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estate taxes in new york

Strategies to Minimize Estate Taxes in New York

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Navigating the complexities of estate planning can be overwhelming, especially when it comes to tax implications. In New York, estates valued above a certain threshold are subject to estate tax, which can significantly impact your loved ones’ inheritance. This article identifies strategies to help you maximize your estate while keeping it below the tax limit.

From leveraging lifetime gifting to utilizing trusts, there are various options available to minimize your tax burden and ensure the smooth transfer of your assets to your heirs.

Understanding estate taxes in New York

Estate taxes in New York can be complex and challenging to navigate, especially for those who are unfamiliar with the intricacies of estate planning. As a resident of the Empire State, it’s crucial to have a solid understanding of how estate taxes work and how they can impact your financial goals.
The estate tax is a tax levied on the transfer of your assets upon your death. In New York, the estate tax is administered at the state level, in addition to the federal estate tax. This means that your estate may be subject to both state and federal estate taxes, depending on the value of your assets.

The current estate tax limit in New York

As of 2024, the estate tax exemption in New York is $6.94 million. This means that if the total value of your estate is less than $6.94 million, your estate will not be subject to the New York estate tax. However, if the value of your estate exceeds this threshold, your estate will be subject to a tax rate that can range from 3.06% to 16%.

It’s important to note that the estate tax exemption in New York is different from the federal estate tax exemption. The federal estate tax exemption is currently set at $13.61 million for individuals and $27.22 million for married couples. This means that if your estate is valued below the federal exemption, it will not be subject to the federal estate tax.

Understanding the difference between the state and federal estate tax exemptions is crucial in estate planning. If your estate exceeds the New York exemption but falls below the federal exemption, you may still be subject to the state estate tax, even if you are not subject to the federal estate tax.

Gifting strategies to reduce your estate

Lifetime gifting is a powerful tool in estate planning, as it allows you to transfer wealth to your loved ones while you are still alive. By taking advantage of the annual gift tax exclusion, you can reduce the overall value of your estate and potentially avoid or minimize the estate tax. Under the current tax laws, you can gift up to $18,000 per person per year (or $36,000 for married couples) without incurring any gift tax.

In addition to the annual gift tax exclusion, you can also utilize the lifetime gift tax exemption, which is currently set at $13.61 million per individual. This means that you can gift up to $13.61 million during your lifetime without incurring any gift tax. However, it’s important to note that any gifts you make will reduce the amount of your estate tax exemption at the time of your death.

Another gifting strategy to consider is the use of a 529 college savings plan. By contributing to a 529 plan, you can effectively remove those assets from your estate, while also providing a tax-advantaged way to save for your loved ones’ education. Additionally, 529 plan contributions qualify for the annual gift tax exclusion, making them a particularly attractive option for estate planning.

Creating a trust to protect your assets

Trusts can be a powerful tool in estate planning, as they allow you to transfer assets to your beneficiaries in a controlled and tax-efficient manner. There are several types of trusts that you can consider, each with its own unique advantages and considerations.

One popular option is the revocable living trust. With a revocable living trust, you can transfer ownership of your assets to the trust while you are still alive, but maintain control and access to those assets. Upon your death, the assets in the trust are distributed to your designated beneficiaries, bypassing the probate process.

Another type of trust to consider is the irrevocable trust. Unlike a revocable living trust, an irrevocable trust cannot be modified or terminated once it has been established. However, this structure can provide significant tax benefits, as the assets in the trust are no longer considered part of your estate. Irrevocable trusts can be particularly useful for protecting assets from creditors or for minimizing estate taxes.

Utilizing life insurance to cover estate taxes

Life insurance can be a valuable tool in estate planning, particularly when it comes to addressing the potential estate tax liability. By purchasing a life insurance policy, you can ensure that your loved ones have the funds necessary to pay any estate taxes that may be owed upon your death.

There are several types of life insurance policies that can be used for this purpose, including term life insurance and permanent life insurance (such as whole life or universal life). The choice of policy will depend on your specific needs and financial goals, as well as the size of your estate and the anticipated estate tax liability.

