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College Savings: An Update

By managewp on August 31, 2021 in

Congress is known for passing enormous bills with lots of little-known provisions that are not entirely central to the key objectives of the bill. Alas, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 is one of them. It contains changes to how students and parents apply for student aid via the Free Application for Federal Student Aid (FAFSA). While the changes won’t go into effect until the 2024-2025 academic year, the first year for new income reporting rules will be 2022.

Updates to the FAFSA are meant to simplify the application process by reducing the number of questions asked and altering how certain calculations are made. Specifically, the application process will drop about 60 questions from the current form, and the process will be even simpler for low-income applicants. Another change is that the term used to determine how much families will pay will be renamed “student aid index” (it is currently “expected family contribution”). Although the form is expected to take less time to complete, it is still likely to be complicated. Experts say that one outcome may be that families with multiple children in college at once may qualify for less aid.1

Divorced Parents

The new rules also affect how divorced parents complete the forms. Currently, the parent with the most custody fills out the forms, but this will change to the parent who pays the most in child support. This could add to the challenges divorced spouses face in getting one parent to become more engaged, even if it would lead to the child receiving more student aid. Moreover, the quagmire of individual divorce agreements — or lack thereof — could complicate this process even further.2

If you’re looking for ways to save for college, there are many, and they are typically no easier to understand than other types of investments. However, that’s what we’re here for. We can help you navigate the web of resources and tailor a solution that works best for your family and finances. Feel free to contact us for more information.

Grandparent Savings with a 529 Plan

The new rules also impact who helps pay for college and by how much. A 529 college savings plan allows the account owner to open, fund, and choose the investments and the account beneficiary — yet still maintain control of the assets. The account owner decides when and where to disburse funds and can even change the beneficiary or close the account and keep the money. Contributions to 529 accounts are made with after-tax income, but earnings and withdrawals avoid federal income taxes if used to pay for qualified education expenses.

Presently, when grandparents help fund college expenses with a 529 plan, that income gets reported on the FAFSA form as untaxed student income. This, in turn, can reduce the amount of aid for which the student is eligible. However, the new simplified FAFSA will no longer ask about these funds, so students may qualify for more aid.3

Custodial Accounts

There are two types of accounts that are often used to help provide college funding. The Uniform Transfers to Minors Act (UTMA) and Universal Gifts to Minors Act (UGMA) allow the transfer of financial assets to a minor without establishing a trust. However, be aware that while these accounts are controlled by the custodian, they are held in the name of the minor and relinquished to the child once he or she reaches the age of majority in that state.4

Coverdell Education Savings Account (ESA)

The ESA, which was previously referred to as an education IRA, enables parents to invest for tax-free earnings as long as the money is used for qualified educational purposes. Coverdell funds may even be used to pay for eligible K-12 schools. The annual contribution limit is $2,000, so it may be best to start saving early to accumulate potential earnings to help offset future education expenses.5

Content prepared by Kara Stefan Communications.

1 Fidelity. June 18, 2021. “Plan now for changes coming to college costs.” https://www.fidelity.com/learning-center/personal-finance/college-planning/college-aid-fafsa-changes. Accessed June 24, 2021.

2 Ibid.

3 Fidelity. June 18, 2021. “Plan now for changes coming to college costs.” https://www.fidelity.com/learning-center/personal-finance/college-planning/college-aid-fafsa-changes. Accessed June 24, 2021.

4 Kristen Kuchar. Saving For College. June 22, 2020. “What is an UGMA or UTMA account?” https://www.savingforcollege.com/article/what-is-an-ugma-or-utma-account. Accessed June 24, 2021.

5 Julia Kagan. Investopedia. June 22, 2021. “Coverdell Education Savings Account.” https://www.investopedia.com/terms/c/coverdellesa.asp. Accessed June 24, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

8/21-1750095C

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Roth vs. Traditional IRA: Retirement and Estate-Planning Advantages

By managewp on August 24, 2021 in

It would be nice if the Roth IRA had been around long as the traditional IRA. Imagine the long-term benefits of tax-free growth throughout a 40-year career. Annual contribution limits for IRAs are relatively low ($6,000; $7,000 for 50-plus), but the Roth is a good complement for investors who also contribute to an employer-based retirement plan. While 401(k) contributions are made from tax-deferred income, Roth contributions are derived from previously taxed income. Both vehicles are permitted to grow without taxes on earnings; however, in retirement, you don’t have to pay any taxes on Roth distributions, whereas all 401(k) distributions are taxed at your then-regular income tax rate.1

That tax bite during retirement can feel pretty punishing when you’re on a fixed income. It’s one reason why the Roth has an edge over the traditional IRA — which also taxes distributions in retirement. One of the key strategies that has emerged in the Roth IRA era is tax diversification in retirement: Try to invest in such a way that not all your income is taxable. This can help avoid taxes on Social Security benefits and keep you from having to pay higher Medicare premiums.2

Everyone has different circumstances, and you should build your financial portfolio to reflect your needs and objectives. Since the total amount you can contribute to an IRA each year — traditional, Roth or a combination — is limited, it’s typically a good idea to pick one that best meets your needs. Another viable strategy for reducing taxes in retirement is later converting a traditional or rollover IRA to a Roth. Investors also should consider the advantages of both versions for estate planning purposes. If you have any questions, or would like help developing a long-term IRA strategy, please contact us.

