Tru Financial Strategies Blog

INHERITED IRA's IRS Changes RMD Rules: What You Need to Know

Thu, 01 Aug 2024 11:32:42 GMT

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RMD's rules have been a topic of many discussions for the last few years within the advisory community with the enactment of the Secure Act 1.0 and the Secure Act 2.0 and then various updates to it from there. Its enough to make your head spin. Today we hope to provide some of the latest updates for you.

Please see the information below that was provided by Slott Report.

IRS Issues Final SECURE Act Regulations: Controversial Annual RMD Requirement During 10-Year Rule Stands

By Sarah Brenner, JD
Director of Retirement Education

On July 18, 2024, the IRS issued final required minimum distribution (RMD) regulations under the 2020 SECURE Act. The newly issued regulations fine-tune existing rules for trust beneficiaries and aggregation of RMDs. They also eliminate burdensome rules for certain spouse beneficiaries and documentation requirements for certain IRA beneficiaries. However, the 260 pages of final regulations keep the majority of the 2022 proposed regulations intact, including one provision that has generated a lot of controversy. The IRS is standing firm and maintaining the requirement that some beneficiaries must take annual RMDs during the SECURE Act’s 10-year payout period.

When the SECURE Act became law in 2020, most nonspousal beneficiaries lost the ability to stretch payments over their life expectancy. Instead, these beneficiaries became subject to a 10-year payout rule. In the wake of the SECURE Act, the IRS proposed regulations took the controversial position that if the account holder died on or after his required beginning date for taking RMDs, then annual RMD payments must continue to the beneficiary during the 10-year period.

The IRS based its interpretation on a long-standing provision in the tax code often referred to as the “at least as rapidly rule”. This rule requires annual RMDs to continue once they have started. Many believed this rule went away with the SECURE Act, but apparently the IRS thought differently. Due to all the confusion its interpretation caused, the IRS waived RMDs during the 10-year period for beneficiaries for the years 2021, 2022, 2023, and 2024.

In the newly released final regulations, the IRS is doubling down on its position that these annual RMDs are required. They must be taken starting in 2025. However, the IRS will not impose penalties for annual RMDs that were not taken for years before 2025.

Example: Karen inherited a traditional IRA from her mother Linda, who died at age 85 in 2020. Under the SECURE Act, Karen is subject to the 10-year rule. She must empty the inherited IRA account by December 31, 2030. The new IRS final regulations also require her to take annual RMDs based on her life expectancy in years one through nine of the 10-year payout period. Due to the IRS waiver of the penalties for missed RMDs in years 2021, 2022, 2023, and 2024, Karen does not need to take RMDs for those years. However, beginning in 2025 she must take an annual RMD for years 2025-2029 from the inherited IRA.

Create or Update your Social Security Login

Thu, 01 Aug 2024 11:22:46 GMT

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Need Help logging into Social Security?

Social Security is a foundational part of a solid financial plan. Understanding your benefits are key. However, the Social Security Administration has made some changes that affect how you login and obtain that information. See this short video below for login assistance and account creation.

IRS Changes RMD Rules: What You Need to Know

Fri, 29 Mar 2024 12:54:50 GMT

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The Secure Act 2.0 brought about numerous changes to how we save for retirement, including when investors need to start taking required minimum distributions (RMDs), ROTH 401k provisions, student Loan Matching and much more.

Today we want to put together a condensed summary of the RMD Changes that took place as a quick reference guide to help you better understand your RMD rules.

Yes, the IRS is making RMD changes yet again. If you are nearing retirement, actively planning for retirement, or already in retirement it’s critical you stay up to date on these changes, and how they may affect your retirement portfolio.

Here’s everything you need to know about these critical RMD changes.

What Changed with RMDs?

Age Changes

Before the Secure Act 2.0 was signed into law December 29, 2022, you had to start taking RMDs by April 1 of the year after you turned 72.

The new law extends the start of RMDs beyond age 72 on a gradual basis moving forward.

For those who reach age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2023, the RMD age would be 73.

Starting in 2033, the RMDs move up to age 75.

The following table illustrates the many ages at which RMDs are or were required to begin under the various legislation:

RMD Beginning Ages

Birth Date or Year Age

6/30/1949 or earlier - 70½

7/1/1949 to 1950 - 72

1951 to 1959 - 73

1960 or later - 75

Penalty Changes

The bill also includes significant penalty changes for not taking required minimum distributions on time.

The hefty 50% penalty for not taking RMDs will drop to 25% in 2023.

The penalty drops to 10% if you take the required amount by the end of the second year that it was due.

The penalty could be waived completely if you didn’t take the RMD due to an unforeseen event, but then withdrew it as soon as you could.

Changes like these are bound to happen to the systems over time. The key is staying up to date and understanding how they affect you. If you need any assistance don’t hesitate to reach out.

What to Know Before You File 2023 Taxes

Wed, 31 Jan 2024 21:11:38 GMT

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With tax season right around the corner, it’s time to talk about what you need to know before you file 2023 taxes.

According to the IRS, “Although the IRS will not officially begin accepting and processing tax returns until Jan. 29, people do not need to wait until then to work on their taxes if they’re using software companies or tax professionals.”¹

You heard it straight from the source – don’t wait! Get ready to file 2023 taxes now before the April 15, 2024 deadline.

Before you file your 2023 taxes, you need to be aware of some significant changes that affect everything from which tax bracket you are in to which tax breaks you qualify for.

Here are 7 key changes to keep in mind as you prepare to file 2023 taxes.

#1 Income Tax Brackets Changed

For 2023, there are still 7 different federal income tax rates, but the income ranges shifted significantly to account for inflation.

In fact, there was about a 7% increase in brackets.

#2 Increased Standard Deduction

There is also a bigger standard deduction for 2023.

The good news is that this reduces your taxable income. According to the IRS:

“The standard deduction for taxpayers who do not itemize deductions on Form 1040, Schedule A, has increased.

The standard deduction amounts for 2023 are:

$27,700 – Married Filing Jointly or Qualifying Surviving Spouse (an increase of $1,800)

$20,800 – Head of Household (an increase of $1,400)

$13,850 – Single or Married Filing Separately (an increase of $900)”²

#3 Increased Estate Deduction Tax

For 2023 taxes, the estate and gift tax exemption has increased to $12,920,000.

Note – This higher exemption will expire at the end of 2025.

Additionally, the annual gift exclusion (the ability to give money to loved ones without tax liability or subtraction from your lifetime estate tax exemption) rose $1,000 to $17,000 total.

#4 Form 1099-K Rule Changes (Again)

The IRS has decided to again delay the change that would require payments over $600 from third-party payment systems to complete Form 1099-K.

According to the IRS, “Following feedback from taxpayers, tax professionals and payment processors and to reduce taxpayer confusion, the IRS delayed the new $600 Form 1099-K reporting threshold for third party settlement organizations for calendar year 2023. As the IRS continues to work to implement the new law, the agency will treat 2023 as an additional transition year.”³

So for the 2023 tax year, previous reporting thresholds are still in place.

Payment apps and online marketplaces will only be required to send out Form 1099-K if you receive over $20,000 and have more than 200 transactions.

Note – You are still taxed on the income – no matter if it is the sale of goods or a side hustle. The difference here comes down to the type of form.

#5 Child Tax Credits

Child tax credits help reduce how much of your income is subject to tax.

For 2023, the Child Tax Credit is $2,000 per child under 17 years of age.

Due to inflation, the refundable portion of the Child Tax Credit has risen to $1,600 from $1,500.

According to the IRS, “You qualify for the full amount of the 2023 Child Tax Credit for each qualifying child if you meet all eligibility factors and your annual income is not more than $200,000 ($400,000 if filing a joint return).

Parents and guardians with higher incomes may be eligible to claim a partial credit.”⁴

Also, the IRS cannot issue refunds for people claiming the EITC or Additional Child Tax Credit (ACTC) before mid-February.

#6 Energy Tax Credits

Did you make any energy-conscious purchases in 2023?

If so, you may qualify for energy tax credits.

If you purchased a clean vehicle or electric vehicle, you may qualify for credits up to $7,500.

According to the IRS, “To claim either credit, taxpayers will need to provide the vehicle’s VIN and file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit, with their tax return.”⁵

Additionally, if you made energy improvements to your home, you may qualify for energy tax credits.

“The Inflation Reduction Act of 2022 expanded the credit amounts and types of qualifying expenses. To claim the credit, taxpayers need to file Form 5695, Residential Energy Credits, Part II, with their tax return.”⁶

#7 There’s Still Time to Contribute to Your IRA

That means there is still time to boost your retirement savings.

IRA contributors are able to invest up to $6,500, with a catch-up contribution limit of $7,500 for those 50 and older for the 2023 tax year.

Note – For the 2024 tax year, the contribution limit allows you to invest up to $7,000, with the catch-up contribution limit for those 50 or older set at $8,000.

As you file 2023 taxes, we hope it is not stressful. Use insights from this year’s tax season to prepare for 2024.

Have questions or concerns about your 401(k) performance? Click below to book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.

Can Your Cash Fight Inflation?

Tue, 26 Apr 2022 13:34:57 GMT

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Can your cash fight inflation?

When was the last time you were able to tell someone that you are making 7%+ on your Gov’t bond, CD, or cash sitting in your bank account? The answer was probably sometime in the late 1980’s. Since then, interest rates have been on a steady decline and have been near zero percent for the better part of a decade. This is kept your cash, treasuries, and CD’s from making anything more than what we like to joke about in the office, and that’s “12 Cents”.

But this decline in interest rates over the last 40 years has done more than make your cash less and less valuable. It is has spurred on a 40-year bull run in traditional bonds. Yes, traditional bonds have been a great low risk asset for the last 40 years, but the tides may be changing. If you’re not sure why, be on the lookout for our upcoming text on Bonds in a rising interest rate environment. SPOILER ALERT!!! Traditional bonds fall in value during a rising rate environment. Now equities have gone through the business cycle multiple times over that same period, making new highs, correcting, and making new highs again.

This continued decline in interest rates has left us to all but forget the harsh realities of real inflation. Sure, inflation has slowly crept into the picture from time to time but with a long-term inflation rate near 2-3% since the early 90’s we are getting a real dose of reality. The problem is how do we fight inflation and where do we park our money?

History says don’t panic about inflation

First, investors should also remember that sustained periods of inflation are rare in US history. There has only been one instance of inflation exceeding 5% for 10 consecutive years (1973-82). While that was a very tough period in US economic history, there have only been seven instances of consecutive years of 5% inflation in US history (and two of those were in the 1800s). While extended periods of inflation can happen, they are infrequent.