In addition to providing a source of funds to pay estate taxes, life insurance can also be used to create liquidity within your estate. This can be particularly important if your estate is primarily composed of illiquid assets, such as real estate or a closely-held business. By using life insurance to generate cash, you can ensure that your heirs have the resources they need to pay any taxes or other expenses associated with your estate.

Considerations for business owners in estate planning

If you are a business owner, your estate planning strategy will require additional considerations and nuances. Your business assets, including real estate, equipment, and intellectual property, can significantly impact the value of your estate and the potential estate tax liability.

One key consideration for business owners is the use of succession planning. By developing a clear plan for the transfer of your business to your heirs or other designated successors, you can ensure a smooth transition and minimize the potential for disputes or tax complications. This may involve the use of buy-sell agreements, family limited partnerships, or other specialized business structures.

Working with a financial planner and estate planning attorney

Navigating the complexities of estate planning and minimizing your estate tax liability in New York can be a daunting task, especially if you are unfamiliar with the intricacies of the New York estate tax system. That’s why it’s crucial to work with a qualified financial advisor and estate planning attorney who can guide you through the process and help you develop a comprehensive strategy.

Remember, estate planning is an ongoing process, and it’s essential to review and update your plan as your circumstances and the tax landscape evolve. By staying informed, seeking professional guidance, and taking a proactive approach, you can ensure that your legacy is preserved and your loved ones are protected.

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Ways to manage your debt

Manage Your Debt

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New Year’s Resolution: Manage Your Debt

As the new year dawns, most Americans are probably happy to bid good riddance to 2020, a year marked by the COVID-19 pandemic, lockdowns, political brawls, and challenging economic times. Many have had to take on debt to tide them over. If you’re among them, or one of the many other Americans who pay an ever increasing portion of their paychecks to service debt, now may be the ideal time to reassess your finances and take steps to manage and reduce your debt.

I Owe, I Owe…

In America today, carrying some debt is unavoidable, and even desirable, for most households. But between mortgages, car payments, student loans, and credit cards, many Americans find themselves in over their heads. In fact, the average U.S. household carries $6,124 in credit card debt, owes $27,649 in auto loans and $46,459 in student loans, and has a mortgage balance of $197,445.1 Paying off such debt can be costly, in terms of both cash on hand and your overall financial health. So it helps to plan. Start by finding out where you stand, then take the appropriate steps to dig out.

Assessing Your Debt

How much debt is too much? The figure varies from person to person, but in general, if more than 20% of your take-home pay goes to finance non-housing debt or if your rent or mortgage payments exceed 30% of your monthly take-home pay, you may be overextended.

Other signs of overextension include not knowing how much you owe, constantly paying the minimum balance due on credit cards (or worse, being unable to make the minimum payments), and borrowing from one lender to pay another.

Here’s how you can build a clear picture of your debt situation:

  • List all of your credit cards and how much you pay to them each month;
  • List all of your fixed loans (such as car loans and student loans) and their monthly payments; and
  • List your monthly mortgage or rent payment.
  • Once you are done, add them all up. That’s your total monthly debt load.

If you find that you’re overextended, don’t panic. There are a number of steps you can follow to eliminate that debt and get yourself back on track.

Begin With a Budget

The first step in eliminating debt is to figure out where your money goes. This will enable you to see where your debt is coming from and, perhaps, help you to free up some cash to put toward debt.

Track your expenses for one month by writing down what you spend. You might consider keeping your ATM withdrawal slip and writing each expense on it until the money is gone. Hang on to receipts from credit and debit card transactions and add them to the total.

At the end of the month, total up your expenses and break them down into two categories: essential, including fixed expenses such as mortgage/rent, food, and utilities, and nonessential, including entertainment and meals out. Analyze your expenses to see where your spending can be reduced. Perhaps you can cut back on food expenses by bringing lunch to work instead of eating out each day. You might be able to reduce transportation costs by taking public transportation instead of parking your car at a pricey downtown garage. Even utility costs can be reduced by turning lights off, making fewer long-distance calls, or turning the thermostat down a few degrees in winter.