Distributions from a Roth IRA can increase your income during retirement since qualified withdrawals are not taxed. Moreover, if an investor doesn’t need to use his Roth funds during retirement, those assets and all potential tax-free earnings they generate can be left tax-free to heirs. Whatever amount he passes on can continue growing tax-deferred and eventually be withdrawn tax free. Note that non-spouse beneficiaries of a Roth will need to take full distribution within 10 years of inheriting the money. However, when beneficiaries have the discipline to leave that money in the inherited Roth for the full 10 years, it can continue to grow for an even larger inheritance with no tax consequences.3

By contrast, traditional IRA distributions to heirs are considered taxable income in the year(s) withdrawn.4 So don’t just think about reducing your own taxes with a Roth; consider its tax-free advantage for your heirs.

Be aware that you can contribute only earned income to an IRA. That precludes Social Security and pension income, dividends, etc. You may continue to contribute throughout retirement as long as you’re earning some income — and may only contribute up to amounts earned, subject to the contribution limits. Also bear in mind that there are income limits for making Roth IRA contributions. Single tax filers must earn less than $140,000 (in 2021); the married and file jointly income limit is 208,000.5

In a Roth conversion, you can move money from a 401(k) into a Roth IRA, converting all or a portion of assets throughout time, but there are considerations. For example, you’ll have to pay taxes on the money you move in the year it’s converted. That’s a good reason to only move a portion at a time; try not to tip your reported income into a higher tax bracket each year. If you conduct the conversion once you’re retired, your taxable rate will be lower.

However, Roth funds are subject to a five-year rule. If you convert 401(k) funds to a Roth you’ve already owned for five years or more, you can go ahead and use that money. But, if you must open a new Roth to make the conversion, you must wait five years before you can tap that account, or funds tapped will be subject to a 10% early withdrawal penalty.6

If you are considering a Roth conversion for any retirement account funds, remember that income tax rates are relatively low right now. If there are any changes in the near future, rates are more likely to go up than down. That’s a good reason to start a conversion now if you and your advisor believe that’s a good strategy for your situation, especially if you plan to roll over funds gradually throughout several years.7

Content prepared by Kara Stefan Communications.

1 Dayana Yochim and Andrea Coombes. NerdWallet. April 28, 2021. “Roth IRA vs. Traditional IRA.” https://www.nerdwallet.com/article/investing/roth-or-traditional-ira-account. Accessed July 21, 2021.

2 Phil Lubinski. ThinkAdvisor. June 10, 2021. “6 Ways to Help Clients Avoid Medicare’s IRMAA Surcharges in Retirement.” https://www.thinkadvisor.com/2021/06/10/6-ways-to-help-clients-avoid-medicares-irmaa-surcharges-in-retirement/. June 23, 2021.

3 T. Rowe Price. Summer 2021. “The Simple Move That Has Significant Advantages.” https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine.pdf. Accessed June 23, 2021.

4 Dayana Yochim and Andrea Coombes. NerdWallet. March 17, 2021. “Inherited IRA: How It Works & Distribution Rules for Beneficiaries.” https://www.nerdwallet.com/article/investing/roth-or-traditional-ira-account. Accessed July 21, 2021.

5 Charles Schwab. 2021. “2020-2021 Roth IRA Contribution Limits.” https://www.schwab.com/ira/roth-ira/contribution-limits. Accessed June 23, 2021.

6 Cathy Pareto. Investopedia. April 9, 2021. “Must-Know Rules for Converting a 401(k) to a Roth IRA.” https://www.investopedia.com/articles/retirement/08/convert-401k-roth.asp. Accessed June 23, 2021.

7 Sarah O’Brien. CNBC. May 20, 2021. “These strategies can reduce the taxes you will pay on retirement accounts.” https://www.cnbc.com/2021/05/20/these-plans-can-reduce-how-much-tax-you-will-pay-on-retirement-account.html. Accessed June 23, 2021.

Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences, including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions. We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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Reshoring: What’s the Future for Products and Services Made in America?

By managewp on August 17, 2021 in

According to a recent survey of supply chain professionals, the COVID-19 pandemic interrupted 98% of global supply chains. Among the most disruptive supply challenges was the procurement of personal protective equipment, pharmaceuticals and semiconductors. Companies that had outsourced manufacturing to other countries experienced firsthand the types of risks associated with offshoring.

The previous administration placed a huge emphasis on reshoring U.S. manufacturing, and the current administration is reiterating that call. Within days of his inauguration, President Biden signed an executive order that increased the domestic threshold for companies to meet to win federal contracts. The order also is designed to limit Chinese clean-tech exports and encourage offshore manufacturers specializing in clean-tech supply chains to relocate to the U.S. The objective is to enable America to produce and scale its own solar, electric vehicle and battery production by bringing supply chains closer to U.S. customers, or at least to rely on countries considered allies. Tech experts consider data to be “the new oil” and therefore it is vital that the U.S. become more self-sufficient in developing and manufacturing semiconductor technology.1

The call for reshoring to generate domestic jobs, data and energy independence is popular, bipartisan and likely inevitable to some extent. Market sectors poised to benefit include construction engineering and machinery, factory automation and robotics, electrical and electronic equipment manufacturing, application software and other auxiliary services. Moreover, North American, European and South Asian banks should see enhanced economic activity associated with reshoring.2 If you’re interested in ways to incorporate reshoring growth potential into your portfolio, please give us a call.