Effect of inflation on the stock market

So, while we don’t want to panic in the face of inflation, we do want to acknowledge its impacts. As we’ve seen in recent months, a sudden spike in inflation can lead to market volatility. Stock prices, and stock market returns, are largely based on expectations of companies’ future earnings. As inflation erodes the value of a dollar of earnings, it can make it difficult for the market to gauge the current value of the companies that make up market indexes. The good news is that while Fed tightening can negatively impact fixed-income investments, equities have often historically done well during these cycles.

If you are invested for long term e.g. retirement assets you’re not living off of, equities are a great place to fight inflation and continue to grow your wealth over time. Withstanding you are invested properly in your retirement accounts you should fight inflation just fine. But what about that cash sitting around earning those 12 cents. We don’t want to risk that cash in short term market swings and know that traditional bonds suffer from a rising rate environment so what do we do?

Consider I-Bonds?

An I-Bond is an Inflation-Protected Savings Bond backed and sold by the U.S. Government. They can only be purchased directly though the government website at https://www.treasurydirect.gov/ .

I-Bonds are unique in that they pay two types of interest rates:

· A fixed, 30-year interest rate (currently 0%)

· A variable semi-annually adjusted interest rate tied to inflation (currently 7.12%)

Because the second component of the interest is tied to inflation when we go through periods of higher inflation, I-Bonds help fight off the effects of that higher inflation. Currently if purchased before April 28 ^th , 2022 you will earn 7.12% annualized return for the next six months on your I-Bond. What’s even more important is that the May 2022 I-bond inflation rate is expected to be 9.62% (based on CPI data released April 12). This combined rate comes to 8.54% over the next 12 months! At 7.12% for April purchases, and a 6-month renewal rate of 9.62%, we believe this is one of the best 12-month cash investments available. That’s a more competitive interest rate than any other “safer” account on the market—bank account, high-yield saving accounts, CDs, money market accounts, etc. Plus, I-Bonds are backed by the U.S. government, providing the “gold standard” of security for your investment.

Furthermore, they don’t carry interest rate risk like traditional bonds because there is no secondary market for them trade on. When you no longer want your I-Bond you simply redeem it through the government website, terms and restrictions do apply.

While I-Bonds benefit investors during periods of high inflation what happens when inflation tappers off and what else should I know about these bonds? Because these bonds are tied to inflation when inflation does finally taper off the yield will subside as well. This makes I-Bonds particularly attractive for the short term but may not be a long-term holding for many individuals.

I-Bonds while being a 30-year bond, only have to be held for a minimum of 12 months. After 12 months and until 5 years you may redeem your bond for a 3-month penalty. You can buy up to $10,000 worth of I-Bonds electronically each calendar year per individual (married couples can buy $20,000 total) and it must be purchased with non-qualified money.

I-Bonds have many advantages for the right investor, but they aren’t suitable for everyone. Like any investment decision, a purchase should make sense for your holistic financial plan.

Before you buy, ask yourself:

· Are you interested in I-bonds because they’ve been in the news or because they could positively impact your portfolio?

· Do you have excess cash you could put to work?

· What’s your risk tolerance and capacity?

· What is your asset allocation? Do you already have a decent percentage invested in fixed-income, or do you want more exposure?

Reach out today to see if I-bonds could be an excellent addition to your balance sheet.

Secure Act 2.0: How It May Impact Your 401(k) Savings

Mon, 25 Apr 2022 17:23:47 GMT

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In response to the retirement crisis in America, the U.S. House of Representatives recently passed the Securing a Strong Retirement Act of 2022 by an overwhelming bipartisan vote of 414 to 5.

The bill, which passed March 29, is referred to as Secure Act 2.0 because it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 . It aims to significantly improve retirement savings plans for Americans.

The Senate working on its own version of the bill, the Retirement Security and Savings Act, is similar to the House bill. It’s expected that, after the Senate passes its version, both bills will be reconciled before being sent to President Biden for signature.

As of publication, the expected timeline for the Senate to mark up and pass their version of Secure 2.0 is sometime in May or June.

Keep reading to find out the main provisions in the House Secure Act 2.0 bill and how, if it passes, it may affect your retirement future.

Delay in Required Mandatory Minimum Distributions

The Secure Act of 2019 increased the age investors had to begin taking RMDs (required minimum distributions) from employer-sponsored plans and traditional IRAs from 70½ to 72.

The Secure Act 2.0 increases this even further:

For participants who reach age 72 after December 31, 2021, and age 73 before January 1, 2029, the age increases to 73.
For participants who reach age 73 after December 31, 2028, and age 74 before January 1, 2032, the age increases to 74.
For participants who reach age 74 after December 31, 2031, the age increases to 75.

The bill also has a provision that would greatly reduce the penalty for failure to take an RMD – from 50% to 25%. This excise tax reduction would be effective for tax years starting after December 31, 2021.

Higher Catch-Up Contributions

The proposed bill would keep existing 401(k) and 403(b) plan catch-up contribution limits for workers aged 50 to 61. However, it would increase the catch-up amount to $10,000 for those who are 62 – 64, starting in 2024. Under current rules, the 2022 limit on catch-up contributions for employees who have reached age 50 is $6,500, for a total contribution limit of $27,000.

Additional Catch-Up Contribution Changes

The Secure Act 2.0 will require all catch-up contributions to be made to Roth accounts, starting in 2023. This means all catch-up contributions would be made with post-tax dollars and can be withdrawn in retirement tax-free.

Employers Can Make Roth Matching Contributions

Starting in 2023, the Secure Act 2.0 would allow employees to elect that some or all of their company matching contributions be treated as Roth contributions (post-tax). Currently, employer matching contributions must be paid into pre-tax 401(k) accounts.

Mandatory Automatic Enrollment

The Secure 2.0 Act expands automatic enrollment in workplace retirement plans, requiring employers to automatically enroll eligible newly hired employees in 401(k) and 403(b) plans. Employees will be able to opt out, but automatic enrollment will be mandatory.

The auto-enrollment rate would be at least 3% of employees’ pay and not more than 10%, with an annual increase of 1% capped at 10%.

There are exceptions. Small businesses with 10 or fewer employees, companies in business less than 3 years, churches, and government plans are exempted from automatic enrollment requirements.

Part-Time Workers Get Easier Access to 401(k) Plans

In the Secure Act of 2019, long-term, part-time workers who worked at least 500 hours per year for at least 3 consecutive years (or those who have worked one full year with 1,000 hours clocked) are eligible to participate in their employers’ 401(k) plans.

The Secure Act 2.0 shortens the period from 3 years to 2 years, with the first group eligible on January 1, 2023.

Note : The above rules are the maximum service requirements that a plan can impose – employers can lessen service requirements.

Student Loan Matching Would Be Legal

For plan years beginning after December 31, 2021, the Secure Act 2.0 allows employers to make matching contributions based on an employee’s student loan payments, even if the employee is not making retirement plan contributions.

These are just a few of the provisions in the House bill that may impact your retirement planning and saving in the next few months. We will keep you posted as the Senate finalizes its version.

10-Step Financial Checklist for 2022

Fri, 07 Jan 2022 21:49:29 GMT

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The new year is upon us, which means it is the perfect time to create and finalize a financial checklist for 2022.

2021 appears to have been a better year financially for many American families. Why? Because many started financial planning for the first time.

According to a study by Northwestern Mutual, “ A third (32%) of Americans say their financial discipline has improved during the pandemic , and 95% say they expect their newfound habits will stick after the health crisis subsides.”¹

The study also found, “Nearly one out of five (17%) U.S. adults aged 18+ say they didn’t have a financial plan before the pandemic, but now they have one in place. Overall, 83% of people were prompted to either create, revisit, or adjust their financial plan during the pandemic.”²

If you were one of those Americans who used the pandemic to improve your financial life, keep the ball rolling with this 10-step financial checklist for 2022.

And, if you struggled financially in 2021, use our 10-step financial checklist for 2022 to turn things around.

Retirement Plan Contribution Limits for 2022

Tue, 09 Nov 2021 17:24:19 GMT

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The IRS has announced contribution limits for qualified retirement plans for 2022.

However, there may be changes coming to the info below.

In the November 3 draft of the Build Back America Act currently sitting in Congress, there are proposed provisions to curb contributions and accelerated distributions for high-balance retirement accounts.

In addition, the bill also has provisions to cut backdoor Roth IRAs and after-tax 401(k) contributions.

We will update you as things unfold.

In the meantime, keep reading below to find out exactly how much you can contribute for 2022, and start making plans now to do what you can to max out your retirement savings next year.

401(k) Retirement Plan Contribution Limits for 2022

401(k)s

Employee contribution limits for 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan are $20,500 – up from $19,500.

For those age 50 and older, the 401(k) catch-up contribution remains the same at $6,500 for 2022. If you turn 50 anytime during December of 2021, you’re still eligible to contribute the additional $6,500.

After-Tax 401(k) Contributions

If you are self-employed or your employer allows for after-tax contributions, the overall defined contribution plan limit will increase to $61,000 – up from $58,000 in 2021. The $61,000 is a cap of the maximum $20,500 contribution limit deferral, plus employer contributions.

Solo 401(k)s

If you have a Solo 401(k), otherwise known as a Self-Employed 401(k) or Individual 401(k), the contribution limits will increase to $61,000 in 2022, up from $58,000 in 2021. This is how much you can contribute as an employer.

The compensation limit has also risen to $305,000 in 2022, up from $290,000 in 2021.

IRA Retirement Plan Contribution Limits for 2022

IRAs
People with individual retirement accounts will not see an increase and contribution limits stay the same for 2022, with a $6,000 maximum contribution limit. This applies to pre-tax or Roth IRAs.

The catch-up contribution for people age 50 and over remains the same additional $1,000.

While the contributions have stayed flat since 2019, there are changes to the Deductible IRA Phaseouts and to Roth IRA Phaseouts.

Expert Tip : You can contribute the maximum for 2021 until April 15, 2022. If you have an IRA, plan now to maximize the contribution limit for 2021 before April 15 next year.

SEP IRAs

Contribution limits for SEPs, or Simplified Employee Pensions, have increased to $61,000 in 2022, up from $58,000. The compensation limit has also gone up from $290,000 in 2021 to $305,000 in 2022.

SIMPLE IRAs

Contribution limits for SIMPLE retirement plans for 2022 increase to $14,000, up from $13,500 in 2021. The catch-up limit remains the same at $3,000.

Deductible IRA Phaseouts

You can earn a little more in 2022 and get to deduct your contributions to a traditional IRA. For singles and heads of household who are covered by a workplace retirement plan, such as a 401(k), and contribute to a traditional IRA, the phaseout range is between $68,000 and $78,000, up from $66,000 and $76,000 in 2021.

For 2022, the adjusted gross income (AGI) phaseout range for married couples filing jointly who are contributing to a traditional IRA is between $109,000 and $129,000 for 2022, up from $105,000 and $125,000 in 2021.