The goal is to reduce current spending so that you won’t need to add to your debt and to free up as much cash as possible to cut down existing debt.

Three Steps to Reduce Debt

Once you’ve got your budget settled, you can begin to attack your existing debt with the following steps.

Pay off high-rate debt first. The higher your interest rate, the more you wind up paying. Begin with your highest-rate credit cards and eliminate the balance as aggressively as possible. For example, assume you have two separate cards, each with a $2,000 balance, one charging 20% interest, the other 8%. By paying the maximum you can afford on the higher rate card, and the minimum on the lower-rate card until the higher-rate card is fully paid off, you will be able to reduce your overall interest costs — perhaps significantly over time.

Transfer high-rate debt to lower-rate cards. Consolidating credit card debts to a single, lower-rate card saves more than postage and paperwork. It also saves in interest costs over the life of the loan. Comparison shop for the best rates, and beware of “teaser” rates that start low, say, at 6%, then jump to much higher rates after the introductory period ends. You can find lists of low-rate cards online from sites such as CardTrak and Bankrate.

If you can only find a card with a low introductory rate, maximize the value of that low-interest period. By paying off your balance aggressively, you will reduce the balance more quickly than you will when the rate goes up.

You can also contact your current credit card companies to inquire about consolidation and lower rates. Competition in the industry is fierce, and many companies are willing to lower their rates to keep their customers. Even a percentage point or two can make a difference with a sizable balance.

Borrow only for the long term. The best use of debt is to finance things that will gain in value, such as a home or an education, or big-ticket necessities, like a washing machine or a computer — assets that will still be around when the debt is paid off. Avoid using your credit card for concert tickets, vacation expenses, or meals out. By the time the balance is gone, you’ll have paid far more than the cost of these items and have nothing but memories to show for it.

By analyzing your spending, controlling expenses, and establishing a plan, you can reduce — and perhaps eliminate — your debt, leaving you with more money to save today and a better outlook for your financial future.

 

1Source: Nerdwallet.com, 2019 American Household Credit Card Debt Study, updated June 2020. Balances are as of June 2020 for households carrying that type of debt.

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

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COVID college costs

College Costs in the Era of COVID-19

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Paying for College in the Era of COVID-19

This semester, millions of students, teachers, and college administrators are having to deal with a radically changed landscape while still managing college costs. At many institutions, classes have been cancelled or moved online. Sports programs have been suspended and dormitories, libraries, and labs shuttered. In fact, traditional campus life has been turned upside down thanks to COVID-19, and it’s unclear how long it will last.

Meanwhile, the cost of a college education is higher than ever. According to the College Board, the average total charges at four-year public colleges (in state) for the 2019-2020 academic year were $21,950. Average costs at four-year private nonprofit colleges were more than double that ($49,870).1 And while increases in costs have moderated in recent years, they continue to outpace inflation and median household income, resulting in a growing dependence on student loans; the average student borrower graduating in 2018 owed about $29,000.2

For cash-strapped students and parents, the current crisis has tipped the scales. Many are rebelling at the high costs in the face of a severely diminished college experience. Others have decided to wait until the crisis has passed before enrolling. Still others are questioning the very value of a college degree under current circumstances.

But the issue of soaring college costs is hardly new, and there are two sides to consider.

Students and Parents: Give Us a Break!

“We are paying a lot of money for tuition, and our students are not getting what we paid for,” comments one California parent, incensed at paying in-person prices for education that has moved online. On-campus facilities and services like computer labs, libraries, and networking opportunities have also been severely diminished by closures.

Already suffering from a pandemic-induced recession, many families are feeling the pinch and want relief. Students in particular have been hard hit with furloughs and layoffs, as many rely on retail service jobs to help them get by — the same jobs that have suffered the most in the face of closures and lockdowns. Many students had also signed leases for off-campus housing and are now stuck with them even if classes are cancelled. In short, students and parents are demanding tuition rebates, increased financial aid, reduced fees, and leaves of absences to compensate for what they feel is a diminished college experience.