With that said, the decision to bring operations back to the U.S. involves a lot of considerations. These include the risks of running out of inventory, potential labor strikes, tariffs, intellectual property rights, government incentives and the value of the Made in USA label — not to mention the impact of future pandemics. One of the biggest challenges is reskilling the U.S. labor force to manufacture things like semiconductor chips used in mobile phones. We do not currently possess that level of expertise on a mass scale, so it will take time and resources to train our labor pool to the level of Germany, Switzerland, Japan and other countries.3

Companies (and by extension, shareholders) also need to see a return on their reshoring investments. In addition to corporate management exploring ways to offset the higher operating costs associated with reshoring, policymakers are expected to facilitate this effort via tax breaks, low-cost loans and other subsidies.

The “State of North American Manufacturing 2021 Annual Report” found that manufacturers are more concerned with the higher costs associated with reshoring than they are with other risks, such as supply chain shortages, proximity to market, demand for U.S.-made products and potential shipping disruptions.4 In other words, the carrot for reshoring needs to be worth their effort from a strictly financial perspective. That will be much harder to achieve given the lack of skilled workers, higher cost of wages and potential labor shortages in the U.S.

The other factor is that Asia not only showed supply chain resiliency during the pandemic, but its growing population represents a tremendous market for U.S. companies. This means they are less inclined to move operations to the U.S. and subsequently incur higher shipping costs to get the goods back to the lucrative Asian consumer market.5

Content prepared by Kara Stefan Communications.

1 Bank of America Merrill Lynch. 2021. “Made in America.” https://www.bofaml.com/en-us/content/reshoring/made-in-america.html. Accessed June 22, 2021.

2 Bank of America Merrill Lynch. July 23, 2020. “The USD 1 trillion cost of remaking supply chains: Significant but not prohibitive.” https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID20_0734/cost_of_remaking_supply_chains.pdf. Accessed June 16, 2021.

3 Deborah Abrams Kaplan. Supply Chain Dive. April 8, 2021. “Supply chains do the math on reshoring’s pros and cons.” https://www.supplychaindive.com/news/supply-chains-reshoring-decisions-sourcing-manufacturing-china/597596/. Accessed June 22, 2021.

4 Edwin Lopez. Supply Chain Dive. June 7, 2021. “Supply chain managers shift reshoring focus to total cost of ownership.” https://www.supplychaindive.com/news/inventory-supply-chain-managers-TCO-reshoring-Thomas/601148/. Accessed June 22, 2021.

5 Matt Leonard. Supply Chain Dive. June 17, 2021. “Tariffs, pandemic may not be enough to drive reshoring.” https://www.supplychaindive.com/news/reshoring-china-north-america-supply-chain-biden-forecast/601971/. Accessed June 22, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

07/21 – 1727346C

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Midyear Market Outlooks

By managewp on August 10, 2021 in

In its midyear review, market analysts at Charles Schwab say that economic growth in the United States may have peaked in the second quarter of this year, and it believes China experienced its peak in the fourth quarter of 2020. However, Schwab is bullish on Europe’s prospects for the rest of this year. It notes that the rollout of Europe’s largest-ever stimulus plan should aid growth and the region still has some way to go before peaking — meaning eurozone stocks could deliver further gains.1

Consider that, because the overall stock market performed well in the first half of the year while bonds underperformed, it’s possible your asset allocation may be skewed. Feel free to contact us for advice on rebalancing your portfolio midyear. This will enable you to cash in on gains and reassess how to potentially position your equity allocation given market projections for the second half of 2021.

Morgan Stanley is bullish on sustained growth in the U.S., citing three factors that appear to be driving the economy. The first is the high savings and consumer spending rate. Despite job losses throughout 2020, U.S. households were bolstered by stimulus payments and supplemental unemployment benefits. As a result, the average household income has already exceeded its pre-COVID level. Consumer demand fuels corporate prospects, so the money manager expects capital spending to continue here and in other developed countries throughout the globe. And finally, Morgan Stanley economists predict that the nation’s core inflation will rise above 2% by year’s end, but not enough to trigger the Federal Reserve to raise interest rates.2

At JP Morgan, economists believe that robust growth and rising inflation in the U.S. will prompt the Fed to taper bond purchases by the end of this year and begin to raise short-term rates as early as the fourth quarter of 2022. Investors should consider that rising rates will produce higher yields that will increase pressure equity valuations. Furthermore, the falling dollar will benefit international equities. The money manager recommends investors consider higher allocations to international equities and alternatives in the near-term.3

In the fixed income market, Raymond James emphasizes the importance of strategic asset allocation to maintain portfolio balance, regardless of the current interest rate environment. The firm’s fixed-income experts believe the 10-year Treasury will end the year in the range of 1.25% to 1.80%. By diversifying assets with a balanced approach, investors can preserve principal and allocate for growth in assets expected to appreciate in price.4

In the stock market, given the reopening of the U.S. economy, Ameriprise Financial expects continued price growth among cyclical value stocks, improving business trends, and strong year-over-year profit growth. While stock fundamentals remain strong, they suffer more from investor views that the market isn’t performing as strong as it could be, which can damper enthusiasm. Going forward, Ameriprise analysts caution that share prices may fluctuate due to changes in growth expectations. Given the uncertainties related to higher inflation and supply shortages, they recognize that short-term conditions may be volatile through the summer but, in the long term, the current environment favors stocks.5

Content prepared by Kara Stefan Communications.

