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Building a Solid Financial Foundation

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Building a Solid Financial Foundation

When the markets and the economy are behaving badly, as they tend to do from time to time, it’s easy to feel helpless. But creating a solid financial foundation can help you gain control of your investments and possibly avoid mistakes that can sabotage your portfolio.

Your Net Worth — A Place to Start

Having a current picture of your finances is an important first step in building a solid foundation. By determining your net worth at the same time every year, you’ll know what sort of financial shape you’re in and whether you’re making progress toward your goals. To find your net worth, list all of your assets, including bank and investment accounts, real estate, retirement plans, life insurance, business interests, etc. Then subtract your liabilities, such as your mortgage, credit card debt, loans, etc. The amount that’s left is your net worth. If you don’t like the number, look for ways to either decrease your debts or increase your assets.

Lost Without Them

Setting specific goals can help you focus your investing efforts. Prioritize the goals you’ve set according to their importance and your time frame for needing the money. Keep in mind that the goals you have now will probably change over time, so be flexible. Revisit your goals periodically and revise them when necessary.

Make It Personal

You can’t control what happens in the economy, but you can control your own behavior. Instead of worrying about whether the market is up or down or which investments will be hit hardest by a decline, think about the things you can do that could make a difference. Investing money on a regular basis or adjusting your portfolio’s asset allocation are steps that can help put you in control.1

Good Behavior

Think about creating a written investment statement that describes your risk tolerance, rebalancing schedule, and reasons for selling an investment.2 Having guidelines to follow can keep you from making mistakes that might thwart your plans. You might also want to review your own financial track record. Tax returns and brokerage statements can tell you a lot about your past successes and failures. Keep in mind that past performance is no guarantee of future results.

 

1Asset allocation and dollar-cost averaging do not assure a profit or protect against a loss. Dollar-cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares though periods of high and low prices.

2Consider the tax consequences when selling investment shares. Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.

 

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

 

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Should I have a living trust?

Planning with a Living Trust

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Adding a Personal Backup With a Living Trust

The managers of well-run businesses usually name “backups” to keep things going smoothly — just in case. That’s also a smart plan for your personal finances, where you risk experiencing financial losses or other difficulties if you can’t make your own decisions because of a long illness or other unexpected problem.

You might prepare for this unhappy possibility by giving a family member or another trusted individual the legal power to act for you if necessary. But what would happen if you made an unsophisticated individual your personal financial backup? You might be more comfortable using what is called a “living trust” — with a professional trustee that could easily step into your financial management role if needed.

Standby Protection

Here’s how a living trust could potentially work. You initially transfer assets into the trust, naming yourself as the trustee. You also name a reliable, experienced trustee as the successor trustee. At that time, you simply continue managing your finances as usual, until the circumstances that you’ve specified in your trust agreement — an illness or extended travel, for instance — prevent it. Then, the successor trustee will take over management of the trust assets for as long as necessary.

Other Advantages

Providing a reliable financial backup is just one advantage a living trust can offer. Another is flexibility. You maintain control of your assets during your lifetime, and are free to make changes anytime. For example, you could give your trustee more or less responsibility, amend the trust’s provisions, or even cancel the trust entirely.

Here’s an additional advantage. Your trust can protect your family after your death by keeping your assets under a professional investment manager’s uninterrupted care. And living trust assets don’t pass through probate. That can make the settlement of your estate easier, faster, and often much less costly.

Eventually, your family or other beneficiaries will receive the trust’s assets on the schedule you’ve arranged and under the conditions you’ve specified. That’s another advantage — the ability to determine what happens to your wealth over the long term. And the terms of the trust are private, unlike the terms of a will that passes through the probate process.

Trial Period

Last, there’s a practical advantage: You can give your future asset management arrangements a test drive. If your trustee manages the trust assets during your lifetime, you’ll be able to decide whether you’re satisfied with the arrangements you’ve made — and with the quality and reliability of the trustee’s services.

