Trinity Legacy Partners, LLC

The Type of Financial Planning Can Make a Big Difference

Mon, 14 Sep 2020 19:46:00 GMT

When seeking assistance in creating a financial or retirement plan, it is essential to understand the differences between goal-based financial planning and planning that relies on detailed cash-flow projections. The type of financial planning provided by advisors typically depends on the software they use, and the results of their analysis and recommendations can vary. Two of the most popular financial planning softwares used by advisors are MoneyGuidePro and eMoney Advisor. The former is goal-based software, and the latter uses a cash-flow based approach. This article will explain the critical differences between the two approaches to financial planning and identify situations that can benefit from a cash-flow based process.

Goal-Based Planning

Advisors often prefer goal-based planning as it is simple to use and less time consuming to prepare financial planning recommendations. Goal-based planning identifies essential goals and guides a financial advisor on the optimal strategy to achieve those goals. The process requires clients to share details on their financial resources, personal situation, and critical financial goals, such as early retirement.

Evaluating a limited number of goals is an ideal situation for using goal-based financial planning. Clients share the age they plan to retire and how much they want to spend annually during retirement. The advisor would use the software to identify how much the client should be saving to achieve the goal and the appropriate asset allocation to achieve that goal.

Goal-based planning may be best suitable for someone who:

Goal-based planning can provide recommendations to help you achieve common financial goals; however, the limitations of this approach can make it challenging to evaluate more complex situations and develop recommendations that consider various factors. Additionally, goal-based planning may not be ideal for individuals with multiple and interdependent financial goals.

Goal-based financial planning software can be ideal for addressing simple goals like retirement planning, saving for college, or the amount of life or long-term care insurance that is needed. Goal-based planning is often used by financial advisors selling products such as annuities or life insurance policies. The ease of use explains its popularity among fee-based and commission-based financial advisors.

Cash-Flow Planning

Cash-flow planning takes a client’s current situation and uses projections to calculate where they may be financially in the future. In other words, the client and advisor can explore possible alternatives to achieve one or more financial goals to determine the most tax-efficient strategy. This method is much more intensive and requires extra work and information gathering on the front end for both the advisor and the client.

Unlike goal-based planning, a cash flow approach breaks out deductible expenses such as mortgage interest, qualified medical costs, and property taxes to better account for expected income taxes. Cash flow planning also categorizes the different income as earned or capital gains for tax projections. Doing so accounts for a more detailed approach than its counterpart, goal-based planning. This method is thorough and considers numerous factors such as investment allocation, inflation, the timing of expenses, and calculating expected taxes.

Not only will a client receive information on whether they are on track to reach their goal, but cash flow planning also calculates detailed projections on how they arrived there. This method recognizes that some goals are equally important and can run simulations accordingly, such as funding college expenses, retirement, and leaving a legacy to heirs. Cash flow planning includes an incredible amount of detail, and reports can be very comprehensive when projecting assets, taxes, and expenses in any given year. While this can be too much information for some, it is precisely what other people are seeking.

You do not need to have a specific goal when you meet with an advisor using cash flow planning. You may be curious to see where you will be in five years if you continue investing and saving, and where you will be in another 15 years after that. You may be curious as to how much your Required Minimum Distributions will be from your Traditional IRA in retirement and if it would be beneficial to do conversions into a Roth IRA. The answer to this is straightforward when using cash flow projections.

Examples of scenarios where it may be beneficial to seek out an advisor using cash-flow planning would be if you:

Conclusion

Although cash flow and goal-based planning are very different approaches, both methods can provide useful information to help you achieve important financial goals. Goal-based planning can help you find the ball-park such as attaining a retirement goal, and cash-flow based planning can help you get to home-plate by providing a more precise approach which considers income tax and other factors.

It is important to remember that financial planning software is a tool and not the answer. In the hands of an experienced and capable financial planner, the software can help the advisor evaluate and develop recommendations that consider the multitude of variables that can impact success. At Trinity Legacy partners, we use cash flow planning with our clients because we believe it is a more comprehensive and collaborative tool to meet all clients’ needs.

How to Start Investing

Thu, 23 Jul 2020 16:45:00 GMT

Investing can seem daunting and overwhelming. Schools and colleges rarely offer classes on investing if you are not a business major, so it can be difficult to deposit your hard earned money into an investment account and have the confidence to endure the market fluctuations.

One way to begin learning about investing is by reading books and research from various reputable sources. In addition to reading books on the subject, the experience gained from investing small amounts can also be an excellent way to augment your learning. The good thing to remember is that it is never too late to start investing. However, the earlier, the better!

No matter how old you are, there are numerous questions a new investor may have – starting with “where to invest?” and “how much?”. The purpose of this article is to walk you through the essential steps to become an investor and answer some questions that you may have.

Where to begin: You can start by opening a brokerage (taxable investment) account and a retirement account with a discount brokerage firm. You can open an account online and transfer money into it without even speaking to a person. Also, if available, contributing to a 401(k) or other workplace retirement plan is highly encouraged and a great way to begin investing.

Initial investment: There is usually a low minimum to open an account, and it is essential to recognize that investment choices for smaller amounts may be limited. The old saying “don’t place all your eggs in one basket” applies to investments, and you should consider a diversified mutual fund or funds to get started.

In addition to mutual funds, exchange-traded funds (also referred to as ETFs) can offer the diversification benefits of mutual funds with the ability to invest a smaller amount than most mutual funds, which may have minimums of $500-$5,000. You should avoid investing funds that you may need in the near term, and be patient as an investor.