1 Charles Schwab. June 15, 2021. “2021 Mid-Year Market Outlook: Peak or Pause?” https://www.schwab.com/resource-center/insights/content/quarterly-market-outlook. Accessed June 16, 2021.

2 Morgan Stanley. June 9, 2021. “2021 Midyear Economic Outlook: A Business Investment Surge Ahead.” https://www.morganstanley.com/ideas/global-economy-midyear-outlook-2021. Accessed June 16, 2021.

3 JP Morgan. 2021. “The Investment Outlook for 2021: A Midyear Review.” https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/investment-outlook-2021-us.pdf. Accessed June 16, 2021.

4 Doug Drabik. Raymond James. June 14, 2021. “Midyear Rate Review: Markets and Investing.” https://www.raymondjames.com/commentary-and-insights/markets-investing/2021/06/14/bond-market-commentary. Accessed June 16, 2021.

5 Anthony Saglimbene. Ameriprise Financial. June 15, 2021. “Midyear market review: What’s ahead for stocks.” https://www.ameriprise.com/financial-news-research/insights/midyear-market-review. Accessed June 16, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

7/21-1711660C

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Putting Inflation Expectations in Perspective

By managewp on August 4, 2021 in

Historically, inflation has been highly correlated with unemployment levels. When more people were out of a job, inflation was lower. As more people got jobs, inflation increased. From an economic point of view, this makes sense. Jobs increase income, which increases spending, which increases demand — supplies drop and prices rise. The opposite is true when fewer people hold jobs.1

That’s one thing that makes economic policy so difficult to set. It requires a careful balance of cause and effect, keeping in mind that what’s good for some portions of the population is bad for others. During periods of rising inflation, it’s important to monitor how it might affect us personally, from buying household goods to managing a portfolio. While economists are keeping an eye on the direction and momentum of rising inflation now, you may want to consider adding inflation-protection measures to your investment portfolio at some point. Contact us if you’d like to learn more about allocations to treasury inflation-protected securities (known as TIPS), real-estate investment trusts or commodities to help hedge the effect of rising inflation.2

In April, the inflation rate grew to 4.2%, which drove speculation that the Federal Reserve might reconsider its current stance on interest rates and monetary policy. The consumer price index (CPI) rose significantly for used cars and trucks, food, housing, airline fares, recreation, motor vehicle insurance, household furnishings and operations.

Currently, the federal funds target rate (which serves as the benchmark for bank interest rates) ranges from 0 to 0.25%. Previously, the Fed indicated that it expects to maintain a near-zero interest rate through 2023. The central bank targets an average inflation rate of 2 percent throughout time, so it appears not particularly concerned with the recent spike. In recent comments, Fed chairman Jerome Powell noted that the committee was monitoring “a broad range of financial conditions,” rather than focusing on addressing just one.3

Besides, Fed officials expected inflation to increase as the U.S. economy reopened. The surge in prices is expected to be temporary, as it is simply a matter of a supply crunch after months of pent-up demand. It’s normal that prices for hotel rooms, rental cars, used vehicles, sporting events and restaurants will go back to their pre-pandemic levels. Once jobs, consumerism and inflation reach a level of normalization, the Fed will consider whether it needs to raise the target federal funds rate.4

In terms of the investment market response, CNBC’s Jim Cramer observed that people expected high inflation due to stimulus and jobs numbers. As a result, when the numbers were announced the market didn’t panic – thus far it has taken the high inflation number in stride. Cramer went on to note that raising interest rates won’t solve all the problems that occurred last year. In many cases, only time can resolve them.5

Likewise, time may resolve the current labor shortage, as restaurants and hotels struggle to find enough workers to fill open jobs. Additionally, the current strong economy could solve for the national minimum wage debate without the need to pass new legislation. For example, retailers Amazon, Costco and Target have all voluntarily increased wages to $15/hr or more to meet demand. This strategy follows the traditional economic principle of supply and demand, in which the only way to stay competitive in the labor market is to increase wages. After all, workers have to keep up with the rising costs of housing, childcare, food and transportation.

Speaking of childcare, after decades of working mothers in the labor market, it will be interesting to see if the rising economy also can address the problem of childcare. During the pandemic, more women than men left their jobs to stay home with children sidelined from schools and childcare centers. This phenomenon may continue until employers — or legislators — come up with a solution. It will be difficult for the American economy to advance while there are millions of unemployed women staying home because of trouble securing child care.

The pandemic also convinced twice the number of Baby Boomers to retire than the previous year. Raising wages and providing more childcare resources, paid parental leave and paid vacation time may be the only way to woo more people back into the labor force.6

Content prepared by Kara Stefan Communications.

1 Greg Depersio. Investopedia. Aug. 22, 2020. “What happens when inflation and unemployment are positively correlated?” https://www.investopedia.com/ask/answers/040715/what-happens-when-inflation-and-unemployment-are-positively-correlated.asp. Accessed June 11, 2021.

2 Greg Iacurci. CNBC. June 8, 2021. “Gold as an inflation hedge? History suggests otherwise.” https://www.cnbc.com/2021/06/08/gold-as-an-inflation-hedge-history-suggests-otherwise.html. Accessed June 11, 2021.

