needs funds could borrow from the cash surrender value. Borrowing is limited to the amount of the cash surrender value.

Advantages to the policyholder include:

1. Shifting funds that may have otherwise increased taxable income and thus increased taxes

2. Helping the policyholder avoid being situated in a higher tax bracket and being subject to the net investment income tax (NIIT)

3. Receiving income in later years without selling taxable assets and relocating back into a higher tax bracket

4. Having some degree of security knowing that income is available when required and, presumably, at a lower tax rate

5. In most cases, the funds borrowed from the policy are not taxable. (There are some exceptions to this benefit which should be clarified before taking a loan.)

As enticing as this scenario appears, borrowing from the permanent life insurance policy creates factors that must be carefully considered.

1. A variable life policy’s death benefit is reduced by the amount of the loan, but is restored as the loan is repaid.

2. Future premiums by the life insurance company may be increased to compensate the company for its loss of anticipated cash accumulation.

3. The insurance company could charge the taxpayer interest for borrowing the funds. If so, the interest would be added to the amount of the loan.

4. It’s possible that the insurance company will reduce the interest rate earned on the cash value of the policy.

5. Interest paid for the policy loan is not deductible, which increases the cost of the loan.

A policyholder is not required to repay the loan. Should the policy terminate or the policyholder die, the proceeds of the life insurance policy are reduced by any outstanding loan indebtedness.

A policyholder can always surrender his or her policy to the company and receive the cash surrender value, less any unpaid loan and interest. If the policyholder either surrenders the policy or lets the policy lapse, any income will be taxed at the taxpayer’s current income tax rate.

Reducing taxable income during high tax bracket years and keeping the funds in a permanent life insurance policy as an available resource if needed could be an effective tool for guarding your wealth and having a ready source of income upon demand.

We hope this article about reducing your taxes with deferred annuities or by purchasing permanent life insurance policies has given you some valuable information about the options available to you for reducing your annual taxes so your estate can grow with as little hindrance as possible.

We would welcome hearing from you about the strategies just presented, as the financial services we offer include these and many other tax-saving options. At Synergy, we continually work on your behalf to increase your wealth and reduce your risk. Please contact us for a consultation that could be highly beneficial for your portfolio. Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

Top 10 Tax Planning Opportunities for 2019, Part 1

No one likes to hear the heavy tread of the tax man, so it’s incumbent on you, your financial planner and your tax specialist to take advantage of the many available tools that keep predatory taxes from cutting into your wealth. The following presentation offers you 10 Top Tax Planning Opportunities you may be able to use to your benefit.

Top Tax Tip #1: Bracket Management

Everyone fits into a tax bracket so Uncle Sam can assess the percentage of taxes you have to pay on your income. However, it is very likely you can manage your taxable placement and reduce your taxes.

Brief Review:

The 2017 Tax Cuts and Jobs Act created seven ordinary income tax brackets as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%, in addition, the Act established three capital gains tax brackets: 0%, 15%, and 20%. (There are also two additional tax brackets for special income.)

To add to the mix, even more tax brackets are possible with the new 3.8% net investment income tax (NIIT) that creates a 40.8% tax rate on ordinary income for high income taxpayers and a 23.8% tax rate applied to long-term capital gains.

Because of the variety of tax brackets that could apply to your particular financial situation and because you might be in a position to save tax expenses by careful planning, the strategies of tax deferral and “income smoothing” could give you a strong tax advantage.

The First Step

A properly considered tax strategy begins with estimating how much taxable income you’re expecting to receive over the next 5 to 15 years. Once this amount is estimated as accurately as possible, discovering ways to avoid the higher tax brackets and the NIIT can be initiated.

Multiple Potential Choices

Your tax strategy might include one or more of the following:

1. Harvest losses in high income years

2. Harvest gains in low income years

3. Contribute to traditional IRAs in high income years

4. Contribute to Roth IRAs in low income years

5. Invest in tax-deferred annuities

6. Create charitable remainder or lead trusts

7. Engage in life insurance strategies

8. Implement Roth IRA conversions

9. Create family trusts

Whichever of these possibilities are most profitable for you and your tax circumstances, the concept is basic: use income smoothing to achieve the best tax-advantage benefit for you.