If you contribute to an IRA but are not covered by a workplace retirement plan, and are married to someone who is, the deduction is phased out if your joint income is between $204,000 and $214,000 in 2022. This is up from $198,000 and $208,000 in 2021.

Roth IRA Phaseouts

The phaseout range for married couples filing jointly who are covered by a workplace retirement plan and contribute to a Roth IRA in 2022 will increase. For 2022, it will be between $204,000 and $214,000, up from $198,000 and $208,000 in 2021.

For heads of household or those filing as single, the phaseout range is between $129,000 and $144,000 in 2022, up from $125,000 and $140,000 in 2021.

Retirement Plan Contribution Limits for 2022

Defined Benefit Plans

The limit on the annual contribution of a defined benefit plan in 2022 will increase to $245,000, up from $230,000 in 2021.

Saver’s Credit

For low and moderate income workers, the new Saver’s Credit (also known as the Retirement Savings Contributions Credit) limit increased to $68,000 for married couples filing jointly – up from $66,000. For heads of the household, the limit has increased from $49,500 to $51,000 in 2022. For singles and married couples filing separately, the limit is $34,000, up $1,000 from 2021.

5 Must-Know Details about Your 401(k) Plan

Wed, 20 Oct 2021 19:50:06 GMT

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If you’re confused by your 401(k) plan, you aren’t alone.

According to a J.P. Morgan 2021 Defined Contribution Plan Participant Survey, 401(k) investors are “overwhelmed and unsure about the various aspects of retirement planning.”¹

In fact, 52% feel they are presented with more plan information than they can absorb.²

Perhaps this is why 51% of 401(k) participants do not take time to read all the investment information provided by the plan.³

401(k) plans may be confusing, especially when you’re presented with a packet written in industry jargon and told to hurry up and make a decision about your financial future.

Understanding exactly what you’re enrolled in and why can be as easy as asking these 5 questions of your HR department or plan provider. Read More...

The 5 most Tax Efficient Income Sources

Fri, 15 Oct 2021 21:43:30 GMT

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Let's talk about income sources. Which ones are the most tax efficient and as a bonus a few inefficient tax strategies just to be aware of.

For the purpose of today's discussion we are not going to bring wages into play here. We are talking strictly about investment income sources.

Income Source #1

ROTH IRA Income is the first and most obvious choice here. The benefit of the ROTH IRA if your not aware, (which is okay if your not - we are all about education here) is that you put your money in after you have already paid taxes but anything in the account grows tax free and can be taken out tax free in retirement. There are some nuances you have to be aware of like you must wait to take your distribution until you have had the account for 5 years you must be 59.5 years old but there are also some nuance early allowances like access to your principle portion at any time. But when it comes down to the general tax fee income it is really hard to beat the benefits of a ROTH IRA . We can discuss future pro and cons at another time.

Income Source #2

Dividends Stock Income can be a very tax efficient income source for a lot of people. Now to offer some clarity here we are only talking about dividend income from stocks not held in any type of IRA or other qualified plan. The big advantage here is that "qualified dividends" are taxed at Long Term Capital Gains Rates which if you read our blog-post on that HER E , you would know have some major tax advantages.

For Single filers you would pay 0% from $0 to $40,000 of income. You would pay 15% from $40,001 to $441,450 and 20% from $441,451 or more. For married filers you would pay 0% from $0 to $80,000 of income. You would pay 15% from $80,001 to $496,600 and 20% from $496,601 or more.

As an example a married couple with $170k in income would be in the 24% tax bracket normally but in the 15% bracket on their dividends that were qualified . That is a pretty hefty amount of income taxed at very low rates. It is important to realize this style of investing does carry market risk and you will want to make sure this fits your overall goals and risk tolerance before diving in.

Income Source #3

Real Estate Income can offer some wonderful tax advantages. Investing directly in rental real estate is a great way to leverage your wealth and get tax advantaged income but with prices at record highs this may not be the best time for that. The easiest way to invest in real estate is through publicly traded REIT funds that trade on the stock market. The main disadvantage of these types of holdings is volatility. Publicly traded REITs often have a high correlation to the stock market, which may be the opposite of what you are trying to achieve with this type of investment. Instead, consider looking into non publicly traded REITS. They often have a much lower correlation to the stock market as they are not traded like stocks. They get most of their value from the underlying real estate itself and not stock market share prices. But what about the tax advantaged income?

The main advantage to rental real estate income is passthrough depreciation. That depreciation is given back to you as a tax deduction in the form of "Return of investment capital", meaning that portion of your income isn't really taxed right now. So lets say you got $20,000 a year in rental income but had $15,000 in depreciation or "Return of investment capital" that would mean you are only paying taxes on $5,000 of income on a $20,000 income source. How great is that. But there is a downside too. That depreciation lowers your cost basis which can increase your long term capital gains taxes if not planned for as part of your overall financial plan. If you want to talk about if real estate makes sense for you click below to schedule a time to chat.

Income Source #4

Life Insurance holds many unique tax advantages. Much like the ROTH IRA you put those dollars in after tax. Like a ROTH it grows tax deferred and the distributions can also be tax free just like a ROTH but that is where the similarities stop. Unlike a ROTH there are no contribution limits or age restrictions or holding requirements. Some types even protect your cash value from loss while others are directly invested in the stock market.

From a tax perspective here is what makes this strategy so unique. We already talked about distributions being tax free but did you know when you borrow money from your life insurance as income the income you take could still earn interest??? Since it is being taken out as a loan against the account the money stays invested. If you earn an average return of say 7% but only pay 4-5% in interest you are actually making 2-3% a year on income you already took out of your account. How great is that. That is called positive arbitration. The best part is your income is tax free and when you die your beneficiaries also get the remaining balance tax free as well.

Income Source #5

Social Security Income can be one of the most tax efficient sources of income in retirement. If you have ever attended one our classes on Social Security planning you may know some of this already but for those that haven't or need a recap lets dive in. Social security can be anywhere between 0% taxable all the way up to 85% taxable. But the unique thing is that social security is never 100% taxable. So at now point will 100% of your check count towards you adjusted gross income for tax purposes. How cool is that. Now how much if it that is taxed is based on provision income. If you missed last weeks video on that click HERE . But basically the lower we can get your provisional income the less taxes you pay on your Social Security which could end up being a big deal long term.

These are some of the most tax efficient income sources and when planned for properly you could very well live your life free of the burden of the tax man . However, there are few sources that are not so tax efficient.

Not so efficient income Sources

IRA/401k Income - Yes you are reading this correctly because IRA dollars are pretax, they have never been taxed before meaning that it is very likely that 100% of that income source is taxed at your federal tax rate. Really the only way to get around this is to fall into the 0% tax bracket which may be hard for many Americans. But don't loose hope just yet. If you have IRAs/401ks talk to us about how advanced planning may help get you to that 0% or 12% rate even with an IRA/401k.
Mutual Funds - One of the reasons mutual funds are so tax inefficient is because of internal turn over ratio and what I call phantom income tax. Basically if you own a mutual fund and it sells some of the holdings within the fund at a profit throughout the year you are liable for the taxes on that gain even though you didn't directly sell anything yourself. Believe it or not this can cause unintended consequences like putting you in a higher tax bracket affecting your Social Security income, IRA income etc.
Certain ETF's - Certain ETF's also fall pray to this phantom income tax and may have the same unintended consequences.

So can you, or should you utilize any of these top 5 Most Tax Efficient Income Sources? I hope this helps making that decision but if you still need helping figuring things out, click the button below to schedule a time to talk.

Is It a Bad Idea to Borrow from My 401(k) to Get a House?

Tue, 21 Sep 2021 21:05:22 GMT

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“Should I borrow from my 401(k) to get a house?” is a question that comes up quite a bit, especially with first-time homebuyers.

It’s understandable because it can be difficult for many first-time homebuyers to accumulate enough savings to make a down payment.

It’s standard for banks to require as much as 20% down, and with home prices on the rise, that means down payments are also higher.

As a result, investors are willing to borrow from their 401(k)s to cover the down payment.

In fact, the TIAA-CREF Borrowing Against Your Future Survey found that “nearly one-third (29 percent) of Americans who participate in a retirement plan say they have taken out a loan from the savings in their plan.”¹

Of the 29% who borrow from their 401(k), one-third of them did so to purchase or renovate a home.²

It’s easy to see why it is tempting to borrow from a 401(k) to get a house.

That doesn’t mean it is the right decision for everyone... Read More

Traditional 401(k)s Vs Roth 401(k)s: Which One Is Right for Me?

Wed, 08 Sep 2021 18:09:30 GMT

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Planning for retirement may include choosing between traditional and Roth 401(k) plans.

Unless you are a financial advisor or have spent a significant amount of time reading up on both, it may be difficult to understand the difference between a traditional 401(k) and a Roth 401(k).

Not to worry. We’ve got you covered. Read on to learn the difference between traditional and Roth 401(k) plans and discover why a Roth 401(k) may be a good fit for your retirement needs.

What’s the Difference between a Traditional 401(k) and the Roth 401(k) Provision?

The Traditional 401(k)

The benefit of a traditional 401(k) is the tax deferral. In short, this means that when you defer money from your paycheck, it goes into your 401(k) on a pre-tax basis.

This means that you’re not actually paying taxes now on the money that goes into the 401(k) and it grows tax deferred. Then, when you pull the money out, that is when you pay the taxes.

The basic idea is that you’ll pay taxes in retirement when you’re utilizing the money, and possibly at a lower tax rate.

When you take distributions in retirement, you’ll be paying taxes on not only what you originally contributed but also on what the employer contributed in the form of a match or profit sharing.

And you’ll pay taxes according to ordinary income tax rates on all the growth of the money over the years.

The Roth 401(k)

Essentially, the Roth 401(k) is a provision inside the traditional 401(k).

The key difference is that the Roth provision allows you to contribute after-tax money to your 401(k).

In other words, you go ahead and pay some taxes now to put the money in your 401(k). It grows tax-free, and, when it comes time to take money out, you don’t pay taxes on it.

Remember... READ MORE

3 Things to Do If You Can’t Max Out Your 401(k) This Year

Tue, 18 May 2021 15:40:09 GMT

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Maxing out your 401(k) contribution every year helps your balance grow and may increase your chances of retirement with enough money to live comfortably.

However, $19,500 (the 2021 contribution limit) is quite a bit of money to stash away each year. Especially when you have a family to feed, bills to pay, and cash to save for emergencies.

If you can’t max out your 401(k) contribution limits this year, here are 3 actions you can take that may help you save more now for your future. Read More...

15 Ways to Prepare for Economic Uncertainty

Tue, 27 Apr 2021 17:46:18 GMT

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Gas prices have recently gone up. And it won’t be long until other goods will start to rise in price.

Between the economic effects of the pandemic and the stimulus packages, economic forecasts are all over the map.