 

 

 

 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

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Facts about an IRA

Brush Up On Your IRA Facts

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If you are opening an individual retirement account (IRA) for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.

IRAs in America

IRAs continue to play an increasingly prominent role in the retirement saving and investment strategies of Americans. According to the Investment Company Institute (ICI), more than one third of U.S. households owned IRAs in 2017. Traditional IRAs, the most common variety, are held by more than one quarter of U.S. households, followed by Roth IRAs and employer-sponsored IRAs (including SEP-IRAs, SAR-SEP IRAs, and SIMPLE IRAs).1

Contributions and Deductibility

Contribution limits. In general, the most you can contribute to an IRA for 2018 is $5,500 and it rises to $6,000 in 2019. However, if you are age 50 or older, you can make an additional “catch-up” contribution of $1,000, which brings the maximum annual contribution to $6,500.

Eligibility. One potential area of confusion around IRAs concerns an individual’s eligibility to make contributions. In general, tax rules require that you must have compensation to contribute to an IRA. Compensation includes income from wages and salaries and net self-employment income. If you are married and file a joint tax return, only one spouse needs to have the required compensation.

With regard to Roth IRAs, income may affect your ability to contribute. For tax year 2018, individuals with an adjusted gross income (AGI) of $120,000 (goes up to $122,000 in 2019) or less may make a full contribution to a Roth IRA. Married couples filing jointly with an AGI of $189,000 (goes up to $193,000 in 2019) or less may also contribute fully for the year. Contribution limits begin to decline, or “phase out,” for individuals with AGIs between $120,000 and $135,000 ($122,000 and $137,000 in 2019) and for married couples with AGIs between $189,000 and $199,000 ($193,000 and $203,000 in 2019). If your income exceeds these upper thresholds, you may not contribute to a Roth IRA.2

Deductibility. Whether you can deduct your traditional IRA contribution depends on your income level, marital status, and coverage by an employer-sponsored retirement plan. For instance:2

  • If you are single and covered by an employer-sponsored retirement plan, your traditional IRA contribution for 2018 will be fully deductible if your AGI was $63,000 or less ($64,000 or less in 2019). The amount you can deduct begins to decline if your AGI was between $63,000 and $73,000 ($64,000 and $74,000 in 2019). Your IRA contribution is not deductible if your income is equal to or more than $73,000 ($74,000 in 2019).
  • If you are married, filing jointly, and the spouse making the IRA contribution is covered by an employer-sponsored retirement plan, your 2018 IRA contribution will be fully deductible if your combined AGI is $101,000 or less ($103,000 or less in 2019). The amount you can deduct begins to phase out if your combined AGI is between $101,000 and $121,000 ($103,000 and $123,000 in 2019). You may not claim an IRA deduction if your combined income is equal to or more than $121,000 ($123,000 in 2019).
  • If you are married, filing jointly, and your spouse is covered by an employer-sponsored plan (but you are not), you may qualify for a full IRA deduction if your combined AGI is $189,000 or less. The amount you can deduct begins to phase out for combined incomes of between $189,000 and $199,000 ($193,000 and $203,000 in 2019). Your deduction is eliminated if your AGI on a joint return is $199,000 ($203,000 in 2019) or more.
  • If neither you nor your spouse is covered by an employer-sponsored retirement plan, your contribution is generally fully deductible up to the annual contribution limit or 100% of your compensation, whichever is less.

Keep in mind that contributions to a Roth IRA are not tax deductible under any circumstances.

Distributions

You may begin withdrawing money from a traditional IRA without penalty after age 59½. Generally, previously untaxed contributions and earnings are taxable at the then-current regular income tax rate. Nondeductible contributions are generally not taxable because those amounts have already been taxed.

You must begin receiving minimum annual distributions from your traditional IRA no later than April 1 of the year following the year you reach age 70½ and then annually thereafter. If your distributions in any year after you reach 70½ are less than the required minimum, you may be subject to an additional federal tax equal to 50% of the difference.