Target investment amount: A good rule of thumb is to have at least 3 to 6 months of living expenses in a savings account as an emergency fund before investing. Anything excess of that cash and any other short-term needs would be suitable to invest. There are no limits on how much you can invest in a brokerage account. However, for a retirement account, there are annual contribution limits.

Investment choices: This decision depends on several factors and is unique for every person based on your risk tolerance, time horizon, goals, etc. It is essential to educate yourself before blindly choosing investments from the many options ranging from the stocks of individual companies, mutual funds, ETFs, and various types of bonds.

Although mutual funds provide diversification, they charge fees to cover operating costs, as well as investment management fees for actively managed funds, and many include marketing expenses. Some mutual funds which are sold by many financial advisors include deferred sales charges that represent an additional cost if you sell shares within three years of purchasing the fund. No-load mutual funds and ETFs can be a good place to begin investing since they offer the opportunity to invest smaller amounts while maintaining diversification.

As you accumulate more money and experience, you can consider individual stocks if you’re willing to spend the time to do the necessary research and monitor the stocks you own. Reading finance books, doing some research, and getting a Barron’s or Wall Street Journal subscription are all viable options on how to gain investing insight. If you have sufficient experience and time to do the research to own individual stocks, it is crucial to diversify your holdings at least 20-30 different companies across a variety of industries.

Know your risk tolerance: While it is possible to mitigate the risks of investing by doing your homework and diversifying your investments, knowing your risk tolerance is essential. Financial markets are subject to significant swings in market value, and you need to know how much you are willing to potentially lose, and then choose an allocation that best suits your risk tolerance.

Typically, the market value of government and investment-grade bonds do not fluctuate as much as stocks; however, they do not have the potential to grow as stocks do. Stocks can significantly vary in risk depending on the size of the company, the industry it’s in, and other factors. It is best to choose an appropriate blend between stocks and bonds.

When to buy/sell: Dollar-cost averaging is an investing practice where an investor contributes the same amount of money every period regardless of fluctuations in the financial markets. Over time, following a dollar-cost averaging strategy can provide favorable outcomes compared to trying to invest based on “market timing.” If not impossible, it is challenging to time the market correctly, and market timers tend to miss the ride up because they are too busy waiting for the bottom. Dollar-cost averaging provides a consistent and straightforward rule for an investor to follow.

When determining when to sell in a taxable account, you must remember that you will owe taxes on transactions where you made a profit. Investment gains within a year of purchase are short term gains and taxed at your ordinary-income tax rate, whereas shares held over a year are long term and taxed at a preferred rate called capital gains tax rate.

Behavioral Finance: One of the biggest challenges in investing is human psychology. People tend to follow the herd, have biases, and use emotions when investing. The industry calls this “behavioral finance”. It is key to try to always think rationally and use facts when making investment decisions. Keep in mind that day-to-day fluctuations should not matter (unless you are a day-trader), and regardless what the current market value is, you do not lose money until you sell a position at a loss.

Hiring a financial advisor: This is a personal decision. Investing may seem overwhelming initially, but there are plenty of resources out there that may transform you into a much more confident investor. People often do not have the passion or time for investing their own money, which may be a good indication of whether you should hire someone. Please refer to an article we previously published on Fiduciaries and why it is essential to hire an advisor with your best interest in mind.

Good luck with your investing journey. Please remember that the market values of equities and other securities change every day, and investment gains are not guaranteed.

Disclaimer: The information contained in this article is for educational purposes only. This article’s material should not be used as the primary basis for investment decisions or construed as advice in meeting the particular needs of any investor. Please note that investing involves risk, including a risk of loss, and past performance does not guarantee future results.

Early Retirement and Healthcare

Thu, 18 Jun 2020 19:30:00 GMT

Early retirement is a common financial goal that requires careful consideration of covering healthcare expenses before age 65 when Medicare eligibility typically begins.

The cost of a severe illness or accident can devastate a retirement nest egg without adequate health insurance coverage. Health insurance premiums have increased significantly since the passage of the Affordable Care Act and many people planning to retire early have not considered the financial impact of this higher cost in determining a retirement budget. Additionally, many coverage options are no longer available on the insurance exchange, as insurance companies have withdrawn or significantly limited their offerings.

Addressing healthcare in retirement should be an essential component of financial planning to increase the likelihood of success and provide needed peace of mind during retirement. While it can be a daunting task to address healthcare coverage options, this article identifies several options for covering healthcare costs before age 65 and potential planning strategies to mitigate expenses before Medicare eligibility.

COBRA Coverage

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is a federal law that, among other things, mandates that health insurance provided by an employer offers employees the ability to continue health insurance coverage after leaving employment. COBRA allows employees and the employee’s immediate family members covered by a health care plan to maintain their coverage if a “qualifying event” causes them to lose coverage.

An eligible employer is generally an entity with 20 or more full-time-equivalent employees and “qualifying events” include loss of coverage due to:

In most cases, COBRA allows for coverage for up to 18 months. If an individual is deemed disabled by the Social Security Administration, coverage may continue for up to 29 months. In the case of divorce from the former employee, the former spouse’s coverage may continue for up to 36 months. In the case of the death of the former employee, the widow’s coverage may continue for up to 36 months.

After termination of employment, eligible individuals have up to 60-days to elect COBRA coverage. COBRA will usually be the least costly health insurance coverage compared to available policies on the exchange. The law requires that premiums cannot exceed the cost to employers for covering active employees.