Before we dive in, we want to make it very clear that we are not predicting economic uncertainty, and remain optimistic. However, we understand the importance of preparing for economic ups and downs because life will never go according to our plans – even the best-laid plans.

According to Kathy Jones, head of fixed income for Charles Schwab, “[The Federal Reserve’s policymakers] have been pretty honest and straightforward about the high level of uncertainty that they see around how the economy’s progressing.”¹

But what does that mean for you and me?

It means we need to take steps to prepare for economic uncertainty.

We are currently experiencing a once-in-a-lifetime pandemic. Those who live in Texas recently experienced a once-in-a-lifetime winter storm.

No matter how well we plan our future, we may still face periods of financial upheaval outside of our control – whether caused by natural disasters, personal losses, or government failures.

Which is why it is wise to prepare for economic uncertainty.

Those who do will feel empowered rather than fearful as they listen to talking heads discuss America’s financial future.

#1 Stock Up on Supplies

#2 Reduce Spending

#3 Build Up an Emergency Fund

#4 Focus on the Future

#5 Diversify Your Income

Keep reading for 15 steps to take today to prepare for economic uncertainty.

7 Disposable Income Mistakes to Avoid

Mon, 19 Apr 2021 18:04:15 GMT

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If you have income left over after paying taxes, it’s important to avoid common disposable income mistakes.

However, there is a big difference between disposable income and discretionary income.

Disposable income is your personal income minus your current personal taxes.

However, it is not disposable income that determines one’s lifestyle. Instead, it is discretionary income.

Don’t squander your discretionary income. Instead, avoid these 7 common disposable income mistakes.

Read More...

Quarterly Market Overview Q1-2021

Wed, 14 Apr 2021 17:44:24 GMT

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As we put 2020 in the rear view mirror, we know it will be a year that goes down in history. The Coronavirus hit America’s shores in March which created a high level of uncertainty. The unknown caused a steep market selloff, which hit a low on March 23rd last year. It was the fastest move from a market high to down 10, 20 and 30%, ever. History has proven that a panicked and emotional market always creates opportunity, so we held course. With hindsight now, the 12-month period from March 31, 2020 to March 31, 2021 turned out to be the best S&P500 performance in the last 30 years. The DJIA & S&P500 are back to all-time highs and the promise of tomorrow is looking brighter.

The Government reacted to the economic downturn by adding a tremendous amount of liquidity. Unprecedented amounts of stimulus came to bear and the Fed kept a lid on historically low interest rates. Companies reacted by improving their online experience and, for those that could, working from home became the norm. As a result, the economy has bounced back quickly. We cannot be positive without recognizing that there are still a large amount of American citizens in financial turmoil. The Economic Policy Institute indicated that 82% of the net job losses last year were suffered by the bottom 25% of wage earners. Though the service industry has been decimated by the Coronavirus, the rest of industry was able to adapt.

Though some uncertainty lingers; vaccinations, low interest rates, tremendous liquidity, an accommodative Fed policy, and an expected reopening of the economy, keeps us cautiously optimistic. Another positive indicator is the broadening out of the market in terms of industry participation. Narrow market leadership from technology was always a concern. Now we are seeing some rotation from growth to value, which is healthy. Though technology is still up this year, the energy, financial, industrial and basic material sectors are performing better. Broader sector participation is a good sign for the market as a whole.

There are two things that cause worry for some. First, the amount of Government spending could cause inflation and a related rise in interest rates. We believe any short term spike of inflation will be temporary, and though interest rates have accelerated quickly from historically low levels, they remain low enough not to be competitive for stocks. Inflation is not typically bad for the market until it reaches levels that start to curtail economic activity.

Second, valuations are above historical averages. The price of a stock divided by its earnings (P/E Ratio) has averaged around 16 times long term. Though we are at about 22 times earnings now, there are other parameters that may justify it. The P/E ratio being higher is justified in a lower interest rate environment and even more, growth is a primary factor. High growth forecast makes current valuations more reasonable. For example: a stock trading at 30 times earnings may actually be cheap if earnings are growing at 50%. First quarter corporate earnings growth is strong and estimates are rising. At the start of the year, earnings were expected to grow by 15.8% and now, they are estimated at 23.3%. The U.S. economy is forecast to grow at 7%, which is the fastest pace since 1984. Overall, higher growth expectations and low interest rates likely justify the current market valuation.

We believe the reopening of the economy, and historic stimulus efforts, will continue to support the equity market. The road ahead may not be without some potholes, but we remain optimistic intermediate to longer term.

Spring is in the air! Enjoy the season of new growth, and may the hope of tomorrow continue to bloom.

10 Financial Tips for Second Quarter

Tue, 06 Apr 2021 18:18:23 GMT

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From funding your retirement accounts to making sure you’re on track to meet your 2021 financial goals, there’s a lot you can do in the second quarter to stay on course.

Here are our top 10 financial tips for second quarter. Read More...

Important IRS Tax Deadline Changes for 2020 Taxes

Mon, 22 Mar 2021 16:17:44 GMT

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The Treasury Department and Internal Revenue Service announced on March 17 that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021.

This extension applies to individual taxpayers, including those who pay self-employment tax. In addition, this extension is for individual federal income tax returns and only applies to federal taxes and not state.

Read More...

Important RMD Changes for 2021

Mon, 08 Mar 2021 17:11:02 GMT

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There are important RMD changes for 2021 that every 401(k) investor needs to know about to avoid penalties.

Required minimum distributions (RMDs) are IRS-mandated withdrawals from retirement accounts.

The IRS requires these withdrawals to ensure that taxes are paid on amounts that were contributed on a pretax basis, plus any tax-deferred earnings in those accounts over the years.

Should you fail to take the required RMD, you will pay steep penalties. Read More...

7 Overlooked Retirement Expenses When Planning

Thu, 04 Mar 2021 15:58:52 GMT

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When thinking about retirement, most people’s minds drift to a dream life involving no work, vacations, and finally getting to enjoy their favorite hobbies.

However, several overlooked retirement expenses may prevent you from doing any of this during retirement.

The disconnect between what people believe they need to attain their retirement lifestyle and what they can actually afford is often the result of overlooked retirement expenses during planning, such as supplemental Medigap coverage and new state taxes.

Consider the following 7 overlooked retirement expenses as you plan your financial future. Read More...

One Action That May Boost 401(k) Returns in 2021

Mon, 22 Feb 2021 15:38:21 GMT

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If you’re looking for a way to boost 401(k) returns in 2021, rebalancing may help you do just that.

Many 401(k) investors fail to rebalance and, in doing so, may potentially miss out on earning more and keeping more of their hard-earned retirement savings.

Because when it comes to saving, it’s not only important what you earn in return.

It’s also important what you keep that may have a big impact on future account value and your ability to reach your retirement savings goals.

This is why rebalancing is so important and may help boost 401(k) returns in 2021. Keep reading to find out what rebalancing is and why it’s important to your retirement future.

What Is Rebalancing? Read More...

Should I Roll Over My 401K or Qualified Retirement Plan?

Fri, 19 Feb 2021 17:46:22 GMT

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Is it ridiculous to think about moving your old 401(k)? I’m mean I get it; you already picked the funds you wanted, you look at the statement every once and a while and as long as it is generally going up over time that’s fine right? “If it ain’t broke don’t fix it” is what my Dad always told me. But is that really what is going to serve your goals the best long term?

Picture this; you’re shopping for a new car and the sales person asks you, “What brought you in here today?” And you respond “Looking for a new car, with an obvious look on your face.” “Oh” says the sales person, “Did yours die on you?” “No, you respond, it’s just time you know. I don’t want to hold on to it so long that it breaks down. I want to get something new now before it’s too late.”

Now think about this story, the car ran fine, it drove fine, it probably still looked fine, it was probably only 5-10 years old, but it was time for a new one. Things have improved in cars after all, better features, they are safer, more efficient, etc. and you want to make sure you’re in the best car for your needs. Why should investing be any different. Do you really want to hold investments because they are “just fine”? So, let’s spend a few minutes actually discussing the pros and cons of keeping and old 401(k) and you can determine for yourself and your situation if that makes the most sense.

Benefits of a QEP:

It goes without saying the most obvious benefits to a qualified employer plan (QEP) are during the active contribution stage, which is the time at which you are making weekly or bi-weekly contributions. First of all; you’re able to take advantage of the much large contribution limit than an IRA account. Plus, those dollars go in pre-tax saving you on federal income taxes during the year you contribute. Another huge benefit is the company match that makes it so irresistible, if the company in fact offers one. I mean who doesn’t love free money. In addition the contribution limit is much higher than in an IRA account allowing you to put more money away faster.

The next biggest benefit to a QEP is the simple investment choices. The plan gives you a menu of funds to choose from that they feel will do well for the collective group of employees. It is different in an IRA account. Typically, with most custodians you’re able to choose from nearly the entire investment world. Did you know that according to www.statista.com in 2019, there were 7,945 mutual funds in the United States, and that doesn’t even count individual stocks, ETF’s and alternative assets? I can see why now if you were responsible for picking the best ones yourself why you would like the limited selection of only a few average funds.

In conjunction with simple investment choices for most investors limited research is done or needed. If the fund has a decent 3-year, 5-year, and 10-year return, just go with that one. While that may be just find as we talked about earlier; don’t you want your money working as hard as you do?

Another perceived benefit of QEP’s is target date funds. What is better than picking your desired retirement date and letting them manage a fund specifically for those people wanting to retire at that year. The idea is to start with a larger percentage in equities and slowly reduce that over time in favor of more bonds. With target date funds you get simplicity, if that is what you are looking for.

Lastly one of the most valuable benefits of a QEP is loan provisions. The ability to borrow money from your QEP without incurring a taxable event and then be able to pay that money back and all the interest you paid was to yourself, is a substantial benefit to those with limited resources. If nearly your entire life savings is all wrapped up in this one QEP and you have limited liquidity for emergencies, you may find great value in this provision. If, however you have an emergency account, extra accounts for liquidity, and the ability to tap into other resources, this one benefit alone may not be worth staying in the plan.

Disadvantages of Staying in An Old QEP

We have talked about most of these so far but in a different light. Just as it may be a benefit to some to have a limited fund menu, it may be hurting your overall goals. Is it possible that there are better funds out on the open market that will achieve your goals faster with less volatility? Consider this; one of the best advantages to leaving a 401k() is the ability to pick your own investments like; individual stocks, ETF’s REITs, Options, and even crypto-currencies. These more specific investments may help you achieve your goals more efficiently over time.

A key disadvantage of the 401(k) is the overuse of target date funds. As stated before, the idea is simple enough but in practice you may not be getting what you were hoping for. The reality is that target date funds will often underperform in good markets and do a poor job of managing downside risk during tough markets. One of the reasons for that is the inability to reduce systemic risk. According to Morningstar analyst Jeffrey Holt in March 2018…

“In the long run, the biggest risk in target-date funds is that they won’t meet

investor expectations for avoiding losses.”