Unlike traditional IRAs, Roth IRAs do not require the account holder to take distributions during his or her lifetime. This feature can prove very attractive to those individuals who would like to use the Roth IRA as an estate planning tool.

 

This communication is not intended as investment and/or tax advice and should not be treated as such. Each individual’s situation is different. You should contact your financial professional to discuss your personal situation.

1Investment Company Institute, “The Role of IRAs in US Households’ Saving for Retirement,” 2017.

2Internal Revenue Service, Notice 2017-64.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

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student loan debt

Bearing the Burden of Student Loan Debt

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Bearing the Burden of Student Loan Debt

If you are weighed down by student loan debt, you are not alone. Recent data shows that there are 44.5 million student loan borrowers in the U.S., and they owe a collective $1.5 trillion. What’s more, 45% of recent graduates have student loan debt and a whopping 62.5% of Americans with some form of student loans outstanding are age 30 or older. The average college graduate with a bachelor’s degree left school with $28,446 in student debt in 2016.1 To put this in perspective, the average starting annual salary for new graduates in 2018 was $50,390.2

Paying off these loans is often a challenge. Beyond the burden of monthly payments, the high level of debt can derail long- and short-term financial goals. One study showed that only 39% of recent graduates with student debt believe they’ll be able to pay it off in 10 years. The researchers also estimated that a graduate of the class of 2018 will have to wait until age 36 before being able to purchase a first home with a 20% down payment and won’t be able to retire until age 72.1

Strategies to Start the Repayment Process

Although the amount of your student debt may seem overwhelming, repayments don’t have to be. Long-held budgeting strategies such as managing everyday expenses and limiting purchases by credit card can be effective ways of finding the cash to put toward student loan payments. Additionally, borrowers have other options depending upon the type of loan they hold.

Graduates who took out federal loans — which represent the bulk of total student debt –have different options and protections at their disposal. Among these are the following:

Standard repayment. Loans are repaid in equal amounts over a stated period, generally 10 years. This is typically the default plan if another option is not selected.

Extended repayment. Under this plan, repayments can be extended up to 25 years. Monthly payments are generally lower than with the standard plan, but total payments are significantly higher due to the extended time period.

Graduated repayments start out lower than under the standard option and increase gradually so that the loan can be paid off in 10 years.

Income-driven repayment is available to borrowers who can demonstrate a partial financial hardship. Typically, repayments are capped at 10-20% of income and repayments can extend up to 25 years.

Income-sensitive repayment also requires a partial financial hardship, and repayment amounts are a function of your annual income and other factors

What if You Default?

There can be serious consequences should a borrower decide to not repay, or to stop repaying, a student loan. Defaulting on a student loan can result in low credit scores that can affect the ability to obtain a future loan or employment. Moreover, student loan debt might not be forgiven in bankruptcy proceedings under current bankruptcy law.

Borrowers who have difficulty repaying a loan may look into some of the hardship-based repayment programs described above. Additionally, the Public Service Loan Forgiveness Program might apply to individuals who work in nonprofit organizations or certain fields, including public education and law enforcement.

If you are facing a mountain of student debt, consider your options and contact your lender, who may be willing to renegotiate the terms.

1Source: Nerdwallet, 2018 Student Loan Debt Statistics, December 4, 2018.

2Source: Korn Ferry, High Demand, Low Reward: Salaries for 2018 College Graduates Flat, Korn Ferry Analysis Shows, May 14, 2018.

 

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

 

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.  This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity. 

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tax efficient investing

Tax Efficient Investing

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Five Strategies for Tax Efficient Investing

As just about every investor knows, it’s not what your investments earn, but what they earn after taxes that counts. After factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments’ returns in any given year may be reduced by 40% or more.