Depending on the type of insurance and state of residence, it may be possible to extend COBRA beyond the initial 18-month period. Each state regulates health and other forms of insurance, so it is essential to understand the regulations in your state. Texas COBRA continuation coverage can provide up to six additional months of coverage after COBRA ends; however, this extra coverage only applies to group health benefit plans issued by insurance companies and HMOs subject to the Texas Insurance Code. The Texas COBRA continuation coverage does not apply to employer self-funded (ERISA) health care plans as they are exempt from state insurance laws (source: Texas Department of Insurance).

Health Insurance Exchange

Purchasing health insurance coverage through Healthcare.gov can be expensive, and available coverage options have decreased significantly since the passage of the Affordable Care Act.

While expensive, this health insurance resource may be the only option for coverage for individuals considering early retirement, and depending on your retirement income level, individuals may qualify for subsidies, which can reduce the premiums paid.

Health coverage is available at reduced or no cost for people with incomes below certain levels. In states that have expanded Medicaid coverage, the household income must be below 138% of the federal poverty level to qualify for subsidies. In all states, household income must be between 100% and 400% of the federal poverty level to be eligible for a premium tax credit that can lower your insurance costs. The number of people living in a household is the basis for determining the federal poverty level, and the income threshold for a couple would be $17,240 in 2020.

A health insurance subsidy calculator is available at www.healthcare.gov/lower-costs/qualifying-for-lower-costs/ to estimate the potential subsidy based on income level. A potential way to lower health insurance premiums is to select a high deductible plan and combine it with a Health Savings Account (HAS) described in the following section.

Health Savings Account

Health Savings Accounts (HSA) provide a tax-efficient way to pay for health care expenses as tax-deductible contributions and withdrawals are tax-free if used for qualified medical expenses.

The central requirement for HSA participation is enrollment in a qualifying high-deductible health plan. For 2020, it refers to a health insurance plan with a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. For 2020, consumers can contribute up to $3,550 for self-only and $7,100 for families. Individuals age 55 or older can contribute an additional $1,000 per year as an annual “catch-up” contribution.

Once eligible for Medicare, individuals are not allowed to contribute to an HSA; therefore, those planning to retire before age 65 should consider starting an HSA early and investing the balance to benefit from the potential tax-free or tax-deferred growth.

Withdrawals for non-qualified medical expenses are considered ordinary income for tax purposes; however, an HSA can augment an IRA with the added benefit of not being subject to required minimum distributions (RMDs) beginning at age 72. The flexibility and tax benefits of an HSA makes it an attractive planning strategy for individuals who would like to retire early.

Employer Retirement Health Insurance

Many employers offer retiree health insurance benefits for employees who meet specific requirements, usually based on age and years of service. As an example, benefits may be available to retirees based on a “Rule of 75”, which means eligibility requires age plus years of service to equal at least 75 with a minimum age of 50.

While the retiree is typically required to pay premiums that are not subsidized by the employer, the cost would likely be less than purchasing insurance through the exchange. The retiree can defer opting in for coverage until it is needed. It is crucial to review retiree health insurance benefits before retirement to understand the coverage benefits.

The retiree benefit may be limited to supplemental coverage to Medicare, and those married to a younger spouse needing coverage should make sure that retirement healthcare coverage will extend to them before Medicare eligibility.

Conclusion

Managing Your Cash

Thu, 21 May 2020 20:51:00 GMT

You may have recently received an inheritance or annual bonus at work and now have a little extra money in the bank, and are wondering what to do with it. Consider having cash an excellent “problem” to have, and be aware of the possible options for holding cash besides a savings account.

First, you should identify your short-term needs and financial goals. Some people may be saving for a down payment on a house or building their emergency fund. For specific purposes like these, accessibility and liquidity can be the most important things to consider when determining where to store your cash. Still, the yield or interest rate you earn on the money can also be a factor, so it is helpful to understand how the different factors impact where to place your cash.

Based on these considerations, you should determine which of the available options would work best for your situation. Below is a list of some possible choices for managing your cash.

Checking Account : a deposit account which typically allows unlimited withdrawals and deposits while offering the convenience of accessing funds using checks, ATMs, debit cards, and electronic payment apps such as Venmo. This type of account is suitable for immediate cash needs and frequent transactions; however, checking accounts typically offer the lowest yield of various options for holding cash.

Savings Account : a deposit account that usually earns a higher yield than a checking account; however, the number of monthly transfers and withdrawals may be subject to strict limitations. This type of account can be a good option for emergency savings or “rainy day fund”. Financial planning professionals typically suggest keeping six months of required living expenses in cash, preferably in a savings account because of its accessibility.

High Yield Savings Account : many online banks offer interest rates that can be significantly higher than comparable savings account from a “brick and mortar” bank. A typical downside of using an online bank is not having the convenience of having money at the same institution as your checking account. Online accounts typically do not offer checks or debit cards; however, an online savings account can be linked to a checking account at another bank to transfer funds between accounts. This type of account is suitable for cash that will not be needed in the next six months or longer to accumulate the additional interest that you would not get if it were in a typical savings account. Uses could include saving for a down payment on a house or car.

Certificate of Deposit (CD) : a deposit that is different from a savings account because it has a fixed term and interest rate. Usually, longer CD maturities have a higher interest rate, and you can forfeit some of the interest as a penalty if you withdraw money before the end of the CD term. After opening a CD, you usually cannot make additional deposits into that CD; therefore, it is common to ladder the CDs, meaning you purchase CDs with varying maturities. This type of account is suitable for planned purchases or payments (such as a large payment that you are expecting in six months) for people who have excess cash reserves on top of their “rainy day fund”. CDs can be a place to set aside money that you do not want to touch until a defined future date, as it accrues interest and can offer a way to mitigate potential volatility risk of other investments.

