Q: For the first time ever, my tax preparer has asked us to make estimated tax payments each quarter. Can you help me understand why this is important?

A: Having to make estimated tax payments for the first time can be a little perplexing. Most people are used to paying their taxes through some sort of automatic “tax withholding” mechanism, such as your wages, IRA, pension, or Social Security.

Some people, however, receive income that isn’t subject to any tax withholding. Of course, the government still expects you to pay taxes on that income evenly throughout the year. Examples of this type of income might include self-employment income, rental income, interest, dividends or capital gains.

Generally-speaking, to satisfy the government, you need to pay at least 90% of your tax obligations for the year or, alternatively, 100% of your prior year’s tax. If you fail to pay these minimum levels of taxes, you could end up paying both interest and penalties.

To avoid this, you should follow your tax preparer’s advice and use your vouchers to pay those estimated quarterly tax payments by the due dates.

Q: With last year’s decline in bonds rivaling the drop in stocks, I’m really wondering if they even make sense for me. What’s the upside of keeping them in my portfolio?

A: When you invest in bonds, you are basically acting as the bank. You are lending money on set terms; the interest rate you’ll earn and when you’ll get your money back. These things are written in stone, so to speak, and normally this makes bonds a much steadier segment of a balanced portfolio.

Like stocks, however, bonds also trade in the open market. This means that bonds can and do fluctuate in value. Last year, bond prices declined way, way more than usual!

In quick fashion, the Fed hiked interest rates. This made your stale, old bonds far less attractive than brand new bonds with their glimmering higher interest rates. As a result, investors did some math and, voila, your bonds fell in value. In fact, they declined  just enough to put your old bonds on financially-equal footing with those brand new bonds.

Now, the bigger and faster the change in interest rates, the greater the price change for your old bonds. The change in interest rates was both very large and very fast.

But, given the set terms of bonds, you should know that the expected total return for your bond portfolio is now significantly higher. For this reason, I think the benefits of holding bonds as part of a balanced portfolio are even greater than before. And, yes, I’m fully aware that this feels like small consolation!

Believe it or not, this year is now officially halfway over! This means you don’t have a ton of time left to think about your planned charitable giving. To spur you along, here are some old giving methods along with a new one that just might fit the bill

Appreciated Securities: If you own a stock that has significantly appreciated in value, you might consider donating some shares directly to a qualified charity. With your donation, you will avoid ever having to pay the capital gains tax. Better yet, your chosen charity won’t get taxed, either. And, if you itemize your deductions on your taxes, you stand to receive a tax break. Of course, given that so many people now opt for the super-sized standard deduction, it’s important to consult your tax advisor to see if your donation will actually result in a tax break.

Donor-Advised Fund: To help you get a tax break, you might consider “bunching up” multiple years of your planned giving through a donor-advised fund. From your new donor-advised fund, you can then take all the time you need to donate the money. Think of this as setting up your very own foundation on the cheap and with very few administrative headaches. Most brokerage firms make donor-advised funds really easy to start.

IRA Donations: For those over the age of 70 ½, you are allowed to donate directly to charity right from your IRA. Normally, when you take money out of your IRA, it’s taxed as ordinary income. However, if you donate the money directly to a qualified charity, you get to exclude those distributions on your tax return. For those who face required minimum distributions each year, using your IRA as a charitable tool is an especially tax smart way to give.

Charitable Gift Annuity: While these have been around for some time, a new version of charitable gift annuities is worth highlighting. To begin, with a charitable gift annuity, your charity gets the money right away and they simultaneously agree to send you periodic payments in return. After some fancy figuring is done, you are entitled to a tax deduction for a portion of your donation. Starting in 2023 under a new tax law, people over age 70 ½ can also establish a charitable gift annuity using their IRA. Importantly, unlike a normal charitable gift annuity, 100% of your donation is deductible on your tax return and it also counts toward your annual required minimum distribution. For some people, this new IRA charitable gift annuity might open up some particularly interesting tax planning opportunities.  

Q: I’ve heard a recent law, known as Secure 2.0, created some interesting possibilities for leftover money held in 529 plans for college savings. Namely, the new law seems to allow you to rollover the unused 529 plan balance into a Roth IRA. How does this work?