For example, if you earned an average 8% rate of return annually on an investment taxed at 28%, your after-tax rate of return would be 5.76%. A $50,000 investment earning 8% annually would be worth $107,946 after 10 years; at 5.76%, it would be worth only $87,536. Reducing your tax liability is key to building the value of your assets, especially if you are in one of the higher income tax brackets. Here are five ways to potentially help lower your tax bill.1

Invest in Tax-Deferred and Tax-Free Accounts

Tax-deferred accounts include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs), and annuities. Contributions to these accounts may be made on a pretax basis (i.e., the contributions may be tax deductible) or on an after-tax basis (i.e., the contributions are not tax deductible). More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to non-qualified annuities, Roth IRAs, and Roth-style employer-sponsored savings plans are not tax deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution.

Pitfalls to avoid: Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA, or annuity may be subject not only to ordinary income tax, but also to an additional 10% federal tax. In addition, early withdrawals from annuities may be subject to additional penalties charged by the issuing insurance company. Also, if you have significant investments, in addition to money you contribute to your retirement plans, consider your overall portfolio when deciding which investments to select for your tax-deferred accounts. If your effective tax rate — that is, the average percentage of income taxes you pay for the year — is higher than 15%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally will be taxed at your ordinary income tax rate, which may be higher than your long-term capital gains tax rate (see “Income vs. Capital Gains”).

Income vs. Capital Gains
Generally, interest income is taxed as ordinary income in the year received and qualified dividends are taxed at a top rate of 20%. (Note that an additional 3.8% tax on investment income also may apply to both interest income and qualified (or nonqualified) dividends.) A capital gain (or loss) — the difference between the cost basis of a security and its current price — is not taxed until the gain or loss is realized. For individual stocks and bonds, you realize the gain or loss when the security is sold. However, with mutual funds you may have received taxable capital gains distributions on shares you own. Investments you (or the fund manager) have held 12 months or less are considered short term, and those capital gains are taxed at the same rates as ordinary income. For investments held more than 12 months (considered long term), those capital gains are taxed at no more than 20%, although an additional 3.8% tax on investment income may apply. The actual rate will depend on your tax bracket and how long you have owned the investment.

Consider Government and Municipal Bonds

Interest on U.S. government issues is subject to federal taxes but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well. An investor in the 33% federal income-tax bracket would have to earn 7.46% on a taxable bond, before state taxes, to equal the tax-exempt return of 5% offered by a municipal bond. Sold prior to maturity or bought through a bond fund, government and municipal bonds are subject to market fluctuations and may be worth less than the original cost upon redemption.

Pitfalls to avoid: If you live in a state with high state income tax rates, be sure to compare the true taxable-equivalent yield of government issues, corporate bonds, and in-state municipal issues. Many calculations of taxable-equivalent yield do not take into account the state tax exemption on government issues. Because interest income (but not capital gains) on municipal bonds is already exempt from federal taxes, there’s generally no need to keep them in tax-deferred accounts. Finally, income derived from certain types of municipal bond issues, known as private activity bonds, may be a tax-preference item subject to the federal alternative minimum tax.

Look for Tax-Efficient Investments

Tax-managed or tax-efficient investment accounts and mutual funds are managed in ways that may help reduce their taxable distributions. Investment managers may employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Pitfalls to avoid: Taxes are an important consideration in selecting investments but should not be the primary concern. A portfolio manager must balance the tax consequences of selling a position that will generate a capital gain versus the relative market opportunity lost by holding a less-than-attractive investment. Some mutual funds that have low turnover also inherently carry an above-average level of undistributed capital gains. When you buy these shares, you effectively buy this undistributed tax liability.

Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized capital losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” capital losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years, subject to certain limitations.

Pitfalls to avoid: A few down periods don’t necessarily mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to ups and downs. However, if your outlook on an investment has changed, you may be able to use a loss to your advantage.

Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the shares you sell in order to minimize your taxable gain or maximize your deductible loss.