Money Market Account: similar to savings accounts; however, money market accounts usually pay higher interest and allow checks and debit cards. They are more restrictive than a typical savings account and typically require a minimum account balance, limited transactions, and fees. This type of account is suitable for someone who can meet the minimum balance requirements and prefers more yield without the restrictions of a CD.

Money Market Mutual Fund : a mutual fund that usually invests in highly liquid, short-term investments such as US Treasury bills and commercial paper that have a high credit rating. These funds can offer high liquidity with a low level of risk based on the type of underlying securities held in the fund. It is essential to understand that Money Market Mutual Funds are not FDIC insured. This type of account is suitable for temporarily parking cash, and as a holding position in an investment account before investing elsewhere. Money market mutual funds can offer the opportunity to earn a small yield while waiting for new investment opportunities to arise. Keeping extra cash accessible can be beneficial when the economy may be approaching a downturn by providing stability during those times and a source of funds for opportunistic investments without having to sell other investments.

Short-Term Bonds : bonds with maturities ranging from a few months to five years. You can choose between US Treasuries, municipal, and corporate bonds. The US government issues Treasury notes, so they do not have the potential default risk that corporate bonds do. It is important to note that the market value of fixed-rate bonds will vary as interest rates change, meaning if interest rates go up, the current market price will fall. Since short-term bonds can fluctuate in value more than other cash alternatives, you should consider owning these bonds until maturity. If you have more than $250,000 in cash (the FDIC coverage limit for deposit accounts), you may want to consider US T-bills because they are considered the safest of all investments. Municipal bonds are attractive to high-income earners as the interest is not subject to federal income tax.

Short-Term Bond Fund: a mutual fund that pools together investors’ money to buy various bonds to diversify the credit risk found in investing in one company or municipality. Since mutual funds have expenses paid by the fund, it reduces the income the investor will receive compared to owning individual bonds. This type of account is suitable for those seeking long-term income with the liquidity that individual bonds do not provide.

Conclusion

Not only should you determine which combination of the previously mentioned cash accounts aligns best with your needs and goals, but you also need to decide what the right amount of cash is for you when looking at your overall portfolio. Keep in mind that holding large amounts in cash typically loses the race against inflation and misses out on the potential gains that the stock market offers. If you need guidance with your financial situation and choosing a blend of cash and investments that work best for you, reach out to a qualified financial professional who can help.

Disclosure: The information provided in this article is for general educational purposes and not intended to represent tax, legal, or accounting advice. Individuals should discuss their unique circumstances with qualified professionals in these areas before making any decisions.

What to Do Upon Death of a Family Member

Fri, 28 Feb 2020 20:55:00 GMT

In addition to coping with the grief of losing a loved one, family members are often responsible for the various financial and administrative tasks that must be done on behalf of the deceased. Death of a loved one can be overwhelming and may result in family members spending months digging through drawers and file cabinets trying to locate important documents and waiting for statements and bills to be received in order to figure out what’s going on.

The following checklist provides a summary of what to do upon the death of a family member, followed by recommendations to alleviate this burden for your loved ones in the future. Some of these tasks are the responsibility of the executor of the decedent’s estate, so if that is not you, then it may be helpful to pass the information along and help with the items that you can.

Prior to death

Immediately after the death

Within a few days after the death

Within a few weeks after the death

Organizing Important Documents

With some careful planning and organization, families can relieve loved ones of facing this future burden by helping your family easily settle your estate, pay required taxes, and quickly receive the benefits they need.

Creating a binder of essential information and documents and letting key family members know where they can find this information is an essential part of financial planning. Organizing this information and storing it in a safe place can also be helpful in the event of an emergency. The financial planning documents should be reviewed annually to ensure that it is up to date and includes the essential information and documents that your family would need in the event of a death or emergency.

Disclaimer: This information is provided for educational purposes and is not intended to be legal or tax advice.

The SECURE Act of 2019 and its Impact on Retirement Accounts

Fri, 24 Jan 2020 16:23:00 GMT

President Trump recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 which is the first major retirement regulation in over a decade. Intended to strengthen retirement security for Americans, the bill includes changes to traditional IRAs, required minimum distributions, and more. We at Trinity Legacy Partners want to make you aware of key changes to the rules governing retirement accounts resulting from the SECURE Act and highlight several planning strategies that should be considered.

The new regulations offer additional flexibility for retirement account owners; however, it also limits the ability of non-spouse beneficiaries (i.e. children who inherit IRAs) to stretch required minimum distributions from inherited IRAs over their lifetime. This change in the IRA stretch provisions for inherited IRAs is particularly important for individuals who name a qualified trust as a beneficiary of their retirement account as part of their estate plan.

It is important to comply with rules governing RMDs since there is a 50% penalty on failure to take the required distribution amount. The following chart provides a comparison of key rules impacted by the SECURE Act.

Source: https://www.congress.gov/bill/116th-congress/house-bill/1994

IRA owners who named a qualified trust as an IRA beneficiary in order to control the timing of distributions of IRA assets to the trust beneficiary should review this planning strategy since the SECURE Act requires distribution of IRA assets within 10-years. Beneficiary designations should be coordinated with the planning provided by a qualified estate planning attorney.