For more information on target date funds, I encourage you to read our partner blog post on the topic “ Are Target Date Funds Good Or Bad? ”.

Many people believer that because they don’t see fees listed on the statement 401(k)’s don’t have fees. Just because they are not listed doesn’t mean your not paying them. One of the greatest challenges participants face is picking 401(k) funds that have low fees. ERISA has tried to make things more transparent but many participants are still left in the dark.

Lastly because of the lack of investment choices, the push towards a one size fits all target date fund, and hidden fees; it is possible that that staying in a QEP may actually be hurting your performance long term. If you would like to know if you are maximizing your dollars to their fullest potential let us know and we would be happy to give you and your QEP a financial checkup. Click here to schedule a meeting to talk.

If you have found this article helpful please consider sharing it with a friend.

Family Financial Planning: Why Awkward Money Talks Are Necessary

Tue, 16 Feb 2021 17:09:34 GMT

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What parent conversation is more uncomfortable than the birds and bees? Talking to your adult children about family financial planning.

According to a study by Home Instead Senior Care, approximately 80 million Americans neglect to have important end-of-life discussions regarding family financial planning.¹

The study also reports, “Unfortunately, research indicates that 70 percent of conversations happen too late, being initiated by an event such as a health crisis or other emergency, which may increase the likelihood of family disputes. According to surveyed attorneys, two-thirds of these disputes that end up in court could have been avoided if end-of-life wishes were communicated and documented in advance.”²

As much as we’d like to control our destiny, we never know when our time will come.

But there is something we can control – our finances.

However, even if you are meticulous with your money, you may still leave your kids in a difficult position if you haven’t practiced family financial planning.

Family Financial Planning Defined

This is an all-encompassing term for planning your financial future and including your family, such as keeping your adult kids in the loop.

These conversations include talking to your adult kids about how much money you have, what your financial outlook is for the rest of your life, and what is to be expected upon your death.

And, if you are like most American parents, that makes you squirm.

It’s hard to talk about your finances with your kids, even after they become adults.

There are many reasons.

First, we’ve been conditioned to think it is inappropriate.

Second, we don’t want to burden our children.

Third, we don’t like to consider a future where our kids exist, and we don’t.

But your adult children need to know where things stand with you financially so that they can better prepare.

READ MORE...

7 Most Common 401(k) Investor Questions Answered

Mon, 08 Feb 2021 18:31:42 GMT

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There’s no such thing as a dumb question – especially when it comes to 401(k) investor questions.

The problem is that, for whatever reason, many investors don’t ask.

If this sounds familiar, you’re not alone.

CNBC reports, “Though it’s one of the most common retirement savings vehicles, 63 percent of Americans don’t understand exactly how it works.”¹

When people in the survey were asked 401(k) investor questions, only 37% could answer confidently.

However, more people are beginning to contribute to their 401(k), and people are contributing more yearly.

401(k) investors stashed away an extra percentage point of their salaries in the past year.²

This is excellent news.

As CNBC explains, “That increase may not sound huge, but it can have a noticeable impact on a saver’s nest egg decades down the road. A 35-year-old earning $60,000 a year would save an extra $85,500 by retirement age by increasing 401(k) contributions by just 1% […]. A 45-year-old earning $70,000 a year would have an additional $43,000.”³

Unfortunately, just because people are contributing more to their employee-enrolled 401(k) plan, it doesn’t mean they understand the ins and outs of the plan. READ MORE...

Can I Really Catch Up on Retirement If I’m over 50?

Mon, 25 Jan 2021 17:12:06 GMT

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For investors behind on retirement and over 50, it may seem as if there is little they can do to catch up.

The good news is that you may be able to get closer to your retirement goals than you think. Below are 9 ways you can catch up on retirement over 50. Read More...

Should I Pay Off Debt or Contribute More to My 401(k)?

Tue, 19 Jan 2021 16:36:04 GMT

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The question of whether to pay off debt or contribute more to a 401(k) is an important one — and one with no definitive answer. After all, no two investors are created equal.

There are also numerous factors to consider when answering the question, such as how on track you are to meet your retirement goals, the amount of debt you carry, and years until retirement.

If you’re wondering if you should pay off debt or contribute more to a 401(k), keep reading to understand the pros and cons, and ideas on how to do both at the same time. Read More...

6 Ways That May Increase Retirement Savings in 2021

Mon, 11 Jan 2021 17:06:31 GMT

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Another year around the sun means another year closer to retirement. For 401(k) investors who are behind on retirement savings and for those looking to get ahead in 2021, here are 6 ways that may jumpstart retirement savings in 2021. Read More...

16-Point Financial Checklist for 2021

Mon, 04 Jan 2021 21:02:11 GMT

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4 Resources That May Help Increase 401(k) Savings

Mon, 28 Dec 2020 18:58:41 GMT

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There are many ways investors can increase 401(k) savings ‒ from maxing out yearly contribution limits to rebalancing account allocations at least 4 times a year.

However, one of the best ways to increase retirement savings is one that is often overlooked by many investors: gaining the necessary education and becoming proactive about retirement savings.

Keep reading for 4 things you can do that may help increase 401(k) savings.

#1 Know How to Read a 401(k) Statement

Many investors approach their 401(k)s with a set-it-and-forget-it strategy. Rather than managing their 401(k)s, too many people hope they’ll have enough saved for retirement.

When a statement arrives, many fail to take the time to review it. READ MORE...

9 Ways to Entertain the Family This Holiday Season

Mon, 21 Dec 2020 19:42:23 GMT

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2020 has been a real grinch. Given everything that has happened this year, it would be easy to throw our hands up and just say, “Bah Humbug!”

To top it all off, the authorities are telling us to stay home.

According to the CDC, “As cases, hospitalizations, and deaths continue to increase across the United States, the safest way to celebrate the winter holidays is to celebrate at home with the people you live with.”¹

That’s right. The CDC wants us to stay home (where we’ve been since March) with the same people we’ve spent every day with for almost the entirety of 2020.

As if the holidays weren’t already challenging enough, now we have to find new ways to create holiday magic for our kids and entertain the family without outside reinforcements (aka grandparents).

But what if this is a blessing in disguise?... Read More

Important SECURE Act Retirement Bill Changes Coming in 2021

Mon, 14 Dec 2020 16:05:11 GMT

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The SECURE Act retirement bill went into effect in January 2020 with the intention of helping more Americans have greater access to retirement savings and avoid running out of money during retirement.¹

Most of the changes under the SECURE Act retirement bill went into effect in 2020 – including changes to the required minimum distribution (RMD) rules for participants and beneficiaries and increased tax credits for small businesses that offer retirement plans to employees.

[Check out our guide to understand how the SECURE Act may impact your retirement.]

However, there is one provision which aims to help people have greater access to retirement savings that is set to go into effect January 1, 2021…

Part-time workers who qualify may participate in 401(k) retirement plans. Read More...

4 Things That May Help Maximize 401(k) Savings in 2021

Mon, 07 Dec 2020 16:53:32 GMT

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With pensions disappearing and the future of social security unknown, American workers are now largely responsible for their retirement savings.

For many employees, a 401(k) is their largest asset come retirement.

Yet, too many investors set up their 401(k), contribute each paycheck, and do little else with it.

Contrary to popular belief, growing your 401(k) savings is not a set-it-and-forget-it strategy. With a little time and effort, it’s easy to shorten the learning curve and take control of your financial future.

Keep reading for 4 things that may help maximize 401(k) savings next year. Read More...

Can I Boost My 401(k) Savings without Contributing More?

Mon, 30 Nov 2020 17:07:12 GMT

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Maxing out yearly 401(k) contribution limits is the best way to ensure investors boost 401(k) savings and have enough money to retire comfortably.

But, this isn’t always feasible.

Consistently contributing as much as you can and meeting the company match may also make a huge difference in your retirement lifestyle.

There is one thing you can do today that may potentially have a significant impact on your 401(k) savings: seeking third-party advice.

In the age of low-cost robo advisors and financial DIY tools you can access on your smartphone, many 401(k) investors overlook the importance and value of third-party expert advice.

Although you might have basic investment knowledge, utilizing an expert to make the moves that require skill and care may change the performance of your account from good to great.

And potentially boost retirement savings.

In fact, studies continue to show... READ MORE...

10 Fun Thanksgiving Facts and Trivia to Entertain Guests

Mon, 23 Nov 2020 21:10:22 GMT

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When we think about Thanksgiving, we envision a delicious meal around a table with our family and friends, football, parades, and Black Friday shopping.

Except this year…which is a bit different.

In the middle of all the traditional Thanksgiving fun, we’re betting there will be lots of post-election and pandemic conversations at your small gathering.

To avoid family infighting over stuffing, you’re going to need as many noncontroversial things to talk about as possible.

With this list of 10 Thanksgiving facts and trivia, you can entertain and educate your guests without fear of offending anyone.

You may even learn some new Thanksgiving facts! Read More...

Learn How You May Pay 0% In Capital Gains Taxes

Tue, 17 Nov 2020 20:10:55 GMT

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Twenty-Twenty has been a volatile ride to say the least. Some have come out with major wins in their investments and some have seen their profits of the last few years, slip right through their fingers. If your reading this its probably because you saw some profits though all this volatility and want to know how to reduce your tax liability, and nothing is better in the tax world the zero!

So how to get to 0%? First is to understand the basics of capital gains taxes. 1. There are two types of capital gains taxes; short-term and long-term capital gains taxes. Short-term capital gains are gains on assets held less than 1 year and are taxed like regular income, that means you pay the same tax rates you pay on federal income tax. Long-term capital gains are gains on assets held more than 1 year and they are taxed at lower rates. Both have the ability to be taxed at 0% if things line up properly for you. But what about when you don’t fall into the traditional 0% capital gains rates??? More about that later on….

For all-intents and purposes while it can be done to get your short-term capital gains taxes reduced to zero it does mean getting your adjusted gross income below the standard deduction, which for many people is difficult. In light of that, let’s focus on getting our long-term capital gains rates down.

One simple way to achieve zero percent long-term gains rates is to simply get lucky and fall into the bracket naturally. If this is the case for you, great. If not let’s see if there are some things we can do to help get you there. Below is a chart of long-term tax rates.

Option 1: Tax-loss Harvesting

Tax-loss harvesting is a strategic way to avoid paying capital gains taxes. It relies on the fact that money you lose on an investment can offset your capital gains on other investments. By selling unprofitable investments at a loss, you can offset the capital gains that you realized from selling the profitable ones. While this strategy can reduce your taxable income and may help get you into that 0% rate, this is a strategy that should be done with caution and attention to detail. Although, this may help justify selling a losing investment in order to get into a better option and get a tax benefit along the way. A discussion with a qualified advisor can help you determine if this strategy is right for you.

