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As we head into the final quarter of 2017, it’s a good idea to stay cognizant of any tax issues that may affect your finances come April 2018. Now is the time to review your investments and income distribution plans to help ensure you don’t trigger additional taxes or penalties later on.

We can help retirees create income distribution strategies that provide a reliable stream of income. As some income-generating strategies could increase your tax liability in a single year, we recommend clients also consult with an experienced tax professional to understand issues regarding their specific situation and any tax planning help they may need. We are happy to make a recommendation from our network of professional colleagues.

One common income distribution strategy is to transfer assets from an employer-sponsored 401(k) plan to a self-directed IRA. This move can give some individuals more investment choices. The IRS encourages eligible taxpayers to consider requesting a direct trustee-to-trustee transfer, rather than doing a rollover. However, if you do not conduct a direct trustee-to-trustee transfer, it’s important to understand the rules related to personally withdrawing money from one account and depositing it to another. The IRS allows a 60-day window to do this without penalty. If an individual misses that deadline, he may qualify for a waiver to extend the deposit window. The IRS will generally allow an extension for one or more of 11 circumstances, including the death of a family member or because the taxpayer becomes seriously ill. Furthermore, a taxpayer can use a new self-certification procedure to apply for the waiver of the 60-day period to avoid possible early distribution taxes.1

Speaking of IRAs, one income distribution strategy that early retirees may be able to take advantage of is IRS Rule 72(t). Normally, someone who retires before age 59 ½ would be subject to a 10 percent penalty on early withdrawals from a retirement plan. However, Rule 72(t) waives this penalty for individuals who make a series of “substantially equal periodic payments” for five years or until the retirement account owner reaches age 59 ½ – whichever is longer. The allowable amount is based on life expectancy and must be calculated using one of the IRS approved methods.2 Since every situation is different, individuals are encouraged to consult with a qualified tax professional before making any decisions.

A 2011 rule from the IRS relates to the “portability deadline.” This is the rule that allows a surviving spouse to absorb any unused portion of a deceased spouse’s estate tax exemption amount. The surviving spouse must file an estate tax return on behalf of the decedent in order to qualify for the portability rule, even if the estate is under the filing threshold and typically would not be required to file an estate tax return. A new IRS guideline grants a permanent automatic extension of the time to file an estate tax return just to claim portability, extending it from nine months to up to two years after the decedent’s death.3

Also, as a reminder, 2017 is the first tax year in which taxpayers age 65 and over are subject to the same 10 percent threshold of adjusted gross income (AGI) for deducting unreimbursed medical expenses as all other taxpayers (in previous years the threshold was 7.5 percent for those 65 and over). Eligible medical and dental expenses must be over 10 percent of the taxpayer’s 2017 AGI in order to claim the deduction.4


Content prepared by Kara Stefan Communications.

1 IRS. April 19, 2017. “2016 Tax Changes.” https://www.irs.gov/newsroom/2016-tax-changes. Accessed Aug. 14, 2017.

2 Investopedia. 2017. “Rule 72(t).” http://www.investopedia.com/terms/r/rule72t.asp. Accessed Aug. 18, 2017.

3 Michael Kitces. Nerd’s Eye View. June 28, 2017. “IRS Extends Portability Deadline (Retroactively) Under Rev. Proc. 2017-34.” https://www.kitces.com/blog/rev-proc-2017-34-automatic-extension-deadline-form-706-portability-dsue-amount/?utm_source=FeedburnerRSS&utm_medium=feed&utm_campaign=Feed%3A+KitcesNerdsEyeView+%28kitces.com+%7C+Nerd%27s+Eye+View%29. Accessed Aug. 18, 2017.

4 IRS. Dec. 15, 2016. “Questions and Answers: Changes to the Itemized Deduction for 2016 Medical Expenses.” https://www.irs.gov/individuals/questions-and-answers-changes-to-the-itemized-deduction-for-medical-expenses. Accessed Aug. 14, 2017.

The content provided in this blog is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice.

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