Since distributions from a traditional IRA are taxed as ordinary income, this type of account represents an ideal asset to pass to a qualified charity for individuals who are charitably inclined. Additionally, IRA owners who want to pass IRA assets to a charity and family members may want to consider the use of a charitable remainder trust (CRT) as an IRA beneficiary. This planning strategy offers the option to extend distributions to the CRT’s income beneficiary beyond the 10-year limit imposed by the SECURE Act and also benefit a qualified charity with the remaining assets at the end of the trust term.

The SECURE Act did not change the rules governing qualified charitable distributions (“QCDs”), and individuals can still make QCDs of up to $100,000 per year to qualified charities beginning at age 70 ½. It should be noted that tax benefits of a QCD will be reduced by any tax-deductible contributions to a traditional IRA after age 70 ½ which is now available under the SECURE Act.

Please note that the information contained in this article is for educational purposes only and is not intended as tax or legal advice. Individuals should consider scheduling a meeting to discuss the potential implications of the SECURE Act as applied to their unique situation.

Social Security

Tue, 27 Aug 2019 18:52:00 GMT

According to the National Social Security Association LLC, more than 90% of Social Security recipients receive less money than they are entitled to. Failure to maximize Social Security Benefits can represent tens of thousands, or even hundreds of thousands, of dollars in lost retirement benefits; however, the rules governing Social Security income are complex and require careful consideration of available options and the individual’s personal situation.

Ways to Maximize Social Security Benefits

The following list summarizes the various ways to potentially maximize Social Security retirement benefits; however, identifying the optimal strategy should include an analysis that considers a person’s health, marital status, estimated benefits, and other financial resources.

Important Considerations

It is important to consider the following provisions of Social Security when deciding the optimal filing strategy to maximize lifetime benefits.

Conclusion

Disclosure: The information provided in this article is for general educational purposes and is not intended to represent tax, legal, or accounting advice. Individuals should discuss their unique circumstances with qualified professionals in these areas before making any decision.

Partial Roth Conversions

Tue, 27 Aug 2019 17:27:00 GMT

While there are several factors to consider, including income tax considerations, converting a traditional IRA or employer-sponsored retirement account to a Roth can be an effective strategy for many individuals.

While there are income limitations on direct contributions to a Roth IRA, anyone can convert a traditional IRA (or other eligible retirement plan asset) to a Roth IRA provided they pay income tax on the conversion amount. In addition to the potential for tax-free growth, Roth conversions provide an opportunity for individuals to potentially lessen the tax burden during retirement and achieve greater flexibility with regards to IRA distributions after age 70 ½.

Eligibility

Individuals with earned income below certain limits (based on modified adjusted gross income) can contribute up to $6,000 per year to a Roth IRA in addition to catch-up contributions of an additional $1,000 beginning at age 50. While there are limitations on the ability and amount that can be contributed to a Roth IRA, these limitations do not apply to Roth conversions.

Pre-tax amounts converted from a traditional IRA (or another eligible retirement plan) to a Roth IRA are treated as a taxable distribution and taxed as ordinary income in the year of conversion. It should be noted that individuals can convert a portion of pre-tax retirement assets over several years and thus spread the tax impact.

Roth IRA conversions may be worth considering for individuals who:

Key Considerations

There are a variety of factors to consider in determining whether to take advantage of partial Roth conversions.

Assets in a Roth IRA have the potential to grow tax-free and can be withdrawn tax-free as “qualified distributions” five years after the initial Roth IRA contribution (or Roth conversion) subject the following qualifications:

Since Roth IRAs are funded with after-tax dollars, contributions can be withdrawn tax-free; however, ordinary income tax will be assessed on Roth earnings on distributions which do not meet the above exceptions in addition to a 10% tax on withdrawals made prior to age 59½.

Potential Benefits

Since income restrictions no longer apply to Roth IRA conversions, many individuals should consider including partial Roth conversions as part of their retirement planning. Potential benefits of a Roth IRA include the following:

Conclusion

Disclosure: The information provided in this article is for general educational purposes and is not intended to represent tax, legal, or accounting advice. Every situation is unique and it is important to consider the tax implications and potential impact on long-term financial goals before making any decision regarding Roth IRA conversions. Individuals should discuss their unique circumstances with qualified professionals in these areas before making any decision.

Roth 401(k) Plans

Fri, 03 May 2019 14:44:00 GMT

Since employers are increasingly including a Roth 401(k) option as part of their defined contribution plan, employees should consider potential benefits of using the Roth 401(k) option instead of contributing to a traditional 401(k).

Much like a Roth IRA, a Roth 401(k) can provide tax-free income during retirement. Roth contributions are made with after-tax dollars compared to traditional 401(k) plans which are funded with pretax earnings. It should be noted that the tax treatment of 401(k) options are designed to be tax-neutral which means the primary factor to consider when making a decision is the individual’s current tax rate compared to their expected tax rate in retirement.

Choosing Between a Traditional and Roth 401(k)

A traditional 401(k) plan is usually the best option for employees who expect their tax rate in retirement to be lower than their current tax rate. The goal in this situation is to avoid current tax on contributions and pay tax at a lower rate in the future.

On the other hand, a Roth 401(k) may make more sense since for an employee who expects to pay tax at a higher rate in retirement since Roth accounts allow individuals to pay taxes today at a lower rate and then later withdraw those funds at a zero-tax rate.

