Your 2019 Financial To-Do List

Things you can do for your future as the year unfolds.  

Provided by Lake Hills Wealth Management        

What financial, business, or life priorities do you need to address for 2019? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to lowering your taxes. You have plenty of options. Here are a few that might prove convenient.

Can you contribute more to your retirement plans this year? In 2019, the yearly contribution limit for a Roth or traditional IRA rises to $6,000 ($7,000 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $137,000 and joint filers with MAGI above $203,000 cannot make 2019 Roth contributions.1

For tax year 2019, you can contribute up to $19,000 to 401(k), 403(b), and most 457 plans, with a $6,000 catch-up contribution allowed if you are age 50 or older. If you are self-employed, you may want to look into whether you can establish and fund a solo 401(k) before the end of 2019; as employer contributions may also be made to solo 401(k)s, you may direct up to $56,000 into one of those plans.1

Your retirement plan contribution could help your tax picture. If you won’t turn 70½ in 2019 and you participate in a traditional qualified retirement plan or have a traditional IRA, you can cut your taxable income through a contribution. Should you be in the new 24% federal tax bracket, you can save $1,440 in taxes as a byproduct of a $6,000 traditional IRA contribution.2

What are the income limits on deducting traditional IRA contributions? If you participate in a workplace retirement plan, the 2019 MAGI phase-out ranges are $64,000-$74,000 for singles and heads of households, $103,000-$123,000 for joint filers when the spouse making IRA contributions is covered by a workplace retirement plan, and $193,000-$203,000 for an IRA contributor not covered by a workplace retirement plan, but married to someone who is.1 

Roth IRAs and Roth 401(k)s, 403(b)s, and 457 plans are funded with after-tax dollars, so you may not take an immediate federal tax deduction for your contributions to them. The upside is that if you follow I.R.S. rules, the account assets may eventually be withdrawn tax free.3

Your tax year 2019 contribution to a Roth or traditional IRA may be made as late as the 2020 federal tax deadline – and, for that matter, you can make a 2018 IRA contribution as late as April 15, 2019, which is the deadline for filing your 2018 federal return. There is no merit in waiting until April of the successive year, however, since delaying a contribution only delays tax-advantaged compounding of those dollars.1,3

Should you go Roth in 2019? You might be considering that if you only have a traditional IRA. This is no snap decision; the Internal Revenue Service no longer gives you a chance to undo it, and the tax impact of the conversion must be weighed versus the potential future benefits. If you are a high earner, you should know that income phase-out limits may affect your chance to make Roth IRA contributions. For 2019, phase-outs kick in at $193,000 for joint filers and $122,000 for single filers and heads of household. Should your income prevent you from contributing to a Roth IRA at all, you still have the chance to contribute to a traditional IRA in 2019 and go Roth later.1,4  

Incidentally, a footnote: distributions from certain qualified retirement plans, such as 401(k)s, are not subject to the 3.8% Net Investment Income Tax (NIIT) affecting single/joint filers with MAGIs over $200,000/$250,000. If your MAGI does surpass these thresholds, then dividends, royalties, the taxable part of non-qualified annuity income, taxable interest, passive income (such as partnership and rental income), and net capital gains from the sale of real estate and investments are subject to that surtax. (Please note that the NIIT threshold is just $125,000 for spouses who choose to file their federal taxes separately.)5

Consult a tax or financial professional before you make any IRA moves to see how those changes may affect your overall financial picture. If you have a large, traditional IRA, the projected tax resulting from a Roth conversion may make you think twice.  

What else should you consider in 2019? There are other things you may want to do or review.  

