Learn From Us

Reflections on Being Thankful

It has been some time since I stepped away from a strictly financial planning topic and pulled back the curtain to talk about something more personal. The goal of this e-newsletter every month is, after all, not about me but about how I can help you find Clear Direction for your Retirement. However, with Thanksgiving on the way, I wanted to share a personal reflection on the topic of being thankful.

I was driving home one day last month and I passed a vehicle carrying a very large Christmas tree. I just remember thinking to myself, “Who in the world puts up a Christmas tree before Halloween?” It’s October, it’s not even below ninety degrees outside yet, you can still take a bath walking to the mailbox for crying out loud. Not that I have anything against a Christmas tree in October per se’, perhaps it’s their way of celebrating the coming respite from the heat and mosquitos, I can get on board with that…but I digress.

My real point is that more and more there is a bypass from Halloween, which seems to be pretty well covered, and straight to Christmas which is really well-covered. There is something missing here. I’m sure you already know where I’m heading with this and my goal is certainly not to come across as judgmental or preachy in any respect. Nobody likes that type of person. What I do want to do is to offer some perspective and encouragement regarding a day that it seems sometimes is all but forgotten.

On the fourth Thursday of every November, we celebrate a holiday. That’s right, it’s Thanksgiving Day. Not everyone forgets, many, many celebrate it. However, when you hear the name in our time it invokes thoughts of football, turkey and stuffing, black Friday, time with families or even a little hunting, for those who fancy that. Those are all great things and there is nothing wrong with celebrating and participating in them. But, is that really what this holiday represents?

The celebration of Thanksgiving started by the Pilgrims in 1621 as a harvest festival, designed to give thanks to God for nature’s bounty and well, their survival during the previous harsh 1620 winter. The Continental Congress, during the American Revolution, designated multiple days a year to give thanks.

In 1789, at Congressional request, George Washington called upon Americans to express their gratitude for the happy conclusion to the country’s war of independence and the successful ratification of the U.S. Constitution. John Adams and James Madison also designated days of thanks during their presidencies.

In 1827, Sarah Josepha Hale — author of the nursery rhyme “Mary Had a Little Lamb”— launched a campaign to establish Thanksgiving as a national holiday and for 36 years, she published numerous editorials and sent scores of letters to governors, senators, presidents and other politicians, seeking their support.

Abraham Lincoln, in 1863, at the height of the Civil War, answered the holiday call in a proclamation encouraging all Americans to ask God to “commend to his tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife” and to “heal the wounds of the nation.” Thanksgiving was set for the final Thursday in November, and it was celebrated on that day every year until 1939. In that year, Franklin D. Roosevelt moved the holiday up a week in an attempt to spur retail sales during the Great Depression. Roosevelt’s plan became known as “Franks- giving” and was met with passionate opposition, and in 1941 the President reluctantly signed a bill once again making Thanksgiving the fourth Thursday in November.(1)

I hope you can see the common theme in the history above. Thanksgiving, historically speaking, is primarily about giving thanks and prayer. Everything else I’ve described has just settled in around it and to some extent crowded it out. Just as with Roosevelt’s retail play in his day, black Friday seems to steal the Thankful thunder in our day.

My encouragement to you this Thanksgiving is carpe diem….seize this day! Seize it for what it is. Have your food, fun and family but truly seize the underlying meaning of the day and what it represents.

For me, Thanksgiving is a special day in which to give thanks to God for all His blessings in my life. And, yes, I even have some food, family, football and even a little hunting now and again.

I am thankful for my family, for you our readers, our clients and so much more. Regardless of your religious leanings, thankfulness frees us to take our eyes off ourselves and put them where they belong, on the immense blessings all around us…a wealth that far more significant than mere money.

Be thankful in all things, it will change your life and the lives of those around you. Blessings to you and yours, my dear friends and Happy Thanksgiving.

                  (1) Source: www.History.com
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IRA Planning

IRA Planning – What Now with New Tax Laws?

Change, as annoying as it can be, is inevitable and so we must be proactive in dealing with it. This is especially true as it pertains to our finances.

For most investors, qualified tax-deferred accounts (IRA’s, 401k’s, etc) are where the majority of their retirement assets are held. In that regard, there have been recent changes in the tax laws that should be analyzed for their impact on the future of your retirement plan. Furthermore, possible legislation like the “Secure Act” could further change implications to these types of accounts but we’ll address that in a separate publication.