Pitfalls to avoid: If you overlook mutual fund dividends and capital gains distributions that you have reinvested, you may accidentally pay the tax twice — once on the distribution and again on any capital gains (or underreported loss) — when you eventually sell the shares.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.

 

 

 1Example does not include taxes or fees. This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

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financial plan

Getting Ready for 2019

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Getting Your Financial Plan Ready for 2019

Last month I wrote about how the Tax Cuts and Jobs Act could affect your year-end planning. Now I’d like to look at year-end planning from a broader perspective. This list should help you get your financial plan ready for the new year:

 

  • It All Starts With Saving…

    Whether you use Mint, a spending tool from your financial advisor, or a year-end report from your bank or credit card issuer, it’s important to track your spending habits. Having a handle on how you spent your money in 2018 will give you an idea of how you can save more in 2019. Sticking to a budget isn’t easy, so start by analyzing reoccurring expenses to find opportunities to save more. It could be cutting the cord (I switched to DirectTV Now this year!), switching to a family cell phone plan or reaching out to your insurance agent to review your policies.

 

  • Instead of Resolutions, Have a Plan…

    This is a good time to look at where you were last year at this time and see if you stuck with your financial plan. If anything has changed in 2018 that affects your long-term goals, this is the time to address them in your plan.

 

  • Make Sure You Have a Liquidity Plan…

    The rule of thumb is to make sure you keep three to six months of expenses in cash to act as an emergency fund. This may be too broad of an approach as everyone’s situation is different. If you take a lot of risk in your career you may want to hold more cash. A larger cash reserve could also apply to retirees that rely on their investments for most of their income.

 

  • Last Chance To Max Out Retirement Plan Contributions…

    The maximum 401(k) employee elective salary deferral for 2018 is $18,500. If you are age 50 or older, you can put in an additional $6,000 as a catch-up contribution. If you are a participant in a SIMPLE IRA plan, the maximum salary deferral is $12,500 and a $3,000 catch-up contribution can be made. The deadline for these contributions is December 31st. If you can put away more for 2018, contact your human resources department to see if more can be taken out of your last paycheck.

 

  • Make sure you take required minimum distributions (RMDs) from your retirement accounts…

    According to the IRS, you must take your first required minimum distribution (RMD) for the year in which you turn age 70½ by April 1st of the following year. After that first year, the distributions must be made by December 31st. Remember, required minimum distributions also apply to inherited IRAs. You must start taking distributions by December 31st in the year following the death of the original owner.

 

  • Is a Roth Conversion Right For You…

    Any money that you convert to a Roth IRA is generally subject to income taxation in the year that you do it. But over the long term, the money will continue to grow tax-free. It also won’t be subject to required minimum distributions (RMD) in retirement. Traditional IRA account owners should consider the tax ramifications, age and income restrictions about executing a conversion from a Traditional IRA to a Roth IRA. Roth conversions must be done by December 31st. If you made any non-deductible contributions to a retirement plan or IRA in 2018, you may be able to convert those to a Roth without any additional tax consequences.

 

  • Review Your Investments and Harvest Tax Losses… 

    2018 has been a volatile year with many asset classes down year to date. You may be able to harvest some losses in your non-retirement investment accounts by offsetting them with realized gains. You can also realize up to $3,000 as a capital loss against your taxable income.

 

  • Making the deadline for a charitable gift… 

    Most charitable gifts must be postmarked or received by December 31st to qualify for a deduction. If you are retired and taking distributions from a retirement account, part of your RMD can be met by making a Qualified Charitable Distribution (QCD). A QCD doesn’t give you a charitable deduction, but it counts against satisfying your required minimum distribution for the year. Therefore, it is excluded from your taxable income. Like your RMD, the deadline for this distribution is December 31st.

 

  • Deducting 529 contributions… 

    Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. If you are in a home state’s plan that offers an income tax deduction on contributions, make sure you get your contribution in by December 31st.