Make charitable gifts. The individual standard deduction rises to $12,000 in 2019, so there will be less incentive to itemize deductions for many taxpayers – but charitable donations are still deductible if they are itemized. If you plan to gift more than $12,000 to qualified charities and non-profits in 2019, remember that the paper trail is important.6    

If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record or a written communication from the charity with the date and amount. Incidentally, the I.R.S. does not equate a pledge with a donation. You must contribute to a qualified charity to claim a federal charitable tax deduction. Incidentally, the Tax Cuts and Jobs Act lifted the ceiling on the amount of cash you can give to a charity per year – you can now gift up to 60% of your adjusted gross income in cash per year, rather than 50%.6,7   

What if you gift appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the investment and donating the proceeds. The non-profit organization gets the full amount of the gift, and you can claim a deduction of up to 30% of your adjusted gross income.8   

Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, you should ask that charity or non-profit group for a receipt. You should always request a receipt for a cash gift, no matter how large or small the amount.8

If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

Open an HSA. If you are enrolled in a high-deductible health plan, you may set up and fund a Health Savings Account in 2019. You can make fully tax-deductible HSA contributions of up to $3,500 (singles) or $7,000 (families); catch-up contributions of up to $1,000 are permitted for those 55 or older. HSA assets grow tax deferred, and withdrawals from these accounts are tax free if used to pay for qualified health care expenses.9

Practice tax-loss harvesting. By selling depreciated shares in a taxable investment account, you can offset capital gains or up to $3,000 in regular income ($1,500 is the annual limit for married couples who file separately). In fact, you may use this tactic to offset all your total capital gains for a given tax year. Losses that exceed the $3,000 yearly limit may be rolled over into 2020 (and future tax years) to offset ordinary income or capital gains again.10

Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pre-tax accounts, and your most tax-efficient securities should be held in taxable accounts.  

Review your withholding status. You may have updated it last year when the I.R.S. introduced new withholding tables; you may want to adjust for 2019 due to any of the following factors.   

* You tend to pay a great deal of income tax each year.

* You tend to get a big federal tax refund each year.

* You recently married or divorced.

* A family member recently passed away.

* You have a new job, and you are earning much more than you previously did.

* You started a business venture or became self-employed.

Are you marrying in 2019? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2019, you will need a new Social Security card. Additionally, the two of you, no doubt, have individual retirement saving and investment strategies. Will they need to be revised or adjusted once you are married?   

Are you coming home from active duty? If so, go ahead and check the status of your credit and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still in place. Revoke any power of attorney you may have granted to another person.   

Consider the tax impact of any upcoming transactions. Are you planning to sell (or buy) real estate next year? How about a business? Do you think you might exercise a stock option in the coming months? Might any large commissions or bonuses come your way in 2019? Do you anticipate selling an investment that is held outside of a tax-deferred account? Any of these actions might significantly impact your 2019 taxes.    

If you are retired and older than 70½, remember your year-end RMD. Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs, 401(k)s, SEP IRAs, and SIMPLE IRAs by December 31 of each year. The I.R.S. penalty for failing to take an RMD equals 50% of the RMD amount that is not withdrawn.4,11

If you turned 70½ in 2018, you can postpone your initial RMD from an account until April 1, 2019. All subsequent RMDs must be taken by December 31 of the calendar year to which the RMD applies. The downside of delaying your 2018 RMD into 2019 is that you will have to take two RMDs in 2019, with both RMDs being taxable events. You will have to make your 2018 tax year RMD by April 1, 2019, and then take your 2019 tax year RMD by December 31, 2019.11

Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your adjusted gross income, plus any non-taxable interest income you earn, plus 50% of your Social Security benefits surpasses a certain level, then some Social Security benefits become taxable. Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.11

Lastly, should you make 13 mortgage payments in 2019? There may be some merit to making a January 2020 mortgage payment in December 2019. If you have a fixed-rate loan, a lump-sum payment can reduce the principal and the total interest paid on it by that much more.

Talk with a qualified financial or tax professional today. Vow to focus on being healthy and wealthy in 2019.       

Citations.