Specifically, there are some IRA ideas on the individual (non-corporate) side that should be considered given these changes.

  1. Deductibility of IRA management fees:

Advisor fees may be deductible on an itemized basis depending on the type of fee. Fee-based investment management fees could be deductible subject to your AGI. However, fees paid for fee-only, advice-only, fee-for-service planners/advisors generally are not deductible. The costs of transactions and the financial products themselves are not deductible on an itemized basis. Your CPA can help you with this so you know what’s deductible and what’s not as well as the best place(s) from which to pay fees for particular types of accounts (IRA vs Non-IRA).

  1. Roth Conversions:

This can be substantial if you miss it. You can no longer reverse or re-characterize Roth conversions. Once a conversion is done, it’s done! Gone are the days of seeing your tax bill the following year and deciding to reverse the decision.

This is not to say that Roth conversions are a bad idea. On the contrary, an effective Roth conversion strategy could be more attractive now than ever due to low tax rates and larger standard deductions.

 

  1. Qualified charitable distributions (QCD):

This one applies for those already over 70.5 years of age. For many, charitable gifts will no longer be deductible because taking the larger standard deduction will be more advantageous than itemizing. However, you can still effectively get the deduction by not only taking the new, larger standard deduction but also making charitable donations by way of QCD, which is excluded from income.

A QCD must be a direct transfer from the IRA to the charity, can be up to $100,000 per person and meet the RMD requirements for IRA’s. The charity must also be an eligible entity. The QCD does not increase Adjusted Gross Income for tax purposes like an IRA distribution does. As a result, charitable giving can be done without affecting Social Security benefits and Medicare premiums. 

  1. Required Minimum Distribution (RMD) Planning:

It is very important to make sure that you are meeting your RMD obligation annually from your IRA’s. Remember, there is a 50% penalty imposed for missing an RMD. That is substantial!

RMD planning can apply to those IRA owners that are over 70.5 but could also apply to younger beneficiary IRA and beneficiary Roth IRA owners depending on the situation. Pending legislation could change the RMD start age but that remains to be seen for the moment.

For those over 70.5, the QCD mentioned above is a good way to help meet those obligations. RMD’s for those who own multiple IRA accounts can be aggregated and pulled from one single account, if desired, and must be pulled by year-end unless it’s your first RMD year.

First-year RMD’s can be deferred till April 1st of the following year but then must be taken in conjunction with the current year’s obligation thus doubling the RMD for that year.

Don’t wait till tax time next year to review your strategies and figure out what changes (if any) need to be made. There is no time like the present to make adjustments and get prepared.

We can help coordinate and implement the items mentioned here with the rest of your overall retirement strategies. We are happy to help so just give us a call and book your no-obligation review today. We look forward to meeting you!

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The Five Critical Puzzle Pieces of Your Retirement Plan – Part 2*

In Part 1 of The Five Critical Puzzle Pieces of Your Retirement Plan (here), we detailed how putting your retirement plan together is like fitting together or coordinating the pieces of a puzzle…some of which are constantly changing. We looked at the first of the five puzzle pieces, the Income Plan. In this post, we’ll explore the other four pieces.

By way of refresher, the five pieces to any retirement plan puzzle are:

  • The Income Plan
  • The Investment Plan
  • The Tax Plan
  • The Health / Life Insurance Plan
  • The Estate Plan

Let’s look first at the investment plan. After all, that funds your income plan.

INVESTMENT PLAN

In retirement, most people care far more about the return OF their money than the return ON it. That is, the only risk they care about is the risk of loss that could affect their income. Yes, return is needed in some capacity, but it’s not typically the driver it was during the working years.

With that in mind, once the plan need for current and future income has been established, you can go about the work of removing as many unknowns as possible. Using the income plan as the template in which to drop in an investment strategy can be very liberating. For most of my career, the coordination of these eluded me, forcing me to stick with traditional, stale strategies. By redefining the target – away from rate of return dependence alone– it allows us to think and proceed with much greater specific intent in our selection of solutions for income and inflation.

TAX PLAN

Do you think taxes are going to increase or decrease over the next twenty years? I certainly don’t pretend to have a crystal ball, but I’d say the current state of financial affairs in the U.S. are going to play a large role in the determination to raise taxes. We are at historic lows in rates now.

