Natalie Choate: The best and worst tax strategies

The tax regime is unforgiving to the wealthy, but there are still plenty of strategies to help mitigate the impact — for those who are creative.

Tax expert Natalie B. Choate, who is of counsel at Nutter McClennen & Fish LLP, last Monday unveiled her “201 Best and Worst Planning Ideas for Your Client’s Retirement Benefits” at the InvestmentNews Retirement Income Summit in Chicago.

Regarding distribution strategies, wealthier clients already are using withholding of their income taxes from their individual retirement account distribution to reduce estimated taxes.

“Your wealthy client who is over age 701/2 doesn’t want or need to take the distribution from his IRA, but he has to,” Ms. Choate said. “He also hates paying estimated income taxes.”

One way to soften the blow is to use the 2013 required minimum distribution from the IRA to pay down the year’s estimated income taxes on Dec. 1.

The RMD payment should go straight to the Internal Revenue Service from the company holding the IRA, Ms. Choate said.

By doing so, the client avoids paying these taxes in four installments, and the withheld income taxes are credited to the client as if he or she had paid them throughout the year, even though the IRS didn’t get the money until December.

This can amount to a few thousand dollars in savings, Ms. Choate said.

Another good idea on distributions from a retirement plan is for individuals over 701/2 to direct up to $100,000 from an IRA to a favorite charity. It has to be a charitable organization, not a donor-advised fund, a charitable-remainder trust or the client’s own private foundation.

By shipping the money off to a charity, the client is keeping that money out of his or her adjusted gross income, which can have lots of planning implications for the taxability of Social Security benefits, the amount the client has to pay in Medicare premiums and the application of the new surtax on investment income, Ms. Choate said.

Single people with more than $200,000 or married couples filing jointly who have more than $250,000 in adjusted gross income are subject to the 3.8% surtax on investment income.

Moving that money out of the IRA via a charitable distribution can keep some people below those AGI limits, Ms. Choate said.

“This isn’t something that’s just for billionaires and millionaires,” she said. “It helps lower income for people who are charitably inclined.”

In terms of rollover guidance, Ms. Choate unveiled a number of tips, including how to ensure that clients who are remarrying can pass their retirement plan benefits to their children.

SIDESTEPPING ERISA

The Employee Retirement In-come Security Act of 1974 requires that a worker’s spouse be named a beneficiary on an ERISA plan. But clients can sidestep that if they roll their money over to an IRA before they get married, and allow the children from the earlier marriage to be beneficiaries.

“IRAs are subject to state law spousal rights, which you can waive with a prenuptial agreement,” Ms. Choate said.

But what if the client has already remarried and only now finds out about the ERISA requirement?

“With a 401(k), you can roll over to an IRA without spousal consent, at least under federal law,” Ms. Choate said. “I’ve heard sad stories here at this conference where things could have gone better if only people had known the rules.”