1 - forbes.com/sites/ashleaebeling/2018/11/01/irs-announces-2019-retirement-plan-contribution-limits-for-401ks-and-more [11/1/18]

2 - irs.com/articles/2018-federal-tax-rates-personal-exemptions-and-standard-deductions [11/2/17]

3 - irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [7/10/18]

4 - forbes.com/sites/bobcarlson/2018/10/26/7-ira-strategies-for-year-end-2018/ [10/26/18]

5 - irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax [6/18/18]

6 - crainsdetroit.com/philanthropy/what-donors-need-know-about-tax-reform [10/21/18]

7 - thebalance.com/tax-deduction-for-charity-donations-3192983 [7/25/18]

8 - schwab.com/resource-center/insights/content/charitable-donations-the-basics-of-giving [7/2/18]

9 - kiplinger.com/article/insurance/T027-C001-S003-health-savings-account-limits-for-2019.html [8/28/18]

10 - schwab.com/resource-center/insights/content/reap-benefits-tax-loss-harvesting-to-lower-your-tax-bill [10/7/18]

11 - fool.com/retirement/2018/01/29/5-things-to-consider-before-tapping-your-retiremen.aspx [1/29/18

When You Retire Without Enough

Start your “second act” with inadequate assets, and your vision of the future may be revised.

Provided by Lake Hills Wealth Management

How much have you saved for retirement? Are you on pace to amass a retirement fund of $1 million by age 65? More than a few retirement counselors urge pre-retirees to strive for that goal. If you have $1 million in invested assets when you retire, you can withdraw 4% a year from your retirement funds and receive $40,000 in annual income to go along with Social Security benefits (in ballpark terms, about $30,000 per year for someone retiring from a long career). If your investment portfolio is properly diversified, you may be able to do this for 25-30 years without delving into assets elsewhere.1

Perhaps you are 20-25 years away from retiring. Factoring in inflation and medical costs, maybe you would prefer $80,000 in annual income plus Social Security at the time you retire. Strictly adhering to the 4% rule, you will need to save $2 million in retirement funds to satisfy that preference.1

There are many variables in retirement planning, but there are also two realities that are hard to dismiss. One, retiring with $1 million in invested assets may suffice in 2018, but not in the 2030s or 2040s, given how even moderate inflation whittles away purchasing power over time. Two, most Americans are saving too little for retirement: about 5% of their pay, according to research from the Federal Reserve Bank of St. Louis. Fifteen percent is a better goal.1

Fifteen percent? Really? Yes. Imagine a 30-year-old earning $40,000 annually who starts saving for retirement. She gets 3.8% raises each year until age 67; her investment portfolio earns 6% a year during that time frame. At a 5% savings rate, she would have close to $424,000 in her retirement account 37 years later; at a 15% savings rate, she would have about $1.3 million by age 67. From boosting her savings rate 10%, she ends up with three times as much in retirement assets.1   

Now, what if you save too little for retirement? That implies some degree of compromise to your lifestyle, your dreams, or both. You may have seen your parents, grandparents, or neighbors make such compromises.         

There is the 75-year-old who takes any job he can, no matter how unsatisfying or awkward, because he realizes he is within a few years of outliving his money. There is the small business owner entering her sixties with little or no savings (and no exit strategy) who doggedly resolves to work until she dies.

Perhaps you have seen the widow in her seventies who moves in with her son and his spouse out of financial desperation, exhibiting early signs of dementia and receiving only minimal Social Security benefits. Or the healthy and active couple in their sixties who retire years before their savings really allow, and who are chagrined to learn that their only solid hope of funding their retirement comes down to selling the home they have always loved and moving to a cheaper and less cosmopolitan area or a tiny condominium.    

When you think of retirement, you probably do not think of “just getting by.” That is no one’s retirement dream. Sadly, that risks becoming reality for those who save too little for the future. Talk to a financial professional about what you have in mind for retirement: what you want your life to look like, what your living expenses could be like. From that conversation, you might get a glimpse of just how much you should be saving today for tomorrow.

Citations.

1 - investopedia.com/retirement/retirement-income-planning/ [6/7/18]

Tolerate the Turbulence

Look beyond this moment and stay focused on your long-term objectives.

Provided by Lake Hills Wealth Management

Volatility will always be around on Wall Street, and as you invest for the long term, you must learn to tolerate it. Rocky moments, fortunately, are not the norm.  