Income Smoothing

Income smoothing typically means one of these two choices:

1. Reducing your taxable income during high income years by increasing your deductions and shifting your income to years with lower income, and/or

2. Increasing your taxable income during low income years by deferring your deductions and decreasing your taxable income to fit into the lower tax brackets.

Another key strategy is to keep your taxable income under the 3.8% NIIT threshold level so you don’t bear the burden of additional higher income tax. Should this strategy not apply, the focus then becomes keeping taxable income under the 37% tax bracket.

Remember, poor bracket management is likely to result in your being responsible for paying taxes you might otherwise not have to pay. A little planning now can go a long way to helping you retain more of your wealth.

As with the other strategies mentioned in this report, this is only the tip of the iceberg of the many permutations available to you with bracket management. Other issues include whether or not you are single or married, and whether you are currently in your early accumulation years, core accumulation years, or enjoying retirement.

Tax deferral can be a very powerful tool, and when used expertly, it can result in significant wealth protection.

Top Tax Tip #2: Roth IRA Conversions

Roth IRAs differentiate from traditional IRAs in several important ways:

  1. Over the long-term, they can lower your overall taxable income

  2. They offer tax-free growth, not tax-deferred growth.

  3. Required minimum distributions (RMDs) are not required at age 70½

  4. Your beneficiaries can withdraw the funds tax-free.

  5. Roth IRAs provide more effective funding of your bypass trust

  6. They are a good instrument for working with the NIIT, and facilitate in come smoothing

Of course, whether or not a Roth conversion is particularly favorable depends upon the taxpayer’s larger financial situation. Only a careful analysis can determine the value of conducting a Roth IRA conversion.

If the taxpayer’s tax rate is low at the time of conversion, the taxpayer will obviously enjoy a positive financial result by converting. The reverse is true if the taxpayer’s tax rate is too high. However, if the tax rate is slightly to moderately high, there are factors that may make a Roth IRA conversion advantageous.

Here are some factors of particular interest:

  • If the taxpayer is able to pay the Roth conversion tax with funds other than the Roth IRA, more financial value will be retained by the IRA, favoring continued growth of the asset.
  • If a taxpayer has such favorable tax capabilities as investment tax credits, net operating losses, charitable deductions, etc., these may diminish the taxable conversion amount.
  • If the taxpayer does not need to receive the minimum distribution at age 70½, the Roth IRA fund can continue to grow for the benefit of the taxpayer’s heirs.
  • When a taxpayer makes a Roth IRA election during their lifetime, they reduce the overall value of the estate and thus potentially decrease the cost of higher estate tax rates.
  • When making a Ross IRA election, taxpayers benefit by paying income tax before paying estate tax…compared with the income tax deduction of a traditional IRA that is subject to estate tax.
  • If a taxpayer is married, there is the possibility that the conversion tax of a married couple filing joint returns could be less.
  • Distributions to the surviving spouse are tax-free.
  • Distributions to surviving beneficiaries are tax-free.
  • Roth IRA distributions are not calculated in the 3.8% NIIT net investment income or MAGI (Modified Adjusted Growth Income).
  • Roth IRA distributions also will not increase 199A taxable income, but might increase the deduction under certain conditions.

When it comes to preserving wealth, Roth IRA conversions fall into one of four factors:

1. Strategic conversions: Conversions in this category seek to take advantage of a client’s long-term wealth transfer goals.

2. Tactical conversions: These provide short-term income tax relief for attributes that will soon expire such as tax rates, tax credits, current year ordinary losses, etc.

3. Opportunistic conversions: This allows taxpayers to take advantage of short-term volatility in the stock market and such things as sector rotation and asset class rotation.

4. Hedging conversions: These conversions allow the taxpayer to be in position to take advantage of potential future events that could cause the taxpayer to be in higher tax rates in the future.

Avoiding the 3.8% NIIT is desirable. A Roth IRA conversion assists with income smoothing so more wealth could potentially be retained. A traditional IRA’s distributions are not NII but they do contribute to MAGI, and that could result in an increase in the taxpayer’s NIIT. For this reason, a taxpayer could choose to use a Roth IRA conversion as a way to keep future income out of the higher tax bracket categories and eliminate NIIT taxation on IRA distributions.

If it’s your goal to pay less taxes in your later years, a Roth IRA conversion could be a very useful tool for retaining your estate’s wealth. Depending on your particular financial circumstances, employing a Roth IRA to limit the tax-man’s bite could be a good solution for you.

