WHITE PAPER INTRODUCTION COULDA-WOULDA-SHOULDA!!! This case was more of a “could have, would have, should have” than it was an opportunity to go back and correct the mistakes of the past. We are choosing to share this case because we think it demonstrates why it’s so important to pursue wise counsel when making big financial decisions. The case involved a high-earning couple. He was a highly paid executive and she was a high-producing realtor. They were planning to make some improvements to their home while also investing in a few income properties. THE CHALLENGE Having a high percentage of their nest egg wrapped up in their retirement accounts, they decided to pull $200,000 out of one of their IRA’s to fund their purchases. When this couple decided to pull the money out of their IRA, they were fully aware of the 10%, $20,000 penalty they would have to pay on the early withdrawal. Given the size of their retirement accounts, it seemed harmless at the time. They, however, had no idea how this decision would come back to haunt them. In creating another $200,000 of taxable income for that year, they not only incurred the $20,000 early withdrawal penalty, they also • Moved themselves into the highest tax bracket (39.6%) • Lost all their exemptions (which cost them over $5,000) • Lost a significant portion of their itemized deductions (which cost them $2,000) When all was said and done, they paid about $95,000 in federal income tax and penalties on their early withdrawal, and netted about $105,000 of the $200,000 they withdrew. THE SOLUTION If this family had sought our advice at the time, we would have recommended that they avoid the $95,000 tax bill by simply choosing to take out a small home equity line of credit. In doing so, they would have retained the full $200,000 in their retirement account and paid no additional taxes. Had this family not been able to borrow against their home we would have encouraged them to do two things: Split the IRA distribution over two years: Not make the $40,000 contributions that they were making to their 401K and IRAs, and use the additional cash flow to reduce the amount needed from the retirement account. This course of action would have enabled them to use their itemized deductions and more of their personal exemptions. They would have put themselves into a lower tax bracket, reduced their tax liability by around $20,000 over the two years, and had another $10,000 in their retirement accounts when all was said and done. Not all decisions lead to this kind of negative outcome, but in this case, the lack of wise counsel caused this family to go down a road that was less than optimal. Having the right advisory team in place would have saved them over $30,000. Coulda-woulda-shoulda! Save as PDF More White Papers WLW: Win One, Lose One, Win One JSZ: Junior Sam Zell SOO: Starting Over, And Over

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AVOID THE HIDDEN TRAPS of Retirement Plan Loans When you are looking for a loan, one option you can consider is to take out a loan from your retirement plan. These loans do not require a credit check, and they generally have very favorable interest rates. For employees who are having trouble securing a loan, borrowing from their retirement plan can be an easy way to secure a loan. However, these plans can be dangerous if not treated with the proper caution. There are complex rules that go along with these loans, and defaulting on the loan results in the remaining balance being considered a taxable distribution from the plan and can be subject to the 10% early distribution penalty. Requirements for retirement plan loans There are 3 requirements that must be met in order to receive a loan from your retirement plan: The entire loan balance must be repaid within five years, except in cases where the loan is used to purchase a principal residence. 1 The loan must be repaid using equal payments on at least a quarterly basis, meaning you cannot make small payments for 4 years and one large payment in the last year. 2 The loan balance cannot exceed $50,000, or one-half of the account balance, whichever amount is lower. 3 Defaulting on the loan results in the remaining balance being considered a taxable distribution, subject to a 10% penalty Repayment of loans In order to avoid the loan being treated as a distribution, you must make all of the payments on time. Plans will generally offer a grace period on missed payments up to the end of the next quarter after the payment was due. However, some plans offer smaller grace periods or no grace period at all. What happens when you leave your job while you are still repaying a retirement plan loan? Most companies don't want to deal with collecting payments from individuals who no longer work for them. When you leave your job you will be given 60 days to pay off the balance of the loan. Any amount not paid off in the 60 days will be deducted from the balance of the plan and will be considered a distribution, which will be taxable and subject to the 10% penalty for early distribution. Key Takeaway Taking out a loan from your retirement plan can be an easy way to secure a loan. There are no credit checks or high interest rates. However, the tax penalty can be painful if you are unable to make the required payments. At Monotelo, we exist to make a difference with meaningful and actionable financial solutions that positively impact our client's lives. If you have questions about what steps you can be taking to prepare for your retirement years, call us at 800-961-0298