 

  • Is Your Estate Plan Up to Date?… 

    Has anything changed in 2018 that would be a reason to make modifications to your will, health care proxy, or power of attorney? This is also a good time to make sure you have the desired beneficiary(s) on all of your retirement accounts and insurance policies.

 

  • Making the Most of Spending Accounts…

    For 2018, if you are in a high-deductible health-insurance plan, you can fund a health savings account (HSA). Individuals can put away as much as $3,450 before taxes, while families, can put away $6,900. Those age 55 and older can contribute an additional $1,000. You have until April 15th to fund an HSA. If you funded a flexible spending account (FSA) through your employer in 2018, you may have to spend down your balance by the end of the year. Unlike an HSA, FSAs typically don’t allow you to carry over much of a balance into the following year.

 

  • Should You Bunch Medical Expenses by Year End?… 

    For 2018, the adjusted gross income (AGI) floor was lowered to 7.5% and will return to 10% in 2019. Any medical expenses above 7.5% of your AGI can be itemized for deductions. To claim the deduction, you must have itemized deductions that exceed your standard deduction (which is now $24,000 for a married couple). You may consider covering some medical expenses before the end of the year that you were going to hold off on, if it will raise your itemized deductions above your standard deduction. Also, 2019 will be a more difficult year to claim the deduction since the AGI floor returns to 10%.

 

As always is the case, these suggestions are only intended to be used as general information and are not intended to be tax advice. You should always consult a tax professional before making tax planning decisions and work with a trusted financial advisor to help you make the most of 2019.

 

All the best in the New Year.

 

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

 

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Year End Tax Planning: TCJA Edition

Year End Tax Planning: TCJA Edition

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Year End Tax Planning: TCJA Edition

With the passage of the Tax Cuts and Jobs Act (TCJA) last December, year-end tax planning could impact even more individuals. A lot has already been written about how it has limited two key itemized deductions: mortgage interest and state and local taxes (SALT). There are also many potential benefits. The TCJA expands the standard deduction and availability of the child tax credit, made reforms to itemized deductions and the alternative minimum tax, and lowers marginal tax rates. Given these changes, here are some things to consider going into the end of the year:

 

  • Is Tax Deferral Still the Way to Go?- Some individual taxpayers will see their effective tax rate go down in 2018. If you are one of those people, you may want to rethink making tax-deferred contributions to your retirement savings. If you are already in a low tax bracket, you may see more of a long-term benefit by contributing after tax money. In addition to a Roth IRA, some employer retirement plans allow for Roth contributions. Withdrawals from the account may be tax free, as long as they are considered qualified. There are some limitations and restrictions. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. It should also be noted that future tax laws can change at any time and may impact the tax benefits of Roth IRAs.

 

  • Should You Convert Tax-Deferred to Roth?- In addition to making new retirement contributions with after tax money, you may benefit from converting money you have in a tax-deferred retirement account to a Roth IRA. Keep in mind, that any money that you convert to a Roth IRA is generally subject to income taxation in the year that you do it. But over the long term, the money will continue to grow tax-free and won’t be subject to required minimum distributions (RMD) in retirement. Roth conversions must be done by December 31st. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. 

 

  • Should You Take Out More Than Your RMD?- For some retirees with a low income or high medical deductions (threshold decreased from 10% of AGI to 7.5% for 2018), it may actually make sense to take more out of retirement accounts than the required minimum distribution. Even if you don’t need the money to cover expenses, the amount taken above the RMD can be converted to a Roth.