So why would someone retiring in a few years choose to ‘max out’ current 401k contributions today? You may find yourself withdrawing that for living expenses at the price of a much higher tax. From another perspective, what are you doing today to maximize the tax efficiency of the income you’ll need to live on after you retire?

ESTATE PLAN

How will you protect your savings for your spouse and heirs from a myriad of risks? Although important, the goal is not simply the legal avoidance of giving your money to the government. Think of it more in terms of providing efficiency of transfer and post-death benefits to your family. Simple things like titling accounts properly and naming beneficiaries correctly can go a long way toward efficiency.

HEALTH/LIFE PLAN

Have you carefully considered the potential costs of retirement medical expenses and come to conclusions about how YOU are going to deal with them? If you retire early, what will you do about health insurance prior to Medicare? What about a potential nursing home stay (Long-Term Care); how’s that going to get handled? If self-insuring LTC, how does this affect your spouse and your existing income plan (among other areas)? Do you really need life insurance and what about non-traditional uses of it to mitigate other risks?

If you are working with advisors who are regularly engaging you in conversations that lead to action steps in each of these previous areas, then you’ve truly found a real advisor. Absent of that leadership, you’re probably making purchase decisions – not financial plans.

If you don’t have a retirement plan, it’s never too late to start. Contact us today and let us help you discover clear direction for your retirement future. We’ll provide a FREE analysis of where you currently stand against your goals and provide important recommendations for getting all the pieces of your retirement puzzle to fit together!

*Tax and Legal Disclaimer: Wootton Financial Group does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.

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The Five Critical Puzzle Pieces of Your Retirement Plan – Part 1

My wife and I are pretty spontaneous travelers. In spite of this, we have found that planning around a few basic things based on where we travel can really help us get the most out of our getaways. Doing some pre-planning around things like our ultimate destination, how long we’re going to stay, specific directions to reduce travel time, ensuring we have appropriate attire and equipment for those “just in case” situations that can occur, and… well, you get the drift. Making these plans takes time and effort on our part, but preparing around these essential things also helps ensure we are able to truly enjoy our getaway.

We all make specific plans when we build a home, plan a college experience for our kids, build a business, or plan a menu. But what amazes me is how, without even seeming to be aware of it, aspiring retirees are so casual about their plans for retirement.

Instead, of having a plan that guides their decisions, they allow their focus to be driven by financial product purchase decisions. As a result, they get lost in a sales process.

Seldom do they really focus on seeking to efficiently coordinate foundational elements of a solid financial retirement plan. Our firm has had three decades of enjoying the privilege of assisting others with this exciting journey and it has taught me to focus my energy on coordinating the financial principles, not on selling financial products. Financial products are simply the tools that can help implement what’s found in the financial plan and it is not one-size-fits-all.

There are Five Critical Pieces of a Sustainable Retirement Plan. We like to think of them as pieces to a bigger puzzle but where the pieces are always changing and must be adapted to in order to make the retirement picture stay whole and intact. That is to say, you want all the pieces coordinated together. Many people retire just fine without specific game plans for each of these areas, but those who do make specific plans in these areas reach the destination with much less stress, and quite often reach it sooner than those who just wing it. In this post, we’ll cover the first piece of the puzzle, the Income Plan. In the next post, we’ll look at the other four pieces.

INCOME PLAN

Two of the greatest financial concerns about retirement are:

1) Will I have enough income or financial assets to retire, and

2) Will our income last for the balance of our lives

So what is the specific plan for delivering the income you’ll need over different time-frames in your life? Which assets should produce income first, which should take care of inflation and from which pot will you buy new cars or help out the grandkids? What about the tax efficiency of the plan? Identifying which assets you’re going to use at different stages to meet your income targets allows you to identify where to allocate risk versus more stable and dependable income streams. Without plan considerations like this, most people make decisions out of the fear of not having enough and wind up taking on a lot of unnecessary risk in several of the other components due to no coordination of the plan.

In part 2 of this post, we’ll look at the other four critical pieces of your retirement puzzle.

If you don’t have a retirement plan, it’s never too late to start. Contact us today and let us help you discover clear direction for your retirement future. We’ll provide a FREE analysis of where you currently stand against your goals and provide important recommendations for getting all the pieces of your retirement puzzle to fit together!

 

 

 

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ROTH IRA

Roth IRAs and the New Tax Laws

As most of you probably know, the new tax law that went into effect for 2018 presents both challenges and opportunities for many. For many of our clients, one of the opportunities this change created concerns Roth IRA conversions.