3 Knowledge@Wharton. June 1, 2021. “Inflation: What Lies Ahead?” https://knowledge.wharton.upenn.edu/article/inflation-what-lies-ahead/. Accessed June 12, 2021.

4 Patti Domm. CNBC. June 11, 2021. “Inflation is hotter than expected, but it looks temporary and likely won’t affect Fed policy yet.” https://www.cnbc.com/2021/06/10/inflation-hotter-than-expected-but-transitory-wont-affect-fed-policy.html. Accessed June 11, 2021.

5 Tyler Clifford. CNBC. June 10, 2021. “Jim Cramer reacts to red-hot inflation number: ‘The market took it in stride’.” https://www.cnbc.com/video/2021/06/10/jim-cramer-reacts-to-inflation-report-the-market-took-it-in-stride.html. Accessed June 11, 2021.

6 Sarah Hansen. Forbes. May 15, 2021. “Could Covid-19 Worker Shortages Create A $15 Minimum Wage—Even Without A New Law?” https://www.forbes.com/sites/sarahhansen/2021/05/15/could-covid-19-worker-shortages-create-a-15-minimum-wage-even-without-a-new-law/?sh=1ae0db234929. Accessed June 11, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

6/21-1693051C

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Retirement Withdrawal Strategies

By managewp on July 29, 2021 in

As hard as retirement saving and investing may seem, that’s the easy part. The real challenge is figuring out how to make your accumulated savings last throughout your and your spouse’s retirements. You need a strategy, and it’s best to have that strategy developed before retirement begins.

Because life expectancy is longer these days, many retirees need to maintain a growth component in their investment portfolio during retirement. That adds an extra challenge to your distribution strategy. The goals for drawing down funds include minimizing market risk to an equity allocation, coping with variable income that may be impacted by market returns, minimizing taxes, and supporting an increase in income needs associated with late-stage medical and long term care. It’s important to understand how these goals and needs interact to customize a retirement distribution strategy, and we can help you with that. Contact us to learn more.

Given that an investment portfolio may need to keep growing even after you retire, it’s important to consider “sequence of returns” risk. This basically means that if you retire around the time of a significant market decline, you can greatly deplete the principal from which you draw retirement income throughout the long term, subsequently having to reduce your retirement lifestyle or risk running out of money. To combat this risk, retirees should remain flexible. For example, continue to work past your planned retirement date if the market has a setback, or even re-enter the workforce post-retirement to help supplement your income and give investments time recover.1

Once you retire, you can set up a systematic withdrawal plan if you need to supplement your regular household income. If your retirement plan indicates you’ll need more money at different stages, consider the bucket strategy, wherein you allocate certain investments (“buckets”) for different stages so you have new assets to tap as you age. This strategy may also enable you to retain a more aggressive equity allocation in buckets you plan to tap later.2

To help minimize taxes in a retirement portfolio, alternatives could be to first withdraw from taxable assets (e.g., brokerage account), then tax-deferred plans (e.g., 401(k) and traditional IRA) and finally tax-free assets (e.g., Roth IRA). This approach gives your tax-advantaged accounts more time to grow tax-deferred. By planning to tap tax-free assets last, there’s a better chance of leaving tax-free income for your heirs.

However, it’s important to tailor your draw-down strategy for your personal circumstances, taking into account your retirement tax bracket. For example, a moderate-income household with multiple account types may want to draw a combination of tax-free, taxable and tax-deferred assets from the beginning to stay within a lower marginal tax bracket.3

It’s also important to consider the best time to start receiving Social Security benefits. Here, too, conventional wisdom recommends delaying as long as possible; preferably to age 70 for maximum accrual. Wayne Pfau, co-director of the New York Life Center for Retirement Income, would like to see the Social Security Administration extend the age to which additional delayed retirement credits (8% a year starting at full retirement age) accrue on benefits until age 72. This would be an effective way to encourage people to work longer and reward them for doing so. Even if they don’t work longer, investors can draw down income from their taxable accounts to reduce the value of their employer accounts and IRAs. Then, when they do begin drawing their larger Social Security benefit for life, they also benefit from lower required minimum distributions (RMD) to help them stay in a lower income tax bracket.4

The key is to customize a retirement distribution strategy for each household’s situation, taking into consideration factors such as health and life expectancy (of both spouses), retirement income needs, where assets are invested, tax bracket management and what assets are best positioned for an inheritance.

Content prepared by Kara Stefan Communications.

1 BlackRock. 2021. “Will my income last a lifetime?” https://www.blackrock.com/us/individual/insights/retirement-income. Accessed June 4, 2021.

2 Curtis V. Cloke. Retirement InSight and Trends. May 4, 2021. “Advanced Annuity and Tax Strategies for Retirement Income.” https://www.retirement-insight.com/advanced-annuity-and-tax-strategies-for-retirement-income/. Accessed June 4, 2021.

3 T. Rowe Price. February 2021. “How to Get More Out of Your Retirement Account Withdrawals.” https://www.troweprice.com/content/dam/iinvestor/resources/insights/pdfs/how-to-get-more-out-your-retirement-account-withdrawals.pdf. Accessed June 4, 2021.