Potential Benefits of a Roth 401(k)

Since many employees expect to have lower taxable income during retirement, maximizing pretax contributions to a traditional 401(k) often makes sense; however, this strategy fails to consider other potential benefits of a Roth 401(k) including the following:

Conclusion

Determining an optimal retirement savings strategy should be based on an individual’s circumstances and financial goals. Using cash-flow based retirement planning which considers the variety of factors which impact results and working with a qualified financial planning professional can help you develop a road map to achieve financial freedom.

Using an IRA for Charitable Giving

Tue, 27 Nov 2018 19:56:00 GMT

Giving Tuesday was created in 2012 by the 92nd Street Y and United Nations Foundation as a “Global Day of Giving”. By designating the Tuesday after Thanksgiving as Giving Tuesday, organizers desired to establish a day focused on celebrating the generosity of giving, a great American tradition. In light of the giving season, this article focuses on a tax-efficient way that individuals who are 70 ½ or older can use an IRA for charitable giving.

While the United States has a long history of encouraging charitable giving through tax legislation, the 2017 Tax Cuts and Jobs Act reduced the number of people who will be able to deduct charitable contributions for 2018. This change resulted from the increase in standard deduction which eliminated tax benefits of charitable giving for individuals who are no longer able to itemize. While the new tax law reduced the number of people who can itemize deductions, there are several financial planning strategies that can offer tax benefits for many individuals in their charitable giving.

Individuals receiving required minimum distributions (“RMDs”) from an IRA and are interested in giving to charity should consider using qualified charitable distributions (“QCD”) to satisfy all or part of their annual RMD. Using QCDs for charitable giving can provide benefits for individuals who are taking the standard deduction as well as many who are still able to itemize deductions.

A large number of people are missing out on this valuable tax break, and time is limited to take advantage of this strategy for 2018 since the deadline is December 31st.

Important Information about Qualified Charitable Distributions

Conclusion

In addition to QCDs, individuals should consider other tax-smart giving strategies under the new tax law and leverage the impact of their philanthropy. Qualified financial planning professionals can review potential strategies to help families maximize tax benefits of their charitable giving and develop an individualized financial plan to support their favorite charities and create an enduring legacy.

The information contained in this article is general and should not be considered legal or tax advice. Consult with an appropriate professional regarding your circumstance.

Retirement Distribution Strategies

Mon, 12 Nov 2018 19:21:00 GMT

A traditional approach of managing investments during retirement is to liquidate taxable investment accounts first before taking withdrawals from retirement accounts like IRAs and 401(k) plans. This retirement strategy allows retirees to spend the least tax-efficient portion of their investment portfolio by using interest, dividends, and potential capital gains – while preserving tax-deferral (and potential tax-deferred growth) as long as possible.

While many investment professionals focus on wealth accumulation strategies, a different approach is needed as individuals begin withdrawing funds from investment accounts to fund retirement needs. There are many strategies to consider for retirement income and making a mistake can be costly. A qualified financial planning professional can assist in evaluating retirement income strategies and help individuals craft an optimal retirement plan based on their specific circumstances.

Blending Withdrawals from IRAs and Taxable Accounts

While deferring IRA distributions can preserve tax-deferral and the potential benefit of tax-deferred growth, this distribution strategy can result in higher tax brackets after age 70 when IRA owners begin taking required minimum distributions (RMDs).

A withdrawal strategy to mitigate the potential impact of deferring IRA distributions until age 70 involves taking distributions from an IRA and taxable investment accounts along the way. By taking partial distributions from an IRA each year, distributions can occur at lower tax brackets without reaching the 24% tax bracket, and taxable investment accounts can last longer before being depleted and potentially avoid the point where a retiree must take distributions from the IRA because there’s no other money left.

By taking a blended-distribution approach, most of the IRA continues to benefit from tax-deferred growth for an extended period, and annual distributions can be managed to avoid hitting higher tax brackets.

Filling Lower Tax Brackets with Partial Roth Conversions

While taking partial distributions from an IRA before age 70 can be an effective means to enhance the longevity of a portfolio by reducing the average tax rate paid on IRA distributions, a caveat to this strategy is that it depletes a tax-preferenced account earlier than may have been necessary.

In other words, this distribution approach faces a fundamental tension between the desire to take more withdrawals early (to avoid “wasting” unused low tax brackets in the early years) versus the objective to benefit from tax-deferred compounding growth (by leaving the money in the IRA to compound tax-efficiently over time). A possible resolution to this dilemma is to “fill up” lower tax brackets from an IRA, without actually liquidating the tax-preferenced account.

Utilizing systematic partial Roth conversions before age 70 involves moving dollars from an IRA to a Roth IRA and generating taxable income that fills the 12% tax bracket in the early years of retirement. A potential result of this approach is the depletion of taxable investments during the first half of the retirement phase; however, a retiree’s tax rate isn’t driven up at that time because the newly-created Roth IRA can be used to supplement income on a tax-free basis.

Ultimately, a combination of taking advantage of lower tax brackets (and avoiding higher brackets) plus the tax-favored compounding in the traditional and Roth IRA accounts means that the partial Roth conversion strategy may produce a greater (net after-tax) wealth than other distribution strategies.

Optimizing Early Partial Roth Conversions and Avoiding Too Much Tax Deferral

An important concept to recognize in tax-efficient liquidation of retirement accounts is that there is such thing as “too much” tax deferral. An IRA or 401(k) that are allowed to compound long enough will eventually be so large that a retiree is driven into even higher tax brackets just trying to tap the account, whether to fund retirement spending or simply because distributions are “forced” out when RMDs begin.