 

  • Bunching Up Your Deductions- With the combination of the standard deduction being doubled and big-ticket deductions, like mortgage interest and SALT, being limited, it is more difficult to meet the threshold for itemizing deductions. With careful planning, you may be able to bunch up deductions like charitable contributions, medical expenses, and unreimbursed employee expenses in one calendar year to get you over the threshold. For example, if you normally make $5,000 in charitable contributions in a calendar year, consider contributing $10,000 to a charity or donor advised fund, and nothing the following year. The donor advised fund will allow you to take the deduction in the year the contribution is made, but offers discretion to give money out over time to the charities of your choosing. While donor advised funds have many advantages, some disadvantages to be aware of include but are not limited to possible account minimums, strict limits on grant allocations, management fees and the potential that future tax laws may change at any time that may impact the tax treatment and benefits of donor advised funds

 

  • Consider a QCD- If you are already age 70 ½, and making charitable contributions, you may consider a Qualified Charitable Distribution (QCD). A QCD doesn’t give you a charitable deduction but it counts against satisfying your required minimum distribution for the year. Therefore, it is excluded from your taxable income. Like your RMD, the deadline for this distribution is December 31st.

 

Keep in mind that these suggestions are only intended to be used as general information and are not intended to be tax advice. You should always consult a tax professional before making tax planning decisions and work with a trusted financial advisor to see how the recent tax laws can affect your investment plan.

 

 

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

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Should I use a 529 plan to save for college?

Facts about 529 Plans

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Getting the Facts Straight about 529 Plans

As many of us are sending our children back to school this month, I thought it would be a good time to clear up some misconceptions about 529 savings plans. A 529 savings plan is an investment program offered by each state. It offers tax-free growth on money invested to pay for education expenses. Here are some common questions that arise regarding these savings plans:

Do I lose the money if my child doesn’t go to college? You will always have access access to the money in your 529 account. If withdrawn for anything other than qualified expenses, you will be subject to income taxes and a 10% penalty on the earnings. The account is funded with after-tax money, so the principal isn’t subject to taxes or the penalty. For example, let’s say you withdraw $10,000 from your plan and $8,000 is principal and $2,000 is earnings. If the money is used for anything other than an educational expense, $2000 is subject to taxes and penalty. If your child doesn’t need the money for education, you can also change the beneficiary to another family member or fund your own continuing education. There are no tax consequences or penalty to change the beneficiary.

What qualifies for an educational expense? A qualifying expense doesn’t have to be tuition or fees to a 4-year college. It could also be used for community college, graduate school, eligible vocational or trade schools, or adult continuing education classes. Funds can also be used for off campus housing, books and supplies, and computers. This year’s Tax Cuts and Jobs Act has expanded qualified expenses to distribute up to $10,000 per student to cover elementary or secondary schools.

What if my child gets a scholarship? You will be exempt from the 10% penalty on withdrawals up to the amount of the scholarship. You will still be subject to income taxes on the earnings. An exemption of the penalty is also applied if the beneficiary dies or becomes disabled, or decides to attend a U.S. Military Academy.

Do I have to use my home state’s plan or choose a school in my home state? You are not limited to using your home state’s plan, but there may be tax advantages. Some states offer a state tax deductions for 529 contributions if you make them to a plan in your home state. Your child can attend any eligible school regardless of where the plan is set up.

Will a 529 plan affect my child’s chances of receiving financial aid? Financial aid eligibility can vary depending on the institution, but it will have some impact. Since the account will be considered assets of the owner of the account and not the child, the impact will be small. An asset of a parent will reduce your eligibility by up to 5.64% of the value of the account. If the account were in the child’s name, it would be reduced by 20% of the value of the account. Also, the distributions will not be counted as income to your child for financial aid purposes.

With education expenses continuing to outpace inflation, a 529 plan can be a valuable tool to help cover the costs. A great resource for researching the different plans available is www.savingforcollege.com. If you are still unsure, reach out and I can help you determine the best way to save for your family’s education expenses.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

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Should I take a 401(k) loan?

Borrowing From Your 401(k)

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Why You Shouldn’t Borrow From Your 401(k)

It’s tempting. The money is sitting there in an account that is doing nothing for you right now. You may be years or even decades away from needing it. Why not put it to work for you now to buy a home, make a renovation, or pay down some debt? You are paying yourself back with interest anyway! Outside of an emergency event, a loan from your current 401(k) is probably not worth it. Here are 5 things to consider before taking out a loan:

Your retirement could suffer a setback. – The time you are repaying the loan could be spent building your retirement savings. You could also be missing out on potential gains that the loan amount won’t realize. This could be a huge opportunity cost when these gains compound over long periods.