4 Ginger Szala. ThinkAdvisor. May 6, 2021. “Wade Pfau Makes Case for Raising Top Social Security Claiming Age to 72.” https://www.thinkadvisor.com/2021/05/06/wade-pfau-makes-case-for-raising-top-social-security-claiming-age-to-72/. Accessed July 7, 2021.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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Demographics differing on retirement plans

By managewp on July 21, 2021 in

According to PwC’s recent Retirement in America report, the median retirement savings among people ages 55 to 64 is $120,000. Unfortunately, that likely would provide less than $1,000 per month for a retiree, for only 15 years.1

There’s an interesting dichotomy among demographics when it comes to retirement planning these days. There are those who believe they will work beyond age 70, or even never retire. Some believe they’ll need to keep working for financial reasons, while others simply want to stay engaged.2 But then there’s another cohort (one-third of workers younger than 54) who aspire to retire by age 55, according to a 2020 survey by the research firm Hearts & Wallets.3

Clearly, the pandemic affected some households’ financial situation more than others. But the primary way to successfully fund retirement is to have a plan, and those who want to retire early generally do. Those who think they’ll never be able to stop working may have either failed to plan adequately or circumstances conspired to send those plans awry. Wherever you are in your planning stage, it never hurts to get advice. We’d be happy to review your current finances — and your retirement plan if you already have one — to either get you on track or ensure you’re still on the right path to retiring when and how you want.

Bear in mind that approximately 40 million people do not have the advantage of investing in an employer-sponsored retirement plan because they work for a small business. There appears to be a growing trend to address this situation, as multi-employer and pooled-employer plans (MEP/ PEP) are starting to come on board. These plans are designed to allow small employers to share investment and administrative costs.4

A 2019 survey of retirement plan participants by American Century Investments found that the number one regret among retirees was not saving enough money for retirement. Not saving enough could lead to working longer than you wanted or scaling back to a lower-cost retirement lifestyle.5

For current retirees or those expecting to retire soon, recognize that the recent rise in inflation is not without its advantages. For example, in April the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased to 4.7% over 12 months ago. This inflation measure is the one that Social Security uses to make annual cost of living adjustments (COLA) to benefits — which means the next COLA increase could reflect that 4.7% increase next year. For context, Social Security benefits rose by only 1.3% in 2021. The actual adjustment will be calculated later this year based on how inflation continues to perform, with the final determination generally announced after the third quarter.6

Content prepared by Kara Stefan Communications.

1 PwC. 2021. “Retirement in America: Time to rethink and retool.” https://www.pwc.com/us/en/industries/asset-wealth-management/library/retirement-in-america.html. Accessed June 15, 2021.

2 American Advisors Group. May 6, 2021. “Nearly One in Three Seniors Plan to Work Past 70 or Never Retire, According to AAG Survey.” https://www.prnewswire.com/news-releases/nearly-one-in-three-seniors-plan-to-work-past-70-or-never-retire-according-to-aag-survey-301285256.html. Accessed May 31, 2021.

3 Hearts & Wallets. March 16, 2021. “Retirement Resurgence: Americans Who ‘Aspire to Retire by 55;’ Anticipation of Increasing Number of Income Sources.” https://www.heartsandwallets.com/docs/press/press_release_2021-03-16_Retirement_Resurgence_Americans_Who_Aspire_to_Retire_by_55_Goal_More_Income_Sources.pdf. Accessed June 15, 2021.

4 Stephen Miller, CEBS. Nov. 16, 2020. “DOL Final Rule Paves the Way for 2021 Launch of Pooled 401(k) Plans.” https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/dol-final-rule-paves-way-for-2021-launch-of-pooled-401k-plans.aspx. Accessed June 29, 2021.

5 Brian Mayfield. American Century Investments. 2021. “4 Reasons to Rethink Cashing Out Your Retirement.” https://www.americancentury.com/content/direct/en/insights/guidance-planning/retirement/saving-for-retirement/rollover-options/cashing-out-retirement-401k-ira-four-considerations.html. Accessed May 31, 2021.

6 David Payne. Kiplinger. June 28, 2021. “What is the Social Security COLA?” https://www.kiplinger.com/article/retirement/t051-c000-s010-what-is-the-social-security-cola.html. Accessed June 29, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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All About RMDs

By managewp on July 13, 2021 in

There really is a purpose behind required minimum distributions (RMD) of tax-advantaged retirement accounts. IRAs and employer-sponsored retirement plans feature tax-deferred income contributions and earnings growth throughout the lifetime of the account. There’s just one catch — when you take money out of that account, it then gets taxed at ordinary income tax rates. Some retirees use that money to pay for their expenses, but others may not need it and would rather let it continue growing, untaxed, and then leave it to heirs.

That means that retirees who need the money are taxed and those who don’t could avoid the tax. Those tax revenues are used to fund government programs, but we are fortunate to have decades of a tax reprieve so gains can accumulate faster.

Retirement investing, and RMDs in particular, can be rather confusing. But just because something is difficult — and ever changing — doesn’t mean we shouldn’t take advantage of the options available. Quite the opposite — tax-deferred investing is a way to optimize the accumulation of wealth, so it’s worth the time and effort to understand how these accounts work.

You can tap the advice of a financial professional to help you manage your retirement accounts, even those that fall under an employer plan. After all, your employer isn’t going to help you manage the rest of your portfolio, so feel free to call us if you have questions about your tax-advantaged accounts and their distribution options.