Colleges: How Can We Manage?

Meanwhile, colleges and universities are taking a major financial hit from the pandemic. Enrollment is down. International admissions and offshore semesters have been halted. Entire programs have had to be suspended for health reasons. What’s more, substantial resources are required to set up an online curriculum, administer the courses, and train educators. There are also major costs involved with constant COVID testing of students and disinfecting of classrooms, offices, and other facilities. And, colleges must continue to pay existing vendor contracts, maintain facilities, and compensate their own staff. The situation has created an existential crisis among smaller colleges, who lack the endowments and funding of larger institutions. For many, it’s a question of survival.

A Mixed Response to Managing College Costs

Given this predicament and the widely varying circumstances faced by different institutions, it’s no surprise that their responses vary widely. A handful of universities have announced substantial price cuts. Some have cut fees. But most have kept prices flat, and a few have even increased them. While many offer refunds of fees and room and board, the reimbursement policies vary from school to school — and nearly all have drawn the line at tuition. Here’s a sampling of actions taken — or not — by different schools:

  • Full or partial refunds for room and board costs
  • Reduced tuition and fees
  • Discounts in the form of scholarships or loans
  • Renegotiated financial aid packages
  • Frozen tuition at previous year’s level
  • Imposition of “COVID fees” to cover added costs
  • Increased tuition to cover added expenses

Which of these actions a given school takes depends largely on its financial health and reputation. Smaller, private colleges with more at stake are generally offering more in the form of relief. Larger, well-endowed institutions, such as the Ivy League colleges and large state schools, trend toward the status quo. But there are many exceptions, and each institution has its own approach.

What Can You Do?

If you are a student or parent seeking compensation or relief, your options are limited, especially for the current semester. At nearly all institutions, tuition reimbursement is almost nonexistent after several weeks, no matter what the circumstances. Some schools are now offering tuition insurance, but coverage typically applies only when a student withdraws for medical reasons. To find out what relief may be available at your school, contact the registrar.

Alternatively, you can join the thousands of students and parents who have signed petitions or filed lawsuits demanding tuition cuts, housing reimbursements, and more. Check online to see if any such actions may be already in the works at your school.

In the end, like so many other issues arising from the pandemic, the current predicament facing students and schools is likely to be with us until a COVID-19 vaccine is in place. Even then, skyrocketing costs and mounting student debt pose longer-term issues. Any resolution will take time and likely have far-reaching implications for the costs and nature of a college education.

Notes:

1The College Board, Trends in College Pricing 2019.

2The College Board, Trends in Student Aid 2019.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

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Converting a Traditional IRA to a Roth IRA

Converting a Traditional IRA to a Roth IRA

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Thinking of Converting Your Traditional IRA to a Roth? Now May Be the Time

Anyone who is thinking of converting a traditional IRA to a Roth IRA may want to consider do it this year. Why? Because today’s unique conditions create an opportunity to minimize the tax bite from converting. In fact, many have already taken advantage of this opportunity, with one provider reporting a 67% increase during the first four months of 2020 compared to a year earlier.1

But before you begin to decide whether or not to convert, make sure you are familiar with what’s involved with a Roth conversion.

What’s a Roth Conversion?

When you convert your traditional IRA to a Roth IRA, any deductible contributions you had made, along with any investment earnings, are taxed as ordinary income for the year of the conversion. That means the taxable value of the conversion could push you into higher federal and state tax brackets.

You will be responsible for full payment of all taxes in the year the conversion is made. If you use assets from the traditional IRA to pay those taxes, the tax amounts could be treated as premature withdrawals, so you could be subject to additional taxes and penalties.

Depending upon your personal financial situation, a Roth IRA conversion could potentially provide a tax-adjusted benefit over time, provided you meet the eligibility requirements.

Why Now?

The coronavirus pandemic has created unique conditions that may make a Roth conversion more attractive than usual.