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WHITE PAPER INTRODUCTION Realtor Sam, while a real person, is not the actual name of this real estate agent. We have changed the name to protect the innocent! The Realtor Sam case is a case we examined in 2015, which had similarities to cases that had come across our desk in the past. Realtor Sam had been in the real estate business for nearly twenty years. He was not only selling real estate, he also owned several residential properties that were generating significant cash flow and taxable income. Realtor Sam had incorporated his commission-based business as a C-Corp ten years prior to our interaction with him. Apart from a bad year in 2013, his gross commissions were generally around ninety-five thousand dollars per year and his commission-based business was generating around forty-thousand per year in free cash flow after all his expenses were paid. What made Realtor Sam’s case unique was the fact that his investment properties were generating significantly more income than his commission-based business. THE CHALLENGE By incorporating his commission-based business, Realtor Sam had taken the first step towards a tax-efficient business structure. However, there were additional steps he should have taken when he first set up his business ten years earlier. Because of the way Realtor Sam had structured his compensation from his C-Corporation for his commission-based income, he was regularly generating losses on his corporate tax returns. Worse, because he was set up as a C-Corporation, those losses could not be used to offset the income he was generating from his rental properties. These issues were causing Realtor Sam to significantly overpay on his tax returns every year. THE SOLUTION Fortunately, we were able to put a plan together for Realtor Sam to help get him back on track. Our first goal was to take advantage of the accumulated losses on his corporate tax return. To accomplish this, we made some adjustments to how he was compensating himself through the business. Our second goal was to help him efficiently pull profits out of his business by taking advantage of some provisions in the Internal Revenue Code that were available to him as an officer of a corporation. These changes reduced his tax bill in the first year by $9,000 and by $5,500 in each of the subsequent years. These results were beyond what we had expected, and beyond what we generally see for someone with Realtor Sam’s taxable income, but they do demonstrate what can happen when we apply a deep understanding of the tax code as it relates to real-estate centered businesses. At Monotelo our focus is more than tax preparation, it is to make a difference with actionable and meaningful financial solutions that positively impact our clients’ lives. Save as PDF More White Papers WLW: Win One, Lose One, Win One CWS: Could-A-Would-A-Should-A SOO: Starting Over, And Over

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SIX MYTHS About Health Savings Accounts If you qualify for one, a Health Savings Account is an incredibly compelling way to pay for your future medical costs. Not only does it allow you to bypass the 7.5% threshold for deducting your medical expenses, it also provides for tax-free growth when you use the proceeds for medical expenses. With significant medical expenses in retirement all but guaranteed, a Health Savings Account is a great tool to save for retirement. As compelling as HSAs are, there are a number of misconceptions about how they work and how you can use the funds held in them. Our goal today is to dispel some of the common myths that surround Health Savings Accounts. 1. You need to use HSA money before the end of the year HSAs are frequently mixed up with flexible spending accounts, which require you to use the funds in the account before the end of the year or lose them. With an HSA the money in the account is yours to keep until you need it. 2. You can’t use your HSA after enrolling in Medicare While you cannot continue to contribute money to your HSA after enrolling in Medicare, you can continue to use the funds that are already in the account to pay for your medical expenses. In fact, once you turn 65 you can also use your HSA funds to pay your Part B and Part D Medicare premiums. If your Medicare premiums are paid directly out of your Social Security benefits you can withdraw the same amount from your HSA to reimburse yourself. 3. You can only open an HSA if your employer offers them. As long as you meet the eligibility requirements, you can open an HSA and start contributing on your own. Many banks and other financial institutions offer Health Savings Accounts. However, if your employer does offer an HSA you are likely better off setting one up through them since many employers make direct contributions to employee’s HSA and will likely also cover the administrative fees of the account. 4. You need to withdraw funds in the same year you pay your medical expenses. Many HSA providers will give you a debit card that you can use to pay your medical expenses directly out of your HSA. However, you can also pay your medical bills out of pocket and then withdraw funds from the account to reimburse yourself. There is no time-frame in which the reimbursement needs to be made. As long as a medical expense is incurred after you set up your HSA, you can wait five, ten or even fifty years to reimburse yourself out of the account. However, the longer you wait the more difficult it may be to prove that the expenses were not already reimbursed in a previous year if the IRS chooses to question the reimbursement so it is best not to wait too long to reimburse yourself. 5. You can only use HSA funds for family members covered under your insurance plan The amount of money that you can contribute to your HSA is dependent on whether your health plan covers your family or just yourself. You can contribute up to $3,500 annually if you have a single plan or $7,000 if you have a family plan. However, even if your health plan only covers yourself and your other family members are on a separate plan, you can still use your HSA funds to cover any medical expenses for your spouse or dependents. 6. You don’t need one if you are healthy. Even if you don’t expect to have significant medical expenses anytime in the near future, you are very likely to have large medical expenses later in life. When viewed as a retirement planning tool rather than an emergency medical fund, the HSA beats both traditional and Roth retirement accounts by allowing for pre-tax contributions and tax-free distributions when used for qualified medical expenses. Summary The Health Savings Account is a powerful tool to prepare for any unexpected medical costs while also saving for retirement. If your healthcare plan qualifies as a High Deductible plan you should strongly consider the benefits offered by an HSA and if you are choosing a new healthcare plan you should look at plans that will qualify for a Health Savings Account. Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