Option 2: Tax deductions

Utilizing the tax code, you may find yourself with the ability to take deductions beyond the standard deduction. This could in tern help reduce your overall taxable income, thereby reducing your capital gains tax rate.

Options 3: Hold for the long term

While this doesn’t sound like it will benefit you immediately and get you to that 0% bracket it is a worth while discussion point. Let’s say that you have stock that you have held for a long time and you never plan on selling it but instead plan on leaving it to your heirs. Did you know when you pass, your heirs get a step up in basis? This means that the cost basis when they go to sell the investment is the cost basis on the day of your death. Any gains you experienced from the time you personally bought it until that point have essentially been washed away, leaving your heirs with a near 0% tax liability. That being said it is never a good idea to hold an investment beyond its useful lifetime just to save a few tax dollars. Opportunity cost could be a much higher price.

So what if none of this helps? What if you have done everything you can to reduce your taxable income and you still find yourself well outside the boundaries of the zero percent zone. Is there anything you can do?

Option 4: Advanced planning and opportunity zones

The Qualified Opportunity Zone Program (“QOZ Program”), created by the Tax Cuts and Jobs Act of 2017, is a tax-incentive program designed to encourage long-term private sector investments in designated communities known as Qualified Opportunity Zones by delivering certain tax benefits to investors through investment vehicles called Qualified Opportunity Funds.

Qualified Opportunity Zones are designated census tracts throughout the United States that have been selected by state governors for inclusion in the program.
Qualified Opportunity Funds are investment vehicles that invest at least 90% of their assets in qualified businesses or real property located within these Qualified Opportunity Zones.
Taxpayers with capital gains from the sale of a prior investment may invest those gains within a 180-day period in a Qualified Opportunity Fund and achieve potential tax benefits. (Temporary extensions and exceptions for 2020 may apply)
Investments in Qualified Opportunity Funds are intended to help drive real estate development, job creation and overall economic growth in lower income communities.

QOZ’s help reduce your capital gains taxes in a few phases.

Phase 1: Deferring capital gains – Any investment that has a realized capital gain can have the gain portion of the investment put in a QOZ fund. By putting the gain in a QOZ fund the taxes owed on that investment become deferred.

Phase 2: Reducing taxable gain – Any QOZ fund made before December 31 ^st 2021 and held until December 31, 2026 will have the taxable capital gain amount reduced through a 10% step-up in basis.

Phase 3: Elimination of taxable gain – Any capital gains taxes on the appreciation of your investment in the Qualified Opportunity Fund if held at least 10 years will be eliminated.

In short here is a how the QOZ fund would work. Let’s say that you had XYZ stock that you have owned for the last 20 years and recently have considered liquidating it but you are afraid to sell it for fear of capital gains taxes. Let’s say that your cost basis is $100k but the present value is $500k. Traditionally if you sold it you would owe capital gains taxes on $400k and at a 20% tax rate Uncle Sam would get $80k. By placing the $400k in a QOZ fund the taxable amount on the $400k would be deferred into the future. If held for 5 years the taxable amount on the $400k would be reduced by 10%, effectively being taxed on only 90% of the gain. If held for 10 years in the QOZ fund the taxable amount would be eliminated. Assuming an average rate of return for this asset class of 7% your $400k in taxable gains would become $786,860 all tax free.

Bottom Line: There are many ways to reduce your capital gains taxes but for some getting to 0% capital gains traditionally is not an option. For those individuals you may want to consider advanced planning techniques like the QOZ fund concept. For those of you on the border, a discussion with qualified advisor may help you use some of the techniques written about here today to reduce your overall tax liability.

12 401(k) Retirement Mistakes Investors Make

Mon, 16 Nov 2020 17:58:52 GMT

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Whether retirement is right around the corner or years away, there’s no better time than the present to start preparing for it.

According to the Report on the Economic Well-Being of U.S. Households in 2019, featuring Supplemental Data from April 2020, a majority of non-retirees are worried about making retirement mistakes.

The study revealed:

One-fourth of non-retirees indicated that they have no retirement savings.

Fewer than 4 in 10 non-retirees felt that their retirement savings are on track.
Nearly 6 in 10 non-retirees with self-directed retirement savings expressed low levels of comfort about making retirement decisions.¹
According to a 2019 Go Banking Rates survey, “Sixty-four percent of Americans are now expected to retire with less than $10,000 in their retirement savings accounts, versus the 42% reported back in January. Yet, the people at risk of a stormy retirement don’t seem to see it that way — nearly half of all survey respondents were not concerned about the size of their retirement savings accounts.”²

It’s a big mistake to think you are ready to retire simply because you have a retirement account and regularly fund it.

Keep reading for an additional 12 retirement mistakes investors make and what to do instead to ensure you have a comfortable retirement. READ MORE...

Thank you Veterans for your Service!

Wed, 11 Nov 2020 23:05:12 GMT

We honor those of you that have served along with our (above) many family members that have also proudly served our country. We thank you all!

Retirement Plan Contribution Limits for 2021

Mon, 09 Nov 2020 16:40:04 GMT

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The IRS recently announced retirement plan contribution limits for 2021. While most limits remain the same as 2020, some plans will see a limit increase.

Keep reading below to find out exactly how much you can contribute for 2021, and start making plans now to do what you can to max out your retirement savings next year. Read More...

13 Cyber Security Tips for the 2020 Holiday Shopping Season

Mon, 02 Nov 2020 19:22:10 GMT

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Holiday shopping is already in full swing.

But, given that the CDC is recommending shoppers avoid crowded stores throughout the 2020 holiday season, Black Friday is going virtual, and Cyber Monday is every day.¹

According to a recent survey by Convey, “Shoppers are planning to shop earlier and mostly online, and they’re conscious of COVID’s impact on retailers […] 8 in 10 shoppers (82%) will do most of their holiday shopping online – and nearly 1 in 3 (30%) will do ALL of it online.”²

Unfortunately, this also means there will be more cyber crimes and card-not-present fraud.

Don’t let a cyber grinch ruin your holidays. Use these 13 cyber security tips to protect yourself online during this holiday season. READ MORE...

How to Read a 401(k) Statement and Understand It

Mon, 26 Oct 2020 17:50:03 GMT

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If you don’t know how to read a 401(k) statement, much less understand it, then you want to keep reading.

We’re breaking down why it’s vital to your retirement future that you look at your statement, but also how to read and understand the information presented.

Why You Need to Open and Read Your 401(k) Statements

Many investors approach their 401(k)s with a set-it-and-forget-it strategy. This is not advisable as 401(k)s are often people’s largest asset come retirement.

If you don’t pay attention to how your 401(k) is performing, understand what you’re paying in fees, or rebalance at least quarterly, you are not in control of your financial future.

Here’s a breakdown of the 3 reasons you want to make it a point to open and read your 401(k) statements: READ MORE...

Should you use alternative investments as part of your portfolio?

Fri, 23 Oct 2020 17:46:24 GMT

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Recently my wife and I took a trip to Columbus Ohio. They have one of the best Zoo’s in the country and my family loves visiting Zoo’s all across the Nation. On this trip we were surprised at how much things have changed, both in our travels along the way and once we arrived at our destination. You know what I’m talking about, right … You visit that city or that favorite place of yours and things changed since last time you have been there. Some for the good, some not so good.

Recently the Columbus Zoo added this amazing Sealion sanctuary with an underwater tunnel and everything. But the tiger exhibits had seemed less taken care of and even less tigers than I remember. The African exhibit was just as cool as we remembered and that was great to see.

Well just like this trip, the financial markets and retirement planning landscape is an ever evolving. What we did, how we managed our money, and what we invested in will need to change over time.

But why now, haven’t there been enough changes in our lives with the effects of Covid-19? Yes, there certainly has, but that doesn’t give us permission to turn a blind eye to things that will need our attention. These changes that have been happening in the financial space have been changing for years, even decades. The stock market is back to all-time highs again but with a new level of volatility. In fact, arguably the last 15-20 years in the market have been much more volatile market times than say the 15-20 years preceding it. In the last 20 years we have seen the Dot.com crash (Nearly 50% decline), the Financial/Housing market crash of 2008-2009 (Nearly 60% decline), Covid-19 (34% decline).

With that, it is understandable that those planning for retirement are concerned about where they should put their money. It has long been understood that a simple Stock/Bond portfolio that changes slowly over time to have less equities is a simple safe solution. That may not be the case anymore and let’s find out why.

The other problem besides volatility.

As you near retirement, you probably understand the need to take some volatility and risk off the table. Many have traditionally favored bonds for this purpose. However, you may want to consider replacing some of the bonds in your portfolio with alternative assets. Here’s why:

As you can see from this chart, bonds are producing historically low yields. While bonds will return principal and interest if held to maturity, during their lifetime they gain or lose value as interest rates change. More on interest rate risk later. Bond funds rarely hold bonds to maturity, which means you could lose some or all of your initial investment if you hold bond funds vs actual bonds. Over the last 40 years, bonds have gained value as interest rates declined. But what about the future? With rates hovering below 2%, are interest rates likely to stay flat, or go up (long term) rather than continuing to fall further?

How do interest rate changes affect bond prices?

Interest rates and bond prices have an inverse relationship. When interest rates rise, prices of bonds fall. The chart below gives an eye-opening look at how to quantify changes in bond prices. As can be seen from the chart, there are two major factors that impact bond price on the secondary market. Duration is critical because longer durations increase the impact of interest rate changes on bond value. For a 10- year bond, a one percentage point increase will reduce the value by 10%. In other words, default is not the only risk you could face.

Alternative assets may be a good bond replacement

Let’s talk about what alternative investments are, what they can do, and the types you may want to consider.

What Is an Alternative Asset?

An alternative investment is a financial asset that does not fall into one of the traditional investment categories. Traditional categories include stocks (Stock funds etc.), bonds (Bond funds etc.), and cash (Money Market etc.) Alternative investments typically have a low correlation with those of standard asset classes. This low correlation means they often move counter—or the opposite—to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Alternative assets may also provide an effective hedge against inflation, which hurts the purchasing power of paper money. Often a versatile investment category that can accomplish a myriad of goals.

What can Alternative Assets do?

One of the many benefits of alternative assets is to add asset diversification to the overall portfolio. That asset diversification can serve multiple benefits. 1. It may lower portfolio volatility/risk. 2. It may enhance overall returns. 3. Help protect capital during periods of market declines. Harry Markowitz, renowned for his research on modern portfolio theory, taught us that traditional investments often increase your return as you increase your risk as noted by the chart below. This is how stocks and bonds typically work. The goal of an alternative asset is to shift the curve.