Your taxable income may be lower

If, like millions of Americans, you have been furloughed or laid off, or your sales commissions are down, you will likely report lower taxable income for 2020. This may put you in a lower tax bracket so that monies converted to a Roth would be taxed at a lower rate than would otherwise apply (unless the amount converted pushes you into a higher bracket). For instance, converting a $15,000 IRA when your marginal federal tax rate is 12% saves $1,500 of tax compared to converting at a 22% marginal rate — and that does not include state tax, which might also drop.2

Your business may incur a loss

The pandemic is causing many businesses to close or incur a loss. If you expect to report a business loss on your personal return, you may be able to convert to a Roth at a reduced tax cost. With the Roth conversion creating additional income, you could use the loss generated by the business to offset some or all of that income.

Your IRA balance may be down

To minimize taxes, it’s better to convert assets when they’re low in value. Although U.S. stocks have recovered most of the ground lost in February and March, it’s possible your IRA balance may still be well off its peak, depending on how it is invested.

RMDs are suspended for 2020

As part of the CARES Act, required minimum distributions (RMDs) for traditional IRAs and qualified retirement plans were suspended for this year. Not taking distributions from a traditional IRA might keep or put you in a lower tax bracket by reducing your taxable income, making it even more desirable to convert to a Roth.

Current tax rates are low and could go up

The 2017 Tax Cuts and Jobs Act (TCJA) reduced federal tax rates, cutting the top marginal rate to 37%. That’s relatively low compared with recent history. Given the staggering price tag of the pandemic bailout (so far) and the ballooning budget deficit, it’s reasonable to assume that at some point, tax rates may increase. When this might happen is anyone’s guess, but converting while rates are relatively low is something to consider.

To Convert or Not?

Whether you would be better off leaving your funds in a traditional account or moving all or some of them to a Roth IRA will depend upon your personal circumstances. Generally speaking, Roth IRA conversions are best suited for investors who have significant time until retirement, are high wage earners, think they may be in a higher tax bracket at retirement, or are looking for an estate planning tool to help pass wealth to their heirs.

Whatever your circumstances, keep in mind that IRS rules governing IRAs and conversions are complex. So be sure to consult with a financial or tax professional before deciding.

Source/Disclaimer:

1Money, Roth IRA Conversions Are Surging. Here’s Why This Retirement Savings Strategy Is So Popular Right Now, June 4, 2020.

2Example is for illustration only. Your results will differ.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year your convert, you must do so before converting to a Roth IRA.

 This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

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Retiring Early Because of COVID

Retiring Early Because of the Coronavirus

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Should You Take An Early Retirement?

The story is a common one these days. You have been furloughed or laid off, just a few years before you plan to retire. Or, your work-from-home arrangement is ending, and you’re not keen on resuming the commute or going back to a crowded workspace. Retiring early may be a good idea, since fate has presented the opportunity?

Many 50- and 60-somethings are asking themselves this very question. In fact, the average American retires at age 61.1 But, that’s at least five years away from collecting full Social Security retirement benefits, not to mention pensions, which typically begin at age 65, when available. What’s more, Medicare coverage does not begin until age 65, leaving early retirees with potentially hefty health insurance premiums until Medicare kicks in.

Anyone contemplating retiring early will want to plan carefully and ask several important questions.

When Should You Begin Collecting Social Security?

You can begin collecting Social Security retirement benefits as early as age 62. But you will face a significant reduction if you start before your normal retirement age: from 66 to 67, depending upon when you were born. Those choosing to collect before that age face a reduction in monthly payments by as much as 30%. Also, there is a stiff penalty for anyone who collects early and earns wages in excess of an annual earnings limit ($18,240 in 2020).

What age is best for you will ultimately depend upon your financial situation as well as your anticipated life expectancy. For most people, holding off until normal retirement age is worth the wait. But you may want to consider taking your benefits earlier if:

  • You are in poor health.
  • No longer working and need the benefit to help make ends meet.
  • Earn less than your spouse and your spouse has decided to continue working to help earn a better benefit.

How Will You Fund Health Care Costs?