Since the end of World War II, there have been dozens of Wall Street shocks. Wall Street has seen 56 pullbacks (retreats of 5-9.99%) in the past 73 years; the S&P index dipped 6.9% in this last one. On average, the benchmark fully rebounded from these pullbacks within two months. The S&P has also seen 22 corrections (descents of 10-19.99%) and 12 bear markets (falls of 20% or more) in the post-WWII era.1

Even with all those setbacks, the S&P has grown exponentially larger. During the month World War II ended (September 1945), its closing price hovered around 16. At this writing, it is above 2,750. Those two numbers communicate the value of staying invested for the long run.2 

This current bull market has witnessed five corrections, and nearly a sixth (a 9.8% pullback in 2011, a year that also saw a 19.4% correction). It has risen roughly 335% since its beginning even with those stumbles. Investors who stayed in equities through those downturns watched the major indices soar to all-time highs.1 

As all this history shows, waiting out the shocks may be highly worthwhile. The alternative is trying to time the market. That can be a fool’s errand. To succeed at market timing, investors have to be right twice, which is a tall order. Instead of selling in response to paper losses, perhaps they should respond to the fear of missing out on great gains during a recovery and hang on through the choppiness. 

After all, volatility creates buying opportunities. Shares of quality companies are suddenly available at a discount. Investors effectively pay a lower average cost per share to obtain them.

Bad market days shock us because they are uncommon. If pullbacks or corrections occurred regularly, they would discourage many of us from investing in equities; we would look elsewhere to try and build wealth. A decade ago, in the middle of the terrible 2007-09 bear market, some investors convinced themselves that bad days were becoming the new normal. History proved them wrong.  

As you ride out this current outbreak of volatility, keep two things in mind. One, your time horizon. You are investing for goals that may be five, ten, twenty, or thirty years in the future. One bad market week, month, or year is but a blip on that timeline and is unlikely to have a severe impact on your long-run asset accumulation strategy. Two, remember that there have been more good days on Wall Street than bad ones. The S&P 500 rose in 53.7% of its trading sessions during the years 1950-2017, and it advanced in 68 of the 92 years ending in 2017.3,4

Sudden volatility should not lead you to exit the market. If you react anxiously and move out of equities in response to short-term downturns, you may impede your progress toward your long-term goals. 

Citations.

1 - marketwatch.com/story/if-us-stocks-suffer-another-correction-start-worrying-2018-10-16 [10/16/18]

2 - multpl.com/s-p-500-historical-prices/table/by-month [10/18/18]

3 - crestmontresearch.com/docs/Stock-Yo-Yo.pdf [10/18/18]

4 - icmarc.org/prebuilt/apps/downloadDoc.asp [2/18]

 

Investing Means Tolerating Some Risk

That truth must always be recognized.

Provided by Lake Hills Wealth Management                

When financial markets have a bad day, week, or month, discomforting headlines and data can swiftly communicate a message to retirees and retirement savers alike: equity investments are risky things, and Wall Street is a risky place.  

All true. If you want to accumulate significant retirement savings or try and grow your wealth through the opportunities in the markets, this is a reality you cannot avoid. 

Regularly, your investments contend with assorted market risks. They never go away. At times, they may seem dangerous to your net worth or your retirement savings, so much so that you think about getting out of equities entirely.  

If you are having such thoughts, think about this: in the big picture, the real danger to your retirement could be being too risk averse.  

Is it possible to hold too much in cash? Yes. Some pre-retirees do. (Even some retirees, in fact.) They have six-figure savings accounts, built up since the Great Recession and the last bear market. It is a prudent move. A dollar will always be worth a dollar in America, and that money is out of the market and backed by deposit insurance. 