In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, with several changes regarding RMDs. Prior to the legislation, retirement account owners had to start RMDs at age 70½; the law increased that age to 72 for anyone born after June 30, 1949. Those with a traditional IRA must take their first RMD by April 1 of the year after which they turn age 72, even if they haven’t retired yet. Each year thereafter, they must take an RMD by Dec. 31. Investors with multiple IRAs must calculate the appropriate RMD for each one, but they can take that total amount from just one of the accounts they own. That’s easier to do with traditional IRAs than with multiple prior employer retirement accounts, which require contacting former employers to calculate and send the distributions.1

There is a penalty for not taking the appropriate RMD: The account owner must pay a 50% excise tax on the amount not distributed each year. Also note that you cannot withdraw a couple’s total RMD from just one spouse’s account or a different type of qualified account.2

The rules for an inherited IRA can be confusing, and they also changed with the recent SECURE Act. Specifically, it is now prohibited for a non-spouse IRA beneficiary to “stretch” out taxable distributions throughout his life expectancy. Starting in January 2020, the named beneficiary is required to withdraw all funds within 10 years of inheriting the account. However, unlike before, the heir can wait the full 10 years before taking distributions, meaning there are no RMDs each year.3

The inherited IRA rules didn’t change for a spouse who inherits a wife’s or husband’s IRA upon death. She also has more options for withdrawals, such as the ability to designate herself as the new account owner, roll it over to her existing IRA or take distributions as a beneficiary.

Be aware that these distribution rules do not apply to a Roth IRA, either directly owned or inherited. Since the Roth is funded with already-taxed income, withdrawals are tax-free in retirement — even the gains accrued over time. The only caveat is that the owner (or original owner, if inherited) must have owned the account for at least five years (the clock starts on Jan. 1 of the year of the first contribution). Contributions withdrawn before that five-year holding period may be taken tax free, but any withdrawn interest is taxable.4

Annuities also benefit from tax-deferred growth, but the account owner takes RMDs only if it is classified as a qualified annuity, meaning that it was funded with pre-tax money. Non-qualified annuity contracts are funded with after-tax income and feature tax-deferred earnings, so they do not mandate RMDs and are taxed upon distribution.5

Content prepared by Kara Stefan Communications.

1 Judith Ward. T. Rowe Price. May 11, 2021. “Five Important Things You Should Know About RMDs.” https://www.troweprice.com/personal-investing/resources/insights/five-things-you-should-know-about-rmds.html. Accessed May 21, 2021.

2 Denise Appleby. Investopedia. April 21, 2020. “Required Minimum Distributions: Avoid These 4 Mistakes.” https://www.investopedia.com/articles/retirement/04/120604.asp. Accessed May 21, 2021.

3 Fidelity. June 1, 2020. “SECURE Act rewrites the rules on stretch IRAs.” https://www.fidelity.com/learning-center/personal-finance/retirement/secure-act-inherited-iras. Accessed May 21, 2021.

4 Barbara Weltman. Investopedia. Feb. 15, 2021. “The Rules on RMDs for Inherited IRA Beneficiaries.” https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp. Accessed May 21, 2021.

5 FINRA. 2021. “Required Minimum Distributions—Common Questions About IRA Accounts.” https://www.finra.org/investors/learn-to-invest/types-investments/retirement/rmds-questions-about-ira-accounts. Accessed May 21, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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How Infrastructure Spending Affects Municipal Bonds

By managewp on July 6, 2021 in

According to the American Society of Civil Engineers, the 10-year tab to meet the country’s basic infrastructure needs is about $6 trillion. The report, published in March, includes $125 billion needed for bridge repairs, $435 billion for roads and $176 billion for the nation’s transportation systems.1

For more than 200 years, municipal bonds have been used as public financing instruments in the U.S. Today, two-thirds of infrastructure projects such as schools, hospitals, highways and airports are financed by municipal bonds.2

In addition to providing revenue for infrastructure projects, muni bonds offer an attractive investment opportunity. They provide tax-advantaged yields for current income, stable credit quality and a risk-averse allocation for an investment portfolio. One way to diversify municipal bond investments is through a municipal bond fund or ETF. Given the potential for increased interest and investment in infrastructure in the foreseeable future, we’re happy to discuss opportunities suitable for your portfolio. Give us a call if you’d like to learn more.

President Joe Biden recently proposed a $2.3 trillion plan to invest in the nation’s infrastructure. One funding option Congress may consider is the Build America Bonds (BAB) program, which was introduced during the Great Recession as a means to fund recovery efforts through infrastructure repairs and development. BABs were originally structured for states, cities, schools, airports, mass transit agencies and other public entities to sell for a limited time. They were particularly attractive because the federal government kicked in 35% of interest costs.3

Stimulus packages over the past year have benefited the municipal market by making funds available to state and local governments to make up for lost sales tax revenues due to lockdowns and the beleaguered economy.5 Now, with more revenue available, local public agencies may be inclined to issue debt for capital purposes.

Bonds backed by states and cities tend to have high credit ratings and low default risk, and the federal government underwriting municipal debt makes them even more attractive. Historically, muni bonds have offered rates as high as 7% or more.6 Furthermore, given the potential that an expensive infrastructure bill may be supported by an increase in income tax rates, municipal bonds offer an opportunity for investors to shield income from taxation.7

Content prepared by Kara Stefan Communications.