By using alternative assets, you may be able to continue getting the same expected return while reducing your risk. Likewise, you may increase your overall return without increasing your risk. Nearly any mixture of pure stocks and bonds will just simply slide you along the original curve i.e. less risk=less reward. Another feature of alternative assets is that they often provide more income. This is especially helpful to those that plan on living off their retirement savings. The more income they can get from their investments the less capital required to achieve your retirement income goals.

Types of Alternative assets and their individual pro/cons.

Gold: The first thing most people think of when they think of alternative assets is precious metals like Gold and Silver. The major use for precious metals by most people is to provide a hedge against inflation and asset protection. While precious metals can be a good alternative, they are not without their downsides. Although Gold (GLD) is up some 22% YTD, it is just now reaching its previous highs set in 2011 after a 40% decline from 2011-2015. So, this strategy is really a very long-term approach. Often longer than most clients are willing to stick with it. Physical metals can be difficult to value, they are Illiquid, unregulated, and even harder to sell. Additionally, because of the correlation to currencies, which then correlates through interest rates, inflation and then back to gold it can fail to act as expected. This all makes it difficult to recommend.

Real Estate: Real estate is one of those assets that has made many people very wealthy in our country and destroyed just as many livelihoods. Its an asset class that can be both very powerful and very harmful. The danger lies there in with lack of liquidity and leverage, meaning borrowing money to buy real estate as an investment. That same leverage is what can create wealth making it a double edge sward. Real estate is a very diverse asset class because of the different use cases, strategies, and financial structure. It can be a complex asset class that you will want to consider carefully. For retirees one of the main benefits is not wealth creation, but income creation and tax advantages. There are many ways to get into real estate that can provide a very nice cashflow during retirement and do it tax efficiently. Here at Tru Financial strategies we can show you how to use this asset to conservatively create additional retirement income.

Options: Often thought of as speculative investments like gambling, options sometimes get a bad reputation. Did you know that even Warren Buffet, the stock guru uses options as a way to conservatively create income in his portfolio? In fact, here at Tru Financial Strategies with our strategic Partnership with both Royal Fund Management and ZEGA Financial, we use options not to gamble on the markets, but as a risk reduction tool or a conservative income tool. Options do have their downsides as well which in some cases include leverage and loss of principle. So, what makes options the way we use them so different? According to Jay Pestrichelli at ZEGA Financial, we use options as a different type of “monthly income” solution. It is a true alternative asset that takes advantage of the natural time decay of short-term options. It creates supplemental income without exposure to rising interest rates. We can use a proprietary model that trades positions with a high probability (>95%) of success. In fact, in the chart here you can see the risk/reward profile of our “conservative” strategy. As a reference, the S&P 500 typically has a standard deviation of 15 and a return of 10%, making our strategy much less volatile while giving up very little long-term return. Options are highly liquid and a properly constructed portfolio brings accessibility to your investments.

Annuities: Lastly but not least is a very mis-understood asset class. Annuities have been around for hundreds of years and have changed dramatically in the last 20-25 years. The old annuities where you give all your money to an insurance company in exchange for a monthly paycheck only to never see the lump sum of that money ever again is few and far between. Here at Tru Financial, we never really see a case for that type of account. So, what make an annuity a viable alternative asset class.

A fixed alternative with less risk

A fixed indexed annuity (FIA), issued by an insurance company, is a contract between you and the insurance company. An FIA can offer an innovative alternative to bonds. They provide tax deferred growth and in addition, any fixed interest earned or interest rate based on the growth of an external index, are locked in at the end of each crediting period. This means any interest or indexed interest and premiums paid cannot be lost if the market declines.

In a fixed indexed annuity, you are not directly invested in the market, but you could benefit from crediting tied to the positive movement of an index, referred to as indexed interest, with upside potential subject to certain limitations, such as a cap, participation rate, spread, or some combination of these.

Cap: A cap is the maximum rate of interest that the contract can earn in a specified period (typically a month or a year). The amount you receive would not exceed the cap rate.

Participation Rate: A participation rate is the percentage of the index increase you would receive.

Spread: Some fixed indexed annuities also calculate your indexed interest by first deducting a percentage from any increase the index achieves in a specified period.

Lastly, penalty free withdrawals are common contractual guarantees in fixed indexed annuities that permit access to a portion of the account value each year that could be used to pay for ordinary household bills. This replaces the need to potentially liquidate bonds at a discount in a rising interest rate environment.

Most fixed indexed annuities also offer the option to add an income rider, often for a fee, which produces a guaranteed predictable income stream that is not dependent on the performance of the market, and that you, and in some cases your spouse, cannot outlive. Whereas, within bond funds, income payments could fluctuate and are not guaranteed.

The take away

As you can see, alternative assets can potentially reduce volatility, provide better cashflow, add diversification, and enhance returns depending on how you use them in your portfolio. This is clear; the traditional stock/bond model is losing traction fast and with interest rates at historic lows, alternatives, specifically to bonds, need to be discussed.

If you have found this article helpful and would like to know if alternative assets should be added to your portfolio, feel free to schedule a 15-Minute discussion with us.

9 Ways to Keep Online Holiday Spending under Control This Year

Mon, 19 Oct 2020 20:43:59 GMT

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It’s hard not to get caught up in the holiday spirit of giving and keep holiday spending under control.

In 2019, holiday retail sales grew 4.1% to $730.2 billion, and online and other non-store sales were up 14.6% compared to 2018, according to the National Retail Federation.¹

That’s why today’s holiday spending tips are important. Keep reading for 9 holiday spending tips to keep your spending under control. R ead More

How to Use a Health Savings Account If I Qualify

Thu, 15 Oct 2020 13:35:45 GMT

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Planning for the future means finding all the ways possible to minimize tax payments to the IRS.

You may be sitting on just what you need to save significantly on taxes without even realizing it – a health savings account.

This is because a health savings account is triple tax-advantaged: to find out how, Read More...

Medicare Cost are Increasing and How You Can Save Now

Mon, 12 Oct 2020 13:01:59 GMT

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Medicare Cost are Increasing and How You Can Save Now

Have you got a letter that sounds something like this? “Thank you for being a loyal customer of XYZ insurance company. Your new rate is $XXX.XX.” Some Medicare recipients are seeing increases as high as 25% this year. If this is you and you want to learn more about how you can save now keep reading…

It seems like you’re the type of person that likes making sure they are getting the best value for their money. Congratulations. So, if you're like me, you are seeing a lot of advertisements this time of year regarding Medicare open enrollment period. So, what exactly does that mean, and how does it affect you?

If you live in the state of Illinois, they are referring to the ability to enroll, change, cancel, or switch Medicare Advantage Plans and drug programs between October 15th and December 7th. Missing this election period means you could be stuck with a less than ideal plan for another whole year. This is why so many American’s consider this time of the year an important time to review all of your Medical and insurance options even the ones you can change outside of this window, like a traditional Medicare supplement plan.

Medicare Advantage VS Medicare Supplements

So what is the difference between a traditional Medicare Supplement Plan and Medicare Advantage? The traditional Medicare supplement plans utilizes original Medicare Part-A which covers hospitalization and inpatient care. It also uses Medicare Part-B which covers your patient Medical coverage.

There are many different types of co-pays and deductibles with Medicare. For instance, Medicare itself only pays for instance 80% of your outpatient covered expenses. While that may sound good, who is left paying the other 20%? You are, unless you have a supplement plan which will cover the majority of those other expenses.

Medicare Supplements

With a traditional Medicare Supplement Plan, you can go to any doctor, anywhere in the country, that accepts Medicare. If they accept Medicare, they will take your Medicare Supplement Plan, no matter who it's with. Also, if you are looking at traditional Medicare supplement plans, for example comparing a plan G with one company to another, its pretty easy. Why? By law, they all have to offer the same basic medical benefits. The only differences between them is price, customer service, rate increase history, and possible fringe benefits, which many find to not be a major purchasing factor. Doing a thoughtful analysis on which plan is best for you is important and getting the best rate is easy with our professional rate tools.

Drug Coverage

Now with original Medicare in addition to a supplement you will want to get Part-D coverage. Part-D is offered through private insurance companies and can help you pay for prescription drugs. Many find this section difficult to understand and hard to shop around. Over the last decade the biggest mistake we have seen is seeing individuals shop this section based on monthly premium cost or just going with companies they “like”. That strategy can cost you thousands of dollars a year. The best way to evaluate this is to take an inventory of all the medications you take, the dosage and frequency, and use Medicare’s tools to compare plans based on “total annual cost”. Without this you will pay more for your drugs than you should. If you need help with this contact us and we can help.

Medicare Advantage Plans

Medicare Advantage Plans by contrast are a type of Medicare health plan offered by a private Insurance company that contracts with Medicare to provide all your Part A and Part B benefits, essentially replacing Medicare. Most Medicare Advantage Plans also offer prescription drug coverage. If you’re enrolled in a Medicare Advantage Plan, most Medicare services are covered through the plan. Your Medicare services aren’t paid for by Original Medicare. With this you may have a lower premium, but here's the main catch: with a lot of those types of plans, you may have out-of-pocket co-pays, along with high deductibles. Also, you will probably be limited to more of an HMO or PPO type of enrollment, where you are limited to the doctors that you can go to within your own local area. Not all doctors who work with regular Medicare have to accept advantage plans. So, if you're a retiree that travels a lot, you probably want to stay away from Advantage plans, where you may not be fully covered if an incident happens outside of your network of Doctors.

The Take Away

The truth is… This is hard, comparing plans is confusing. Did you know you will pay the same monthly rate whether you work with a professional or not? So how would you know for sure what type of plan is best for you at this particular time? Feel free to use our more than a decade of experience in helping clients navigate this confusing terrain. Click HERE to schedule your 15-minute virtual consultation and we can help answer that question.

Presidential Elections and the Stock Market

Mon, 05 Oct 2020 18:10:43 GMT

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Presidential Elections and the Stock Market

With the elections coming up, many investors are concerned about the presidential election and the stock market.

There’s uncertainty in the air. And the market doesn’t like uncertainty.

So, what do you do with your hard-earned money in the meantime? Keep reading for more information.

Why RMDs Don't Matter... For Most People

Thu, 01 Oct 2020 12:01:12 GMT

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Why RMDs Don't Matter... For Most People

RMD, or required minimum distribution, is an amount of money that a retiree has to withdraw from a traditional IRA, SEP, or SIMPLE individual retirement account. When a retirement account owner reaches 70.5 or 72 years old, then a certain amount of money will have to be withdrawn every year. So, in essence, the percentage distribution from the qualified required account is made by the government and it will make you withdraw cash when you reach 70.5 or 72 as of the new rule.

Now, why is this so important to know? The reason is that not taking the distribution will put a 50% penalty on the cash amount you should’ve withdrawn. It’s something that many individuals would want to avoid.