To refresh your memory, a Roth conversion is different from a Roth contribution. A conversion simply “converts” existing IRA dollars into a Roth IRA and triggers income tax on the conversion amount as it gets added to the rest of your income for the year. Conversions also have no income limitations. Contributions allow you to deposit after-tax money up to a certain amount annually into your Roth account. There are income limitations as to whether you qualify to make those contributions or not.

So why, you may ask, are conversions such great opportunities right now? Before the tax law took effect and lowered the rates for many, we were already at some of the lowest income tax rates in 60 years. It’s my opinion this makes Roth conversions very valuable for many who are in retirement or headed into retirement very soon.

You can convert IRA dollars today at a lower tax rate rather than waiting until the IRA pot is even bigger and paying taxes at a much higher rate later. Would you rather pay taxes on the seed or the harvest? This has already been a viable opportunity for many of our clients for many years, as we believe that, unless some things change in Washington, tax rates will be higher in the future. We’ve also educated clients on the issues we see with over-funded, pre-tax retirement accounts (RMD’s, lack of tax-efficient options in retirement) in the lives of retirees and the need to mitigate that risk before they enter retirement years.

As great an opportunity as this is, there are many things to consider and you will want to talk to your tax and financial advisors about what would be best for your situation.

One of the primary reasons to do even more due diligence on this topic before executing a conversion is that the new tax law eliminated the ability to re-characterize your conversion or, in layman’s terms, reverse your decision. We normally recommend making Roth decisions in the 4th quarter of the year and typically not after December 15th since many custodians can’t handle the request volume and won’t guarantee that it gets processed timely.

With the right analysis and strategy, the new tax law’s higher standard deduction and lower rates creates the potential to “unwind” IRAs into tax-free vehicles. Also, increases in the estate tax exemption mean that you can pass on your Roth to beneficiaries tax-free (at least until 2025 when the law has to be re-approved or else go back to pre-2018 tax levels).

Gifting exclusions also allow for some interesting strategies such as gifting family members funds to pay the tax on their own Roth conversion (to get them started) or to make their own Roth contribution without the worry of gift limitations. This can help younger families get started building their Roths.

There are also provisions that could be helpful in regards to leaving more money to grandchildren, by way of the generation–skipping transfer tax (GST) exemption. Also, those who may be subject to the “kiddie-tax” rules and even IRAs that have trusts as beneficiaries could find some help through the new law and conversions.

Finally, one of the questions people have in doing a conversion is “what if I do this, pay all this tax upfront and then Uncle Sam changes the game on me?”

Unfortunately, no one knows that answer. Historically however, Roth’s have been a terrific revenue generator for the Feds and let’s face it, they like that! This is why they dropped the income limitation on conversions back in 2010.

The best you can do is to plan around what you know today and adjust annually as needed. Stay in the game and stay on top of what’s going on.

Let us know how we can help you find clear direction for your retirement with these strategies, we’d be honored to visit with you. We are more than happy to help you with an analysis on this or to any other issue related to your retirement plan.

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Dollar Bills

Negative Interests Rates May Be On Their Way

Have you been hearing rumblings of negative interest rates? If you’ve been reading what’s being said in financial media circles you may have heard prognosticators discussing the specter of negative interest rates. You may be asking, “What’s exactly is a negative interest rate? Who would ever invest like that?”

To understand what negative interest rates are, we first need to do a quick review of how governments fund their debt. When a government takes on debt to fund operations, they create bonds…like a U.S. Treasury bond…and sell these to investors to take in money. If you buy bonds, the government agrees to pay you, the investor, a rate of interest to compensate you for investing in their debt. Simply put: YOU become a lender to the government.

Now, imagine if you will that you lend your hard-earned retirement dollars to someone and instead of them paying you a rate of return for your loan, you have to pay them for the “privilege” of doing so. Or, suppose you’re asked to invest and then you’re told immediately how much money you’ll lose for doing so. These examples demonstrate what a negative interest rate is…an investment that implicitly has a negative return the moment you enter the transaction. Think of it like paying someone a storage fee to park your cash and receiving nothing from it in return. Negative rates are a real concern in the global bond space right now.

Balderdash, you may say! No one would ever do that!

Well, do it they have! Ignoring this situation or worse, denying its reality, could be detrimental to your retirement investment plan.