1 Thomas Franck. CNBC. March 26, 2021. “Build America Bonds may be key to financing Biden’s infrastructure plans.” https://www.cnbc.com/2021/03/26/build-america-bonds-may-be-key-to-financing-bidens-infrastructure-plans.html. Accessed May 5, 2021.

2 Jenna Ross. Visual Capitalist. Nov. 4, 2019. “From Coast to Coast: How U.S. Muni Bonds Help Build the Nation.” https://www.visualcapitalist.com/municipal-bonds-build-nation/. May 5, 2021.

3 Karen Pierog. Reuters. March 31, 2021. “Build America Bonds may stage a comeback in Biden’s infrastructure plan.” https://www.reuters.com/article/usa-biden-infrastructure-bonds/build-america-bonds-may-stage-a-comeback-in-bidens-infrastructure-plan-idUSL1N2LR1UZ. Accessed May 5, 2021.

5 Sanghamitra Saha. Nasdaq. April 7, 2021. “4 Factors Why Muni Bond ETFs Could Rally.” https://www.nasdaq.com/articles/4-factors-why-muni-bond-etfs-could-rally-2021-04-07. Accessed May 5, 2021.

6 Ibid.

7 Franklin Templeton. March 18, 2021. “Stimulus and Infrastructure: Boon for Muni Bonds?” https://www.franklintempleton.com/investor/tools-and-resources/investor-education/talking-markets-podcast/stimulus-and-infrastructure-boon-for-muni-bonds. Accessed May 5, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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Tax Strategies

By managewp on June 29, 2021 in

In an effort to pay for new legislation, the Biden administration has proposed higher taxes for the nation’s highest earners. The president advocates returning the top tax rate to 39.6% for individuals earning $452,700 or more, and married couples with more than $509,300 in combined taxable income.1

This top tax rate was just reduced in 2017 (to the current 37%), which emphasizes a very important point: Tax rates are going to rise and fall. While it may be prudent to make adjustments to income, investments, deductions and other tax strategies in response to changes, it’s always important to do what’s best for your circumstances. Making adjustments every few years could end up derailing your long-term goals. Before making any changes based on proposed or even enacted tax laws, be sure to consult with experienced financial and tax professionals to develop a sound strategy that works for the long haul. Feel free to call us if you’d like to discuss tax strategies.

With that in mind, there are tactics you can use to help minimize your tax obligations and still remain aligned with your goals. For example, if you are currently retired and regularly make charitable contributions, you can use your required minimum distributions (RMD) to donate directly from your IRA account. Those assets would no longer be reported as income, so you would not have to pay taxes on them. It’s a way to continue your charitable goals but minimize your taxes.2

Another asset that could be targeted for higher taxes is an inherited home. Today, heirs enjoy a step-up in basis, which means the home’s cost basis is adjusted to market value at the time of the owner’s death. If the heir sells the home immediately, he or she will owe no capital gains tax. Also, heirs can defer paying taxes on that value until they actually sell the home. However, Biden’s proposed inheritance tax would remove the step-up and tax capital gains upon the death of the parent, as if the home was sold. The current proposal includes tax exemptions up to $1 million for single heirs and up to $2.5 million for couples.

That may sound like a lot, but the heirs may have to sell the property if they don’t have ready cash to pay the gains tax. For example, say a son inherits his parents’ home. It was originally purchased for $300,000 and is valued at $1.5 million when he inherits it. Under the Biden proposal, he can subtract both the original cost ($300,000) and the exclusion rate ($1 million), but that still leaves $200,000 on which he would owe capital gains taxes.3

Another tax strategy being pursued by this administration is to collect taxes legally owed that are not currently being collected. According to the IRS, that’s about $1 trillion a year based on analysis from 2011 to 2013. However, between the proliferation of virtual currencies and the impressive growth in billionaire wealth just over the past year, the amount of uncollected tax revenues could be a lot higher than that now. In fact, IRS analysis has found that illegal and foreign-sourced income that is not currently being reported would yield an additional $175 billion in tax revenues from America’s wealthiest households. In an effort to avoid raising taxes on middle and lower-income households, Biden has proposed a 10.4% increase in IRS funding to help enforce tax laws already on the books.4

Content prepared by Kara Stefan Communications.

1 Kate Duffy. Business Insider. April 29, 2021. “Biden’s tax hike will hit married couples earning more than $510,000 combined, report says.” https://www.businessinsider.com/joe-biden-tax-rise-hits-married-couples-earn-less-400000-2021-4. Accessed May 3, 2021.

2 Steven A. Morelli. Insurance News Net. April 9, 2021. “Advisors Dealing With A Flood Of Tax Anxiety.” https://insurancenewsnet.com/innarticle/advisors-dealing-with-a-flood-of-tax-anxiety. Accessed May 3, 2021.

3 Kate Dore. CNBC. April 29, 2021. “Biden’s plan for inherited real estate may impact more people than just the wealthy.” https://www.cnbc.com/2021/04/29/bidens-tax-plan-for-inherited-homes-may-impact-more-than-the-wealthy.html?recirc=taboolainternal. Accessed May 3, 2021.

4 Aaron Lorenzo. Politico. April 13, 2021. “IRS chief says some $1T in taxes going uncollected annually.” https://www.politico.com/news/2021/04/13/irs-one-trillion-taxes-uncollected-annually-481128. Accessed May 3, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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