A: Among the many changes that Secure 2.0 created to enhance retirement savings, Congress did establish some new rules for college savings plans, commonly known as 529 plans.

Starting in 2024, leftover 529 plan balances can now be rolled over into a Roth IRA for the plan’s named beneficiary. However, the new law lays out a number of rules that diminish the planning opportunity.

To start, in order to be allowed to do a 529 plan-to-Roth IRA rollover, you’ll need to have started the college savings plan at least 15 years prior. Naturally, to get this countdown started, you should open a 529 plan for your kids or grandkids as soon as possible.

Next, you are limited in the amount that can even be rolled over into a Roth IRA. The overall limit for a 529 plan-to-Roth IRA rollover is $35,000.

Further, you aren’t allowed to do this amount as a one-time rollover. Instead, the annual rollover limit is set at the normal IRA contribution maximum. Today, that annual IRA contribution limit is $6,500. To reach the $35,000 lifetime limit, it will obviously take multiple years of planning.

And, finally, the only dollars that are eligible for a 529 plan-to-Roth rollover are those that have been invested in the 529 plan for at least five years.

Q: With our federal debt continuing to grow, it seems that tax rates are going to increase in the years ahead. It’s got me seriously thinking about doing some substantial Roth conversions. What factors should I consider before pulling the trigger?

A: I must admit, it’s difficult to argue that tax rates are going to decline in the future! Given this, Roth conversions should certainly be top-of-mind.

But, a comprehensive Roth conversion analysis isn’t as straight-forward as simply guessing about future tax law changes. There are multiple considerations and peculiarities that can substantially raise the cost of Roth conversions.

For example, you should be aware of the possible tax effect that Roth conversions can have on the taxation of your Social Security benefits.

In addition, in the case of large Roth conversions, you’ll also need to watch out for a lesser-known wrinkle lurking in the tax code called the Net Investment Income Tax.

And, of course, another important consideration is pushing your income so high that it results in you having to pay higher premiums for your Medicare Part B benefits.

It is summertime in Traverse City. The sun is blazing, the water is warming up, and like clockwork, members of your family are at your doorstep. With all of them within earshot, now might just be the perfect moment to bring up the importance of estate planning. Try to ignore their groans when you raise the topic in the middle of your family picnic

Estate planning often carries the connotation as something that’s only for the wealthy. That’s dead wrong. After all, estate planning is just about making sure you’ve got all your affairs in order. Your wealth is irrelevant. Simply put, everyone needs an estate plan.

While you’re still alive, you need to have two legal documents to cover the possibility of your absence or inability to act on your own. One focuses on your money matters and another guides your health care decisions. On the money side, you designate a person willing to act as your “agent” in all of your financial affairs. For your health care needs, you name a person who will be your “patient advocate” in an emergency medical situation. Both of these are referred to as a Durable Power of Attorney.

In addition, upon your death you also need to provide clear direction for the distribution of your money and property and the possible need to make arrangements for the care of certain loved ones.

The first task in your estate planning journey is to carefully name your beneficiaries of your assets. For some assets, like retirement accounts and insurance policies, most people know to name specific beneficiaries. It’s a bit less known that you also can do the same for your non-retirement investment accounts and bank accounts. That’s even true for your real estate holdings, too. Now, there are often really good reasons to not name beneficiaries for each and every one of your assets. It’s important to meet with an experienced attorney to make sure you think through all the unique angles of your life.

Next up in your estate plan is to have a Last Will. This basic estate planning document plays multiple roles. At its heart, a Last Will names a “personal representative” to help divvy up your material stuff and it lays out who gets what if you failed to name an explicit beneficiary for an asset or account. On top of that, this document also is the spot you designate a “guardian” to care for your minor children or pets.

With these four steps complete – that is, your two Durable Powers of Attorney, your beneficiary setup and your Last Will – you could have everything nicely covered.

On a final note, people often ask whether or not they need a trust. Nowadays, many people don’t, but some absolutely do. Naturally, you should call an attorney to find out more. It’s money and time well spent.

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com