In reality, for most people, it doesn’t matter. Why is that, and why is this not important for most people? We’ll explore that below and will also mention when this matters for some categories of people.

Why It Doesn’t Matter for Most People

A 50% penalty is not a small amount, especially if you’ve accumulated a nice sum of money in your retirement account. You’d think that most people would rush to withdraw the cash and avoid the penalty. Still, in most cases, people don’t care about the penalty and so the RMD doesn’t matter to them.

The main purpose of creating a retirement account is so that people can live off the amount stored on the account after retirement. Therefore, most people who accumulated some good sums of money did it with the sole purpose of living off those funds.

So, if the goal of the retirement money is only meant to help you live off it after you retire, then you are taking distributions to help meet your lifestyle requirements. Let’s imagine a situation now, and say that before you retired, you required about $5,000 monthly. With that in mind, you assess the retirement sources of income you will benefit from after you retire, such as pensions, social security, side businesses, and so on. Doing that results in you discovering an income gap which is about $2,000 every month, for example.

In general, people are going to use the distribution taken from their retirement accounts to fill that gap, and as a result, the RMDs are satisfied. With that in mind, an RMD is not something that you should be afraid of.

We’ve made quite an interesting discovery regarding people who go into retirement and have to start using their accumulated funds. Usually, retirees may go into retirement afraid to spend their cash out of FORO, aka the Fear of Running Out. It’s understandable – after all those years spent saving money into a retirement account, it would be terrible if someone ran out of cash during their retirement.

But through the help of a qualified professional and after an analysis has been made, you may be able to create a way to ensure your money lasts as long as you do. If so, RMDs exist as a way to encourage clients to take a few distributions, to have fun and treat themselves. The client could now take the money and enjoy different aspects of life – money that they would normally not allow themselves to withdraw. We like encouraging people to take the money and enjoy it however they want, treating themselves after working so hard for such a big part of their lives.

If you think about it, is life only about building up the biggest stockpile you were able to, and then just look at it and do nothing with it? The money has been gathered with a purpose – to be used. In our office, we have a saying; “True Success is found in the lives you’ve changed… not in the things you have obtained.”

Why It Does Matter to Some People

Although to most people an RMD doesn’t matter, there are some people for which it does matter. For example, Social Security could be more taxable for those that don’t need an RMD to enjoy or to meet certain lifestyle goals. When it comes to Social Security, you have to know that this source of retirement income is a very tax-efficient one. As such, the more of the retirement income you’re able to get from your Social Security compared to your qualified distributions, then the lower the federal taxes are going to be. Of course, you can ask us about this if you have any questions.

But it doesn’t only make Social Security more taxable. It can also make you bump into the next tax bracket. If that happens, then the income will become even more taxable, which makes things even worse for you.

On top of that, it may also force distribution on you from an account that you may not wish to make a distribution from, which is again not convenient. In some cases, people may require permission in order to spend some cash after they retire. In other situations, you may need that money to make long-term investments to meet certain goals. So, making unnecessary distributions when you’re trying to meet a goal would only prevent growth.

How to Evaluate Whether RMDs Matter to You and What Can You Do About It?

Are you unsure whether RMDs matter to you or not? There’s no need to worry. Here’s how to make an evaluation and discover if an RMD is important for you and what you can do regarding the situation.

Find Out the Income Gap
What you need to do is find out what your income gap is. Is it below the RMD, or is it exceeding it? If it’s the latter, then you don’t have to worry about them. Basically, you will already be making a distribution, so it doesn’t really matter.
Discover If Additional Taxes will be Caused
When it comes to RMD, an account owner will be taxed at the income tax rate depending on how much of the RMD is withdrawn. But you need to figure out if there are some additional taxes added by the RMD. In case you’re unsure, we’re here to help you. What we can do is make a plan that will help us decrease the gravity of the situation through various strategies.
Figure Out If SS Will Become More Taxable

Another thing you should do is try to find out if the SS is going to become more taxable. If you’re not sure, you should reach out to us. If we draft a thorough plan, we’ll be able to combat this thanks to proper strategic planning.

Another possible solution for this may be a Roth conversion. A Roth IRA conversion occurs when money from a Traditional IRA – where income tax-deductible contributions applied but distributions in retirement become taxable – is converted to a Roth IRA. The cool thing is that in the Roth IRA, you can make contributions with the after-tax amount of cash. A Roth conversion would be ideal when the balance for a traditional IRA has dropped when it’s at a much lower tax rate, or when there are no Required Minimum Distributions necessary. With that in mind, you should be aware that Roth conversions are not right for everyone.

In Conclusion

RMDs may matter in some cases, but to most people, they don’t. It’s important to know whether they matter to you and what you can do about them. If you need our help in discovering any potential additional taxes or whether the SS will become taxable, don’t hesitate to contact us. We can help you.

22 Financial Steps to Take before the End of the Year

Mon, 28 Sep 2020 16:47:18 GMT

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Fourth quarter is here, which means there are important financial steps to take before the end of the year. Taking the time now to work through this checklist may help end the year strong and start 2021 with a bang.

We recommend printing off this list and scheduling time to work through it in the coming weeks. Your future self will thank you!

Keep reading for our top 22 financial steps to take before the end of the year.

#1. Review your 2020 financial goals and assess your progress.

Take note of what you still need to accomplish by the end of the year. Don’t beat yourself up if you’re off target – it wasn’t an easy year for many of us. Do what you can to adjust your budget to meet these goals.

#2. Review Current Cash Flow

5 Questions to Ask a 401(k) Plan Provider Sooner Rather Than Later

Tue, 22 Sep 2020 16:16:51 GMT

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Employees often find themselves confused and frustrated with making changes to their 401(k) because complex terminology is difficult to understand.

Other 401(k) investors follow a buy and hold strategy and may see changes as unnecessary.

The bottom line is that it’s critical to your retirement savings (and your future retirement lifestyle) to understand exactly what you are enrolled in and why.

This begins with asking questions–the right questions. Here are 5 questions you should ask your 401(k) plan provider sooner rather than later. Read More...

When Does a Roth IRA Conversion Make Sense?

Sat, 19 Sep 2020 04:06:01 GMT

When Does a Roth IRA Conversion Make Sense?

There are a few factors that make converting a Traditional IRA to a Roth IRA more ideal. Currently, amid the pandemic, we have a combination of factors that have created a bit of a silver lining for those considering a conversion.

In this post, we’ll dig into when it makes sense to do a Roth IRA conversion and 3 reasons why it’s worth having a conversation about it right now.

First, let’s define a Roth IRA conversion. A conversion takes place when money from a Traditional IRA, where any prior contributions were income tax-deductible but where distributions during retirement would be taxable, and converts it to a Roth IRA. In a Roth IRA, contributions are made with after-tax money, so that when the rules for a Roth IRA are followed, it grows income tax free and qualified distributions would be income tax free during retirement.

You should keep in mind that taxes on the amount converted to a Roth IRA would be due in the tax year the conversion takes place. So for example, any conversions done January 1, 2020 through December 31, 2020, would be added to ordinary income when clients file their taxes in 2021. Contributions, funded with after tax dollars, may be made up to the filing deadline for that tax year. For example, 2020 Roth contributions could be made up until the filing deadline of 2021.

So, when does it makes the most sense and when is it even more advantageous for you to do a Roth IRA conversion? That’s what we’ll cover in this post.

1. When at a lower tax rate

If you feel taxes will go up in the future, you could be better off doing a Roth IRA conversion now. With the current state of the world and of the economy, as well as the need to offset trillion-dollar stimulus programs, many predict taxes will go up in the future. If that does happen, the amount owed on any conversion or amounts taken out of pre-tax retirement savings could be more in the future.

Additionally, some of you may have less income this year due to unemployment, reduced hours, or no bonus or raise-- this reduces your taxable income and might allow some room for your taxable income to increase with the conversion and still be manageable.

We’re also still under the Tax Cuts and Jobs Act until almost all provisions expire after 2025. The TCJA shifted the thresholds for some income tax brackets, lowering tax rates for the time-being. This is another reason it may make sense for you to consider a Roth IRA conversion right now.

One of the benefits of a Roth IRA is the confidence in KNOWING how much will be owed in taxes while letting gains grow income tax free. On the other hand, with a Traditional IRA, the amount that will be owed in taxes during retirement is based on what the tax rate will be at that time, which is yet to be determined.

You may be thinking that converting now results in few dollars working for you. For example, if you convert say a $100,000 IRA and pay 25% between federal and state taxes, you will only have $75,000 working for you going forward. That's a real concern for anyone, right? Maybe it shouldn't be.

Let's examine the math in a hypothetical example. Using the Rule of 72, we know that an account will double in 10 years at a 7.2% compounded rate of return-- $75,000 would grow to $150,000 in that case and $100,000 would grow to $200,000! That's a significant difference. At least until you pay the taxes...

Applying the same 25% combined federal and state tax rate, $200,000 becomes $150,000 after tax. It's the same outcome! However going forward, any interest or gains on the after-tax money will be subject to tax as well. That is not the case on a Roth IRA.

So, it makes sense to ask-- Will my effective tax rate be greater in the future or not? If the answer is yes, it may make sense for you to consider converting some of your Traditional IRA.

2. When a Traditional IRA balance has dropped

For many, the market hit their accounts hard and this can obviously be devastating. However, a reduced balance can be viewed as an opportune time to consider a Roth IRA conversion.

Since you would owe taxes on the amount converted, a lesser balance means less taxes due. That said, not every client will want to convert the entire amount of the Traditional IRA. Doing partial conversions over a period of time into an account and spread out their tax liability may be a good idea. Doing partial conversions can also be a good plan with large Traditional IRA balances.

3. When no Required Minimum Distributions (RMDs) are required

We are facing a rare situation in 2020 where individuals of RMD age are permitted to waive their RMD. Typically, an RMD must be taken in the year a client reaches age 72 (70 1/2 for folks who were already required to take a RMDs prior to the passing of the SECURE Act in December 2019 or who have Inherited IRAs) and every year after and that amount is taxable to you. What makes this a potential drawback when it comes to doing a conversion is that a person would have to take an RMD first before they could do a Roth IRA conversion—increasing their taxable income even more.

This year, however, a person would have the option to only be responsible for paying taxes on the conversion (if they chose to do one) and not an RMD on top of that.

Once it’s converted to a Roth IRA, another advantage is that there are no RMDs on the Roth IRA while the owner is alive. Therefore, you aren’t forced to take money out if you don’t need it.

In Conclusion

If you are wondering about how to improve your retirement outlook and find the positives in the current situation, it might make sense to introduce yourself to the idea of a Roth IRA conversion. And if you’d like to strategies that could make this even more appealing, reach out to us today. This is a conversation you do not want to put off.