Spend some time reviewing your retirement accounts before 2019. 1 2 If you hold shares of a mutual fund in a taxable investment account (taxable meaning not held in an IRA or other “deferred” investment account), then you will receive distributions from this fund in the form of interest, dividends or capital gains. These distributions are likely automatically reinvested into more shares immediately after they are received. While this can help you keep your money productive, it can also create a number of tax consequences when these funds are not held in tax-deferred accounts. Save as PDF TAX CONSEQUENCES of Reinvesting Your Mutual Fund Taxes on Reinvested Distributions When these funds are held in a taxable account, you will pay taxes on the interest, dividends or capital gains in the year that you receive them, even if they are immediately reinvested back into the fund. This can come as a surprise to some taxpayers who think they shouldn’t owe any taxes since they never pulled the money out of the account. Disallowed Losses When a fund that you hold shares in has declined significantly in value you may sell those shares to prevent any further decline in value as well as to realize a tax deduction for your losses. However, if the proceeds are automatically reinvested back into the fund you may cost yourself the tax deduction for those losses due to the IRS “wash sale” rule. This rule states that when you purchase “substantially identical” shares within 30 days before or after the loss sale, your deduction will be reduced by the amount of purchases made within the window. If you plan to sell shares of a fund to realize a loss, make sure the proceeds are not automatically reinvested in a similar fund within 30 days. Records Nightmare from Long-Held Stock When you sell shares of a fund you need to report the original purchase price in order to reduce the taxable gain on the sale. If you only held the shares for a few months or a few years, then this likely is not a cause for concern. The fund company should know exactly when you purchased the shares and how much you paid. However, if you purchased the shares many years or even decades ago, you could find yourself making countless phone calls and digging through old records to try and determine your basis in the shares. Worse, if you cannot find your original purchase price the IRS will set it at zero and you will owe capital gains taxes on the entire sale. Reinvesting at the Top You are likely to receive more distributions from a mutual fund after the fund has a profitable year. If your distributions are set to be reinvested automatically this can lead to you routinely buying more shares at their highest price and fewer at their lowest price. In these situations, it may be more advantageous to manually invest the distributions in other funds that are not at their peak price. Summary Automatically reinvesting your earnings from mutual funds is an efficient way to keep your money active in the market without requiring your constant supervision. However, it can also create some unforeseen tax consequences at the end of the year if those funds are not held in a tax deferred account such as an IRA. Being aware of these potential tax consequences and monitoring your investment account throughout the year can help you avoid surprises and headaches when you file your taxes at the end of the year. Read more articles Share Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

TAX TIPS For Home Sellers As the housing recovery begins to pick up steam, some home sellers will have gains on the sale of their homes for the first time in nearly a decade. The good news is that the tax code recognizes the importance of home ownership by providing certain tax breaks when you sell your home. THE MOST IMPORTANT THING TO KNOW when selling your home is that your sale qualifies for an exclusion of $250,000 in gains ($500,000 if married filing jointly) if you owned the home and used it as your main home during 2 of the last 5 years before the sale and you have not claimed any exclusion for the sale of another home within the last 2 years. The 24 months of residence can fall anywhere within the 5-year period. It doesn't even have to be a single block of time. All you need is a total of 24 months (730 days) of residence during the 5-year period. POINTS/HOME IMPROVEMENTS/ MOVING & PROPERTY TAX DEDUCTIONS IF YOU HAVE TO SELL YOUR HOUSE because you're relocating for work, you might be able to deduct some of your moving expenses. Deductions could include transportation costs, travel to the new place, storage costs and lodging costs. YOU CAN DEDUCT YOUR PROPERTY TAXES for the portion of the year that you owned the home - up to the date of the sale. SOMETIMES YOU NEED TO IMPROVE YOUR HOME to get it sold. If you make home improvements that help sell your home, and if they are made within 90 days of the closing, they may be considered selling costs, which could be deductible. IF YOU PAID POINTS TO LOWER YOUR INTEREST RATE when you refinanced your home, you might qualify for an additional deduction. Because you can deduct a proportional share of the points until the loan is paid, when you pay off the loan through a sale,you can deduct the remaining value of those points. ADDITIONAL TIPS IF YOU DON'T QUALIFY for the Section 121 exclusion (left), you will owe taxes on any profit, so make sure you deduct all your selling costs from your gain. Some of the selling costs could include: Your real estate agent's commission Legal fees Title insurance Inspection fees Advertising costs Escrow fees Legal fees SELLING PRICE - SELLING EXPENSES CALCULATION AMOUNT REALIZED - ADJUSTED BASIS GAIN OR LOSS REPORTING REQUIREMENTS YOU NEED TO REPORT THE GAIN IF: 1 2 3 You have a taxable gain on your home sale and do not qualify to exclude the sale. You received Form 1099-S. If so, you must report the sale even if you have no taxable gain to report. You wish to report your gain as a taxable gain because you plan to sell another property that qualifies as a home within the next two years, and that property is likely to have a larger gain. Save as PDF Read more articles Share Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

2020 Strategies for a Lifetime of Tax Savings Join us as we share clear steps you can take to reduce your tax bill and cohesively address each area of your financial life. Minimize the risk of rising tax rates Reduce your current tax burden Maximize the productivity of your assets to improve your future income stream Minimize the drag from your long-term tax liabilities with potential lifetime savings of more than $200,000 on a $500,000 retirement portfolio Provide a quiet confidence that your financial affairs are arranged to meet your long-term goals

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