A big obstacle to early retirement is health insurance. If you are working for a company that pays all or most of your health insurance, you could face hundreds of dollars in added monthly expenses if you retire before age 65. Plus, most companies no longer offer retiree health benefits, and if they do, the premiums can be high or the coverage low. In addition to health insurance premiums, there are also co-pays, annual out-of-pocket deductibles, uncovered procedures, and out-of-network costs to consider — not to mention dental and vision care costs.

On the positive side, the Affordable Care Act (ACA) prohibits insurance companies from discriminating because of preexisting illnesses and limits how much they can charge based on age. And for those with lower incomes, government subsidies may be available.

What Will Early Retirement Mean for Your Investing and Withdrawal Strategies?

Perhaps the most significant concern for early retirees — one that is often overlooked — is how retiring early will impact their investing and withdrawal strategies. Retiring early means taking larger distributions from your retirement savings in the early years until Social Security and pension payments begin. This can have a significant impact on how long your savings last, perhaps more so than if larger distributions are taken later in retirement. Consider the following:

  • Delay withdrawals from tax-favored retirement accounts, such as individual retirement accounts (IRAs) or 401(k) plans. The longer you wait to withdraw this money, the more you can potentially benefit from tax-deferred compounding. Instead, consider tapping into taxable accounts first.
  • Adjust your withdrawal rate to help ensure that your savings will last throughout a lengthened retirement. Financial planners typically recommend a 4%-5% annual withdrawal rate at retirement, but you may want to lower this since you will need your savings to last longer.
  • Structure your investments to include a significant growth element. Since your money will have to last longer, you will want to consider including stocks or other assets that carry high growth potential. Stocks are typically more volatile than bonds or other fixed-income investments but have a better long-term record of outpacing inflation.

So, if the coronavirus pandemic has left you thinking about retiring early, make sure you are prepared. The first place to start is with a detailed plan that includes estimated income and expenses. Work with a financial professional to put in place a plan that factors in all of the necessary elements you will want to consider.

 

Source/Disclaimer:

1Source: Gallup, Snapshot: Average American Predicts Retirement Age of 66, May 10, 2018.

 

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

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Getting prepared to retire

Retiring? Take Control of Your Assets

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Retiring? Take Control of Your Assets

After years of saving and investing, you can finally see the big day — retirement. But before kicking back, you still need to address a few matters. Decisions made now could make the difference between your money outlasting you or vice versa.

Calculating Your Retirement Needs

First, figure out how much income you may need. When retirement was years away, this exercise may have involved a lot of estimates. Now, you can be more accurate. Consider the following factors:

  • Your home base — Do you intend to remain in your current home? If so, when will your mortgage be paid? Will you sell your current home for one of lesser value, or “trade up”?
  • The length of your retirement — The average 65-year-old man can expect to live about 17 more years; the average 65-year-old woman, 20 more years, according to the National Center for Health Statistics. Have you accounted for a retirement of 20 or more years?
  • Earned income — The Bureau of Labor Statistics estimates that by 2022, 23% of people aged 65 or older will still be employed, almost twice the proportion that prevailed in 2002.1 If you continue to work, how much might you earn?
  • Your retirement lifestyle — Your lifestyle will help determine how much preretirement income you’ll need to support yourself. A typical guideline is 60% to 80%, but if you want to take luxury cruises or start a business, you may well need 100% or more.
  • Health care costs and insurance — Many retirees underestimate health care costs. Most Americans are not eligible for Medicare until age 65, but Medicare doesn’t cover everything. You can purchase Medigap supplemental health insurance to cover some of the extras, but even Medigap insurance does not pay for long-term custodial care, eyeglasses, hearing aids, dental care, private-duty nursing, or unlimited prescription drugs. For more on Medicare and health insurance, visit Medicare’s consumer website.
  • Inflation — Although the inflation rate can be relatively tame, it can also surge. It’s a good idea to tack on an additional 4% each year to help compensate for inflation.

Running the Numbers

The next step is to identify all of your potential income sources, including Social Security, pensions, and personal investments. Don’t overlook cash-value life insurance policies, income from trusts, real estate, and the equity in your home.