In August of this year, the German government sold 30-year bonds at negative rates paying no coupon interest at all. In fact, in August, $700 billion of global debt went into negative rate territory. Most of the negative-yielding debt is in the government bond space due to its “safety” factor but there is also about $60 billion in U.S. Corporate debt in that territory as well. With 10 year U.S. Treasuries yielding about 1.7% (at the time of this writing), when you factor in inflation, the 10 year is also in negative territory. Although the U.S. is currently not quite as bad as some of its global neighbors, the risk is still there for many different reasons too lengthy to address here. Suffice to say, it is becoming more and more likely this trend will continue within the developed world.

Bottom line: given that bond prices and yields move inversely, if investors foresee low growth and low inflation ahead they are typically more likely to buy bonds that offer lower returns. They believe that the possible price increase of the bond offers returns, even though yields may be negative. Interestingly, what is seen as the biggest bond market plunge risk to those in these high price/low yield bonds is the possible recovery of global economies in regaining economic momentum and reversing course on monetary easing.

This is really important in terms of staying on top of your retirement income plan and overall investment plan and philosophy, two of the five primary retirement plan areas of focus I speak about frequently. Global economics can turn on a dime and whats a good investment today may not be a good investment tomorrow. You must be flexible in this regard.

If you’d like to get a fresh look at your retirement plan or simply get started with one let us help you discover clear direction for your retirement.

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Billionaire Mentor

The Secrets of Arkad: Your Personal Billionaire Mentor – Part 2

In our first post on “Your Personal Billionaire Mentor” (here), we looked at the first two secrets for building wealth drawn from the book “The Richest Man in Babylon” and its primary character, Arkad. He apparently did pretty well for himself, as he went from poor scribe to reportedly being the richest man in all of ancient Babylon – the wealthiest city in the world – by following some basic principles.

In this post, we’ll continue with five more lessons Arkad taught on building wealth. It’s like having your own personal billionaire mentor!

The Third Cure – Make thy Gold Multiply

Financial independence is not about age it’s about cash flow. This occurs when you have enough income from other sources that you no longer have to go to work. Prudent investing can help you multiply assets and produce income. A man’s wealth is not so much found in the money in his account, but in the income he builds. The stream that continually flows into his purse and keeps it always bulging. Desire an income that continues to come whether you work or travel.

The Fourth Cure – Guard thy Treasures from Loss

Arkad teaches, ‘Gold in your purse must be guarded with firmness or it will be lost.’ The first sound principle of investing is finding security for your principle’. While risk to a degree is sometimes necessary to build wealth, the penalty of risk is probable loss and must be balanced.

Be careful when you loan to another. Study the dangers of any investment before putting money there. Consult with wise men. Secure the advice of those experienced in the task of handling money prudently and let their wisdom protect your treasure from unsafe investments.

The Fifth Cure – Pay Off Your Dwelling

Despite popular belief, from a cash flow perspective, your home is a liability (defined as something that takes money out of your purse). Own your home – pay it off and it will only cost the insurance and taxes. Your heart will be glad and your cost of living will be greatly reduced, making more of your earnings available for pleasures or investing in income-producing assets. Paying off the house is not always feasible but those I’ve seen who have done this have much less stress in retirement.

The Sixth Cure – Ensure a Future Income Plan

Think about your future and make preparations for your family should you no longer be with them or able to support them. Houses and land, owner-financing sales, wills, life insurance and disability insurance all can provide a measure of security for the future.

 The Seventh Cure – Increase Your Ability to Earn

What are you doing to increase your ability to earn? Preceding accomplishment must be desire. Your desires must be strong and definite. The process by which wealth is accumulated is first in small amounts, then in larger ones as a man learns and becomes more capable.

We hope this gets you thinking. And, here’s some additional good news…you don’t have to be a billionaire to have an amazing retirement. All you need is a strategic plan that can help you manage five core areas…income planning, investment planning, health/life insurance planning, tax planning and estate planning. We think it’s a lot like putting together the pieces of a puzzle in which some of the pieces are continually changing!

If you would like help finding clear direction for your retirement, contact us today for a complimentary assessment of where you are relative to your retirement goals. We’re happy to help!

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Billionaire Mentor

The Secrets of Arkad: Your Personal Billionaire Mentor – Part 1

Imagine what it would be like if you could be personally mentored by a billionaire. Do you think you would learn anything about building wealth? What could you teach your children?