Accordingly, the fundamental goal of spending from a portfolio in a more tax-efficient manner is to find constructive ways to whittle down a pre-tax account and stop it from growing too large, either by taking distributions outright at an earlier phase or by doing partial Roth conversions. Of course, if “too much” is withdrawn or converted in the early years, the retiree may drive up their tax rate now, which doesn’t help the situation either. In other words, the end goal is to find the balance point between the two.

Of course, where that balance point is will depend on the retiree’s overall income and wealth levels. For some, the balancing point may be to “just” fill up the 12% ordinary income tax bracket and try to avoid any rates that are 24% or higher. For those with more significant retirement accumulations, the sheer size of the family balance sheet may make it impossible to avoid being in at least the 22% bracket, and the goal will be to stay there and not drift up into the 24% or 32% brackets.

For those with very significant wealth, any tax bracket that’s less than the top 37% bracket may be appealing to fill with partial Roth conversions. Nonetheless, the strategy for tax-efficient spend-down of a retirement portfolio remains the same – to allow for maximum tax-preferenced growth in retirement accounts by spending from taxable brokerage accounts first, but not letting low tax brackets “go to waste” by filling them with partial Roth conversions along the way.

Reverse Dollar-Cost Averaging

Dollar-cost averaging is a technique of investing a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. Dollar-cost averaging can mitigate risk of market downturns by dividing up a lump sum and investing over time and taking advantage of market downturns. During wealth accumulation, dollar-cost averaging during market volatility can reduce average investment cost compared to funding investments with a lump sum.

During retirement, investors typically withdraw money on a regular basis and if investments are being sold on a regular basis to fund retirement, reverse dollar-cost averaging takes place which can force the sale of investments regardless of price. If share values are low, an investor will have to sell more shares to get a predetermined withdrawal amount compared to when share values are high. Since it’s important to buy when share values are low and sell when share values are high, selling regardless of market conditions is not wise.

During retirement, it’s important to be strategic with withdrawals and take advantage of certain market conditions. While timing the market isn’t generally recommended when putting money into investments, timing the market when withdrawing from investment accounts isn’t only helpful, it’s many times necessary. When an investor’s withdrawal rate remains the same, the price per share fluctuates and therefore requires selling a variable number of shares every month. Sometimes the price per share is high, other times, the price per share is low.

Withdrawing money on a regular basis during volatile and negative markets not only reduces the account value, but it also reduces the potential for recovery when markets improve due to the adverse impact of reverse dollar-cost averaging.

Emphasis on Investment Income with Growth Potential

An investment strategy focused on growing dividend income can provide an attractive alternative to relying on total return or high-income investments. By having a retirement portfolio focused on generating sufficient dividend income to cover retirement expenses, an investor can avoid having to liquidate investments during market downturns.

A strategy focused on growing dividend income should identify investment opportunities based on fundamental research that analyzes a company’s willingness and ability to pay an attractive dividend. An actively managed retirement portfolio may offer an effective way to navigate around some of the dividend declines seen in the broader market and passive index strategies.

Not only can dividend income contribute to funding retirement expenses, but also a well-managed portfolio may outpace inflation over time due to price appreciation.

Establishing a Strategic Liquidity Reserve

A strategic liquidity reserve can provide some control over the timing of withdrawals and offer an opportunity to reduce the impact of the short-term negative market performance. A strategic liquidity reserve can include savings account, money market account, or accessing home equity using a home equity line of credit (HELOC) or FHA home equity reverse mortgage (HECM) line of credit. The amount to hold in savings during retirement should consider monthly retirement spending with a goal of having at least six months of expenses in savings.

Benefits of a HELOC include low set up cost; however, this type of financing requires credit approval and lenders will consider income qualifications and home value in determining the credit amount. HELOCs require interest payments on the outstanding balance, the borrowing amount borrowed is static, and the revolving feature typically expires within ten years. Finally, HELOCs can be canceled by a lender which could create issues for the borrower.

To qualify for a HECM line of credit, homeowners need to be at least 62 years of age and demonstrate an ability to pay property tax and insurance on their home. The loan amount relies on the property value and borrower’s age. The available borrowing amount on a HECM line of credit increases each year due to an actuarial adjustment. Payments are not required on a HECM line of credit as long as the borrower lives in the house and pays the property tax and insurance, and the outstanding amount is not due until the borrower dies or moves out of the house.

HECMs are more expensive than HELOCs since a borrower is responsible for cost of a title policy, private mortgage insurance, as well as other fees including required credit counseling.

Using Qualified Charitable Contributions to Satisfy RMDs

Charitably inclined individuals over 70 should consider using qualified charitable distributions (“QCDs”) from their IRA to fund favored qualified charities. QCDs count toward meeting annual RMD requirements (up to $100,000 per year) while also reducing taxable income. Since the 2017 tax law doubled the standard deduction, QCDs can provide a tax benefit for individuals will no longer qualify for itemized deductions as a result of the doubling of the standard deduction as part of the 2017 tax law. Finally, lowering taxable income with the use of QCDs for charitable contributions may also result in lower Medicare Part B premiums since they are based on taxable income.

Conclusion

Since retirement assets may need to last for 30-years or more, having an optimal financial plan during retirement is critically important considering the limited ability to correct mistakes. A qualified financial planning professional can assist individuals to craft a plan to fund retirement in a tax-efficient manner and ensure achievement of retirement goals.