Also review your asset allocation — how you divide your portfolio among stocks, bonds, and cash. Are you tempted to convert all of your investments to low-risk securities? Such a move may place your assets at risk of losing purchasing power due to inflation. You may live in retirement for a long time, so try to keep your portfolio working for you — both now and in the future. A financial advisor can help you determine an appropriate asset allocation.

                            Robber Baron: Inflation
Here’s how a 4% inflation rate would erode $400,000 over a 25-year period. Because inflation slowly eats away at the purchasing power of a dollar, it’s important to factor inflation into your annual retirement expenses.
 Retiring? Take Control of Your Assets

 
  This example is hypothetical and for illustrative purposes only.

A New Phase of Financial Planning

Once you’ve assessed your needs and income sources, it’s time to look at cracking that nest egg you’ve built up. First, determine a prudent withdrawal rate. A common approach is to liquidate 5% of your principal each year of retirement; however, your income needs may differ.

Next, you’ll need to decide when to tap into tax-deferred and taxable investments. The advantage of holding on to tax-deferred investments (employer-sponsored retirement plan assets, IRAs, and annuities) is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.2 However, earnings and deductible contributions in tax-deferred accounts are subject to income tax upon withdrawal — a tax that can be as high as 39.6% at the federal level. In contrast, long-term capital gains from the sale of taxable investments are taxed at a maximum of 20%.3 The key to managing taxes is to determine the best strategy given your income needs and tax bracket.

Also, tax-deferred assets are generally subject to required minimum distributions (RMDs) — based on IRS life expectancy tables — after you reach age 70½. Failure to take the required distribution can result in a penalty equal to 50% of the required amount. Fortunately, guidelines do not apply to Roth IRAs or annuities.2 For more information on RMDs, see the IRS’s RMD resource page or call the IRS at 1-800-829-1040.

A Lifelong Strategy

A carefully crafted retirement strategy also takes into account your estate plan. A will is the most basic form of an estate plan, as it helps ensure that your assets get disbursed according to your wishes. Also, make sure that your beneficiary designations for retirement accounts and life insurance policies are up-to-date.

If estate taxes are a concern, you may want to consider strategies to help manage income while minimizing your estate tax obligation. For example, with a grantor retained annuity trust (GRAT), you move assets to an irrevocable trust and then receive an annual annuity for a specific number of years. At the end of that period, the remaining value in the GRAT passes to your beneficiary — usually your child — generally free of gift taxes. Another option might be a charitable remainder trust, which allows you and/or a designated beneficiary to receive income during life and a tax deduction at the same time. Ultimately, the assets pass free of estate taxes to a named charity.

It’s easy to become overwhelmed by all the financial decisions that you must make at retirement. The most important part of the process is to consult a qualified financial professional, a tax advisor, and an estate-planning attorney to make sure that you’re prepared for this new — and exciting — stage of your life.

                   How Much Can You Withdraw?
This chart can give you an idea how much you could potentially withdraw from your retirement savings each year. For example, if you begin with $400,000 in assets and expect an average annual return of 5% over a 25-year retirement, you could potentially withdraw $18,000 per year. Withdraw more than that each year and you may outlive your money. Also consider: This chart doesn’t take income taxes into account, which can range from 10% to 35%, depending on your tax bracket.
 Retiring? Take Control of Your Assets
Assumes 5% average annual return, and that withdrawal rate is adjusted for annual 4% inflation rate after the first year. This example is hypothetical and for illustrative purposes only. Investment returns cannot be guaranteed.

 

1Source: Labor Force Projections to 2022, Monthly Labor Review, U.S. Bureau of Labor Statistics.

2Withdrawals from tax-deferred accounts prior to age 59½ are taxable and may be subject to a 10% additional tax. Neither fixed nor variable annuities are insured by the Federal Deposit Insurance Corp., and they are not deposits of — or endorsed or guaranteed by — any bank. Withdrawals from annuities may result in surrender charges.

3A 3.8% tax on unearned income may also apply.

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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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