According to Forbes Magazine’s list of billionaires from March 2019, Jeff Bezos sits atop the leader board of the world’s 2,153 billionaires at $131 billion! Could we learn anything about money or saving or investing from him?

A man by the name of Arkad was reportedly the richest man in all of ancient Babylon – the wealthiest city in the world. Despite its wealth, the citizens of Babylon were poor. Wealth had become concentrated in the hands of a few, while most people had a hard time just feeding themselves. King Sargon of Babylon asked Arkad to teach 100 people the secrets of attaining wealth.

While Arkad is a fictional character from the book “The Richest Man in Babylon”*, the secrets of curing a small savings (he calls it a ‘lean purse’) are the same today as they have always been. This is a book I like to read often. While at younger ages, I asked my three children to read it; and again as they’ve matured.

In this first of two posts on ‘Your Personal Billionaire Mentor’, we’ll look at the first two lessons that Arkad taught his students. In ‘Your Personal Billionaire Mentor’ – Part 2, we’ll dive into the remaining five secrets to building wealth.

First Cure – Start

What skills do you possess for your job? Didn’t you have to learn them? Well, here’s some good news about building wealth, especially to those who would think, “I’m just not that smart.”

Because you learned the skills you need to succeed at your job, you have already shown you have the ability to learn. Guess what? That means you can also learn the necessary skills to make wealth…because it is a skill, not a matter of luck. Each person has a stream of money from which to divert a portion to his own purse (savings).

Arkads first rule is this: “Do this with your purse – for every ten coins you put in, take out only nine. It will then grow and you will feel good about the increasing weight of your purse.”

This is the pay-yourself-first concept. A strange truth that I’ve noticed in helping others to save is that when you commit to this regimen you will manage to get along just as well as before. And before long, saving will come to you more easily than before.

What do you desire most? Is it the gratification of your short-term desires each day – cars, bigger houses, expensive clothing and leisure? Or is it substantial long-term assets like lands, real estate, and income-producing investments? The coins you take from your purse bring the former of these. The coins you leave in will bring the latter.

The Second Cure – Control Your Expenses

A lack of savings rarely has anything to do with the amount of your wages. I’ve counseled with plenty a high-income earners with little savings. Arkad taught an unusual truth: “that which each of us calls our necessary expenses will always grow to equal our incomes unless we protest to the contrary.”

The concept here is don’t confuse your necessary expenses with your desires. He also said that each of us is burdened with more desires than we can ever gratify. So, carefully study your accustomed habits of living and let your actions demand 100% of the value from each dollar you earn. Spend only nine-tenths of your earnings. If you are a charitable person, consider only eight-tenths of your earnings by paying yourself 10% and then giving 10%. While there is nothing wrong with enjoying the fruits of our labor, one must always keep perspective of longer-term goals.

Those are the first two gems of wisdom from your billionaire mentor.

We hope this gets you thinking. And, here’s some additional good news…you don’t have to be a billionaire to have an amazing retirement. All you need is a strategic plan that can help you manage five core areas…income planning, investment planning, health/life insurance planning, tax planning and estate planning. We think it’s a lot like putting together the pieces of a puzzle in which some of the pieces are continually changing!

If you would like help setting clear direction for your retirement, contact us today for a complimentary assessment of where you are relative to your retirement goals and recommendations that can get you where you want to go.

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IRA

Individual Retirement Account Planning – What Now?

Change, as annoying as it can be, is inevitable and so we must be proactive in dealing with it especially as it pertains to our retirement savings planning. For most investors, tax-deferred accounts, such as IRAs and 401(k)a are where the majority of their retirement assets are held.

In that regard, the changes in the tax laws that started with your 2018 return should be reexamined in relationship to your retirement savings efforts. Specifically, there are some strategies pertaining to IRAs that should be considered given these recent changes. Interestingly, there is also current legislation in the Senate that could affect pre-tax accounts in a big way but we will focus here on what we know today.

1. Deductibility of IRA fees

IRA advisory fees are no longer deductible on an itemized basis. Based on your personal tax situation you should seek your CPA’s help in optimizing the best place(s) from which to pay fees for particular types of accounts. Generally speaking, you could pay IRA fees from your pre-tax IRA. This would effectively provide a deduction since pre-tax funds are being used to pay the fee. You could also opt to pay all fees from non-taxable accounts but again, it depends on your situation as to whether this would be beneficial. You do not, however, want to pay any non-ira account fees from an IRA.