We hope this first article about two strategies you can use to save money n your taxes in FY 2019 was insightful. We welcome a discussion with you on how Synergy Financial Management can facilitate your tax savings this year. Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

8 Ways Your Portfolio Could Be Handcuffed

It’s a distressing thought that your portfolio can be subject to limitations, but once you consider the various ways in which your portfolio might be constrained, you have the opportunity for making changes that enhance your ability to increase your wealth while protecting your gains.

Let’s take a look at how your portfolio’s performance could be restricted.

1. Time Horizon: This is a factor you probably don’t have much control over. We all know there is a strong likelihood your portfolio will eventually need to shift into more conservative holdings. Hopefully you began setting aside funds and made good investments at a very young age, and you’ve enjoyed the benefit of a long time horizon. As we know, time is an investment ally when you have a lot of it. If you began investing late in life, the limitation of years you’ve had to build your wealth might be a limiting factor when you reach retirement.

2. Taxes: Taxes can have a potent influence on your investment results, which is why taxes should be carefully analyzed for their influence on your wealth-building efforts. Even though your portfolio might be creating impressive gains annually, what really matters is how much money you retain after taxes have been paid, or will be paid as capital gains in the future. This is why investment advisors recommend you consider investment choices such as tax-deferred or tax-free investments compared with the apparent value of investing in income producing or capital growth investments. One person’s champagne is another person’s soda water, and every situation is unique to that particular investor’s circumstances. Even so, a conversation with your financial planner about the value of tax-deferred and tax-free investments in your portfolio should be considered.

Taxes are the #1 predator eroding your wealth, so considering the issues of whether to have an active or passive investment strategy for particular asset classes, noting that portfolio turnover accelerates taxes in taxable accounts, evaluating the impact of ordinary income tax rates and capital gains tax rates on your portfolio and estate, and contemplating ways to transfer your wealth and limit gift and estate taxes is worthy of considerable reflection.

3. Liquidity: There are times when you may have the need to convert assets into cash, but the cost of converting your assets’ value is too high to consider because of the penalty, which could come from volatile markets, fees, and/or taxes. Therefore, a certain amount of your portfolio may need to be held in cash or cash equivalents in order to provide required liquidity. While this might be a good tactic, your security with having cash available will also restrict your rate of return.

4. Legal: Oh, just think about all the limitations legally placed upon your portfolio! All the regulations and requirements and rules… As you know, there is a mountain of traffic lights that are green, amber, and red. Always seek the advice of an attorney for any concerns you have regarding your investment accounts’ legal and regulatory constraints.

5. Marketability of Assets: Some assets have surrender charges, and may also contain management or participation fees. Some of these features may be inappropriate or prohibitive as a good choice for your portfolio. When making a decision to purchase an asset, you have to be aware of limitations placed on your investment by fund managers and always consider the eventual cost of your exit.

6. Diversification: Perhaps your investments are limited to certain asset classes, which therefore control your portfolio’s exposure to market influences that may be more or less beneficial than the selections you’ve included. By carefully positioning your investments in asset classes designed to either increase and/or safeguard your wealth based on your personal financial need, you can use diversification to your advantage rather than being victimized by it.

7. Social: Social constraints on funds are also popular, since some investors choose to buy only ‘green’ or do not invest in companies that make armaments or pollute the planet. An investor who makes a conscious decision to invest with a social constraint understands that returns might not be as grand as investments in other companies, but is willing to accept a lower return in exchange for moral peace of mind.

8. Fees: Hopefully, this is not an alien topic and you’ve reviewed the variety and cost of fees you’re paying to invest in a fund. Many of these fees are disguised, so it would be a great help to have a discussion with your financial planner about the kinds of fees your portfolio is paying and how you might save some of your wealth by transferring to less costly management. Of course, it could be worth your while to work with a financial advisor who receives compensation as a fee-based advisor.

We hope this article about understanding the ways in which your portfolio may be constrained will lead you to a discussion with your financial advisor that opens the door to a more appropriate and better crafted portfolio designed around your specific financial requirements. If you’d like to discuss the possibilities of re-creating a more customized portfolio, we would love to meet with you and discuss your interests. Please give us a call. Thank you!


Synergy Financial Management, LLC

13231 SE 36th Street, Suite 215

Bellevue, WA 98006

ph: 206.386.5455

fx: 206.386-5452

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