This article is for educational purposes only, and the information contained in this article is general and should not be considered legal or tax advice. Individuals should consult with an appropriate professional regarding their specific circumstances. The information contained herein is not intended to be used as the primary basis for investment decisions or construed as advice in meeting the particular needs of any investor. Please note that past performance does not guarantee future results.

Fee-Based or Fee-Only: What’s the Difference?

Fri, 29 Jun 2018 21:09:00 GMT

The way an advisor gets paid can create a potential conflict of interest, whereby they place their financial interests above your own. Financial advisors are compensated for their advice in one of three ways: commission- based, fee- based, and fee- only. Understanding an advisor’s form of compensation can provide a transparent view of their business practices, and help you decide which advisor is more likely to put your interests first in providing recommendations that benefit your situation.

The Difference

Both Commissioned and Fee-Based financial advisors can receive compensation based on specific products they recommend to a client. The Fee-Based term was developed by the brokerage and insurance community to counteract success of the Fee-Only classification and, while the terminology sounds similar, they can be confusing and potentially misleading.

What is a Fee-Based advisor?

A Fee-Based compensation model creates the potential for a conflict of interest, which can influence a Fee-Based advisor to recommend a commissioned- based product instead of comparable alternatives that may be less costly to the client. Because of the conflict of interest inherent in these transactions, these advisors may have difficulty putting their client’s interests above their own.

What is a Fee-Only advisor?

The only source of compensation that a Fee-Only advisor receives is from fees paid directly to the advisor from clients in the form of an hourly fee, a retainer fee, or a fee based on a percentage of the assets under investment management. Regardless of the methodology used for calculating fees, the Fee-Only advisor is not receiving a sales commission, and their compensation is independent of the financial products recommended.

Why It Matters

The Fee-Only method of compensation is the most transparent and objective method available because it minimizes conflicts and ensures that your financial advisor is acting as a fiduciary. Fee-Only financial advisors are compensated directly by their clients for advice, financial plan implementation and the ongoing management of assets. Fee-Only financial advisors may be paid hourly, as a retainer, as a percentage of assets under management, or as a flat fee, depending upon the option you choose.

Conclusion

Before you decide to work with a financial advisor, whether it is a small firm, or a big brand name financial firm ask how and what their compensation plan looks like, and whether or not they accept commissions. Do not be afraid of asking tough questions at the end of the day you want to pick the advisor that will put your interest over their own, and provide honest and trustworthy guidance on your financial situation.

The Fiduciary Standard

Tue, 14 Nov 2017 06:00:00 GMT

The United States Department of Labor’s (DOL) recommendation to require financial advisors to adhere to a fiduciary standard received a lot of attention and reaction by financial institutions.

While the financial services industry understood the requirements imposed by the proposed DOL fiduciary rule, many consumers did not fully understand the importance of a fiduciary standard and limitations of the proposed rule as it applied to advice provided by financial advisors. This article provides an explanation of a fiduciary standard, when it applies, and why it should be important when selecting a financial advisor.

Fiduciary Standard

The National Association of Personal Financial Advisors (NAPFA) defines a fiduciary as “a person or organization that owes to another the duties of good faith, trust, confidence and candor. When acting in a fiduciary capacity, the advisor is legally obligated to maintain an allegiance of confidentiality, trust, loyalty, disclosure, obedience and accounting to his or her clients.” A fiduciary should be a person who holds a legal or ethical relationship of trust to act prudently and act in the client’s best interest. ( 1 )

Suitability Standard

Prior to the proposed DOL fiduciary rule, financial advisors who received commissions on sale of investment products and annuities were subject to a suitability standard which required recommendations to be suitable based on a client’s financial objectives, risk tolerance, and other factors. A suitability standard does not require financial advisors to consider costs the consumer might incur in following a financial advisor’s recommendations; therefore, it is difficult for consumers to discern if the advice is being influenced by commission income the advisor might receive.

DOL Fiduciary Rule

The proposed DOL fiduciary rule required financial advisors to follow a fiduciary standard; however, it is important to note that the proposed rule only applied to qualified retirement accounts such as 401(k) plans and individual retirement accounts. The reason for the limited application of the proposed rule is that retirement accounts are subject to The Employee Retirement Income Security Act of 1974 (ERISA) which established minimum standards for most pension and retirement plans to provide protection for individuals. The proposed fiduciary rule did not apply to commission based advisors who recommended products in non-retirement accounts.

Advisor Compensation

Financial advisors can receive compensation in one of three ways: sales commissions, combination of sales commissions and fees, or fee only. Financial advisors who receive commissions are supposed to ensure that product recommendations are suitable for a client; however, commission-based advisors are not required to offer less expensive alternatives which may also satisfy a consumer’s financial objectives. Since sales commissions on some products can be 8% or more of the investment amount, financial advisors who receive sales commissions may have strong incentive to recommend certain products.

It is important to understand the difference between financial advisors who are “fee-based” and those who are “fee-only.” A fee-based advisor can be compensated by sales commissions or by a fee for service, depending on the product or service. As the title suggests, a fee-only advisor is only compensated by a fee and does not receive commissions based on product recommendations. While fees should be disclosed in writing, sales commissions are not always disclosed and may make it difficult for a consumer to determine the underlying cost of the product they are purchasing.

Conclusion

While a fiduciary standard creates a better alignment of interests between the financial advisor and consumer, the fee-only model offers a higher level of transparency regarding compensation compared to sales commission and fee-based compensation models. Additionally, a fee-only model creates a better alignment of advisor compensation to the intent of the fiduciary standard.

(1) www.napfa.org