Missing out on an employer match. – At least part of your monthly retirement contributions will now go towards repaying the loan. By replacing your elective deferrals with loan repayments, you could also be missing out on a company’s matching contribution.

A pre-tax contribution is now repaid with after tax dollars. – You may have initially made the contributions with pre-tax dollars but the money that you use to repay the loan will be after-tax dollars. When you retire, all distributions will be subject to tax even though money has been added back to the plan with after-tax dollars. You are essentially paying taxes twice on the loan amount.

What if you can’t pay it back? – If you don’t pay back the loan within the given repayment period, usually 5 years, the balance of the loan is an early distribution and becomes taxable. You could also be subject to a penalty, if you are under age 59 ½.

If you change jobs, the loan becomes due…even if you’re fired– If you leave your job, you’ll have to pay back the entire balance. Otherwise, it will be treated as an early distribution and you’ll pay taxes and potentially a penalty on the balance. This is even the case if you are fired from your job. You would have to pay back a loan at what may be the most inopportune time.

We are in an age of uncertainty surrounding Social Security and pension plans are being diminished in the workforce. Retirement savings will need to provide the difference to cover expenses. If you still decide that a loan is right for you, check with the administrator of your plan about associated fees. If you are still unsure, reach out and I can help you make this important decision.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

 

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What should I consider when receiving my pension?

Considerations when Receiving a Pension

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What to Consider When Determining How to Receive a Pension Benefit

One of the biggest decisions that a retiree receiving a pension benefit will face could be the decision to take the benefit as a lump sum or receive it in the form of an annuity distribution. The benefit of the annuity is clear. It can provide a predictable income stream for your life and potentially your spouse’s. The income is guaranteed by the company paying the benefit and at least some of it may be guaranteed by the Pension Benefit Guarantee Corporation (PBGC).

The downside to annuity income is that you lose control of how you take the benefit. You don’t have the flexibility to take out more or less of your benefit as needed. There is also the potential loss of purchasing power due to inflation if the benefit doesn’t have a cost of living adjustment.

So what questions should you ask yourself before making this decision?

Do you need more guaranteed income? What will your expected living expenses be in retirement and how much is covered by Social Security and other sources? Is the monthly pension benefit needed to make up the difference? If it is more than you need, see if you could take distributions on a portion of the lump sum and invest the rest.

How is your health? The longer you live the better the annuity option looks. We don’t have a crystal ball, but if you have concerns about your health and outliving your life expectancy, an annuity payment may not be for you.

What is your risk tolerance? If you don’t feel that you have the discipline to stick with an investment plan and ride out market volatility, the annuity payments may be a better option.

What about your significant other? Make sure the annuity would pay an adequate survivor benefit for your spouse if they were to outlive you.

Do you want to leave behind a legacy? Most annuities only make a payment for yours and possibly your spouse’s life, so there will be nothing left to leave behind as a legacy. If you were to take the lump sum, there is the potential for funds to be left over for your heirs or charity if invested properly.

What is the financial strength of your company? If your benefit isn’t fully guaranteed by PBGC, you may run the risk that your company may not be able to fulfill the benefit if they were to run into financial trouble.

Shop Around Even if you decide that the annuity payment option is the way to go, compare the monthly benefit you are being offered to current rates on an immediate annuity from an insurance company. You may be able to rollover the lump sum to an IRA and purchase an annuity with more favorable terms.

How to receive a benefit that you have worked a lifetime for is a difficult choice and depends on your personal needs. Once you make a choice, you can’t change your mind, so it is important to factor in all these considerations before making a decision.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

 

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

 

 

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