Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Clients who inherit a traditional IRA partly funded with nondeductible contributions will need to take special care in reporting their taxes when taking distributions from the account, according to Money magazine. These taxpayers should file Form 8606 to show that taxes have already been paid on the non-deductible contributions. Taxes are bad enough to start, one expert says. There's no reason anyone should pay more than they should just because of poor record keeping. -- Money
Millennials are the most savvy generation ever, and they can become the richest generation by embracing the concept of tax deferral, according to Forbes. The power of deferring taxes can help a person who saves only $5 a day to retire in style if he or she starts early enough. -- Forbes
Buying employer stock in a 401(k) plan is often discouraged, but it can be a smart move under certain circumstances, according Motley Fool. One such situation is when employers offer their shares to plan participants at a discount to fair market value. Another advantage comes when its time to take distributions from a 401(k). Under the net unrealized appreciation rules, a client can take a distribution of employer stock in kind and put the shares into a regular taxable brokerage account. The client will pay income tax on the original cost of the shares when they were bought in the 401(k), but taxes will be deferred on any gains until the stock is sold. -- Motley Fool
A 1031 Exchange enables investors to avoid paying hefty capital gains tax when selling a highly appreciated real estate property, according to Barrons. Under this IRS rule, the proceeds of the sale must be used to acquire another real-estate property of the same value to defer the tax. The 1031 Exchange can be a useful strategy for clever investors to roll money from an overvalued property to get an undervalued property. It also helps those who are looking for cash flow, as they can sell their old property and buy a new one that fetches a higher rent. Barrons