2. Roth Conversions

This can be substantial if you miss it. You can no longer reverse or re-characterize Roth conversions. Once a conversion is done, it’s done! Gone are the days of seeing your tax bill the following year and deciding to reverse the decision. This is not to say that Roth conversions are a bad idea. On the contrary, an effective Roth conversion strategy could be more attractive now than ever, due to low tax rates and larger standard deductions. There is a short window however to take advantage of these lower rates before they sunset. Future conversion strategies should be done based on your individual situation and the IRA accounts in question. Hurry, time is limited to optimize your strategy.

3. Qualified Charitable Distributions (QCD)

This one applies to those already over 70.5 years of age. For many individuals and households, charitable gifts will no longer be deductible because taking the larger standard deduction will be more advantageous than itemizing. However, you can still effectively get the deduction by not only taking the new, larger standard deduction but also making your charitable donation by way of QCD which is excluded from income. A QCD must be a direct transfer from the IRA to the charity, can be up to $100,000 per person and meet the RMD requirements for IRAs. The charity must also be an eligible entity (a qualified charity). The QCD does not increase Adjusted Gross Income for tax purposes like an IRA distribution does; therefore, charitable giving can be done without affecting Social Security benefits and Medicare premiums.

4. Required Minimum Distribution (RMD) Planning

It is very important to make sure that you are meeting your RMD obligation annually from your IRAs. Remember, there is a 50% penalty imposed for missing an RMD. That is substantial! RMD planning can apply to those IRA owners that are over 70.5 but could also apply to younger beneficiary IRA owners (and bene Roth IRA owners) depending on the situation. For those over 70.5, the QCD mentioned above is a good way to help meet those obligations. RMD’s for those who own multiple IRA accounts can be aggregated and pulled from one single account if desired and must be pulled by year-end unless it’s your first RMD year. First-year RMD’s can be deferred till April 1st of the following year but then must be taken in conjunction with the current year’s obligation thus doubling the RMD for that year.

Don’t wait till tax time next year to review your strategies and figure out what changes (if any) need to be made. There is no time
like the present to make adjustments and get prepared.

We can help coordinate and implement the items mentioned here with the rest of your overall retirement strategies. We are happy to help so just give us a call setup your no-obligation review today. We look forward to meeting you!

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Storm

Avoiding Investment Disasters: It’s No Accident – Part 1

This is the first in two posts on how avoiding investment disasters is no accident. It takes careful and thoughtful planning.

It’s true in life but is especially true in terms of investing: avoiding disasters is no accident.

When markets are up, indices are consistently setting new records, investor exuberance is high and risk management largely gets ignored as the lemmings chase ever-higher returns to their ultimate demise. But things that can’t go on forever won’t. Almost as soon as markets start to rise, corrections are on their way. When the party ends it usually catches many off-guard and is incredibly painful. This is not being pessimistic; it’s just not being ignorant of and refusing to acknowledge history.

Benjamin Graham, the “Dean of Wall Street” and the man Warren Buffet attributes teaching him all he knows about investing, said, “The essence of investment management is the management of risk, not the management of returns”. If this is true…and it is…then what’s the best approach for you?

The investment industry’s standard method of managing client portfolio risk is best exemplified by the widely used “60/40 portfolio”. Risk management is accomplished by holding 40-percent of the investment funds in bonds. Since bonds are favored in times of stock distress, this is meant to serve as a buffer to stocks during bear markets. This practice has become so standardized that it is commonly referred to as simply the “balanced portfolio”.

In fact, throw a dart at the mutual fund’s * page of the Sunday paper and you’ll probably find one of these funds. At best, if you’re with a traditional advisor, you may find a bevy of bond and equity mutual funds blended together in a format representing the same goal, managing risk by balancing bonds to equities.

This passive, fixed and unchanging style of risk management is called static risk management. But, does this static method provide the type of risk management most people desire? The answer is NO!

Static risk management supplies too little protection in bear markets and too much in the bull markets. In fact, a good analogy is to think of a static portfolio like an individual who dresses for all types of possible weather conditions but is actually ill-prepared for any specific condition… like someone wearing a ski parka and beanie cap while walking around in Bermuda shorts and flip-flops!

* Mutual Funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing in Mutual Funds. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

 

 

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