This is all well and good, but the problem is what that money is earning. Even with interest rates rising, many high-balance savings accounts are currently yielding less than 0.5% a year. The latest inflation data shows consumer prices advancing 2.3% a year. That money in the bank is not outrunning inflation, not even close. It will lose purchasing power over time.1,2

Consider some of the recent yearly advances of the S&P 500. In 2016, it gained 9.54%; in 2017, it gained 19.42%. Those were the price returns; the 2016 and 2017 total returns (with dividends reinvested) were a respective 11.96% and 21.83%.3,4  

Yes, the broad benchmark for U.S. equities has bad years as well. Historically, it has had about one negative year for every three positive years. Looking through relatively recent historical windows, the positives have mostly outweighed the negatives for investors. From 1973-2016, for example, the S&P gained an average of 11.69% per year. (The last 3-year losing streak the S&P had was in 2000-02.)5

Your portfolio may not return as well as the S&P does in a given year, but when equities rally, your household may see its invested assets grow noticeably. When you bring in equity investment account factors like compounding and tax deferral, the growth of those invested assets over decades may dwarf the growth that could result from mere checking or savings account interest.

At some point, putting too little into investments and too much in the bank may become a risk – a risk to your retirement savings potential. At today’s interest rates, the money you are saving may end up growing faster if it is invested in some vehicle offering potentially greater reward and comparatively greater degrees of risk to tolerate. 

Having a big emergency fund is good. You can dip into that liquid pool of cash to address sudden financial issues that pose risks to your financial equilibrium in the present.

Having a big retirement fund is even better. When you have one of those, you may confidently address the biggest financial risk you will ever face: the risk of outliving your money in the future.

Citations.

1 - valuepenguin.com/average-savings-account-interest-rates [10/4/18]

2 - investing.com/economic-calendar/ [10/11/18]

3 - money.cnn.com/data/markets/sandp/ [10/11/18]

4 - ycharts.com/indicators/sandp_500_total_return_annual [10/11/18]

5 - thebalance.com/stock-market-returns-by-year-2388543 [6/23/18]

 

Your Diversified Portfolio vs. the S&P 500

How global returns and proper diversification are affecting overall returns.  

Provided by Lake Hills Wealth Management

“Why is my portfolio underperforming the market?” This question may be on your mind. It is a question that investors sometimes ask after stocks shatter records or return exceptionally well in a quarter.  

The short answer is that while the U.S. equities market has realized significant gains in 2018, international markets and intermediate and long-term bonds have underperformed and exerted a drag on overall portfolio performance. A little elaboration will help explain things further.    

A diversified portfolio necessarily includes a range of asset classes. This will always be the case, and while investors may wish for an all-equities portfolio when stocks are surging, a 100% stock allocation is obviously fraught with risk.    

Because of this long bull market, some investors now have larger positions in equities than they originally planned. A portfolio once evenly held in equities and fixed income may now have a majority of its assets held in stocks, with the performance of stock markets influencing its return more than in the past.1

Yes, stock markets – as in stock markets worldwide. Today, investors have more global exposure than they once did. In the 1990s, international holdings represented about 5% of an individual investor’s typical portfolio. Today, that has risen to about 15%. When overseas markets struggle, it does impact the return for many U.S. investors – and struggle they have. A strong dollar, the appearance of tariffs – these are considerable headwinds.2,3  

In addition, a sudden change in sector performance can have an impact. At one point in 2018, tech stocks accounted for 25% of the weight of the S&P 500. While the recent restructuring of S&P sectors lowered that by a few percentage points, portfolios can still be greatly affected when tech shares slide, as investors witnessed in fall 2018.4   

How about the fixed-income market? Well, this has been a weak year for bonds, and bonds are not known for generating huge annual returns to start with.3 

This year, U.S. stocks have been out in front. A portfolio 100% invested in the U.S. stock market would have a 2018 return like that of the S&P 500. But who invests entirely in stocks, let alone without any exposure to international and emerging markets?3 

Just as an illustration, assume there is a hypothetical investor this year who is actually 100% invested in equities, as follows: 50% domestic, 35% international, 15% emerging markets. In the first two-thirds of 2018, that hypothetical portfolio would have advanced just 3.6%.3

Your portfolio is not the market – and vice versa. Your investments might be returning 3% or less so far this year. Yes – this year. Will the financial markets behave in this exact fashion next year? Will the sector returns or emerging market returns of 2018 be replicated year after year for the next 10 or 15 years? The chances are remote.   

The investment markets are ever-changing. In some years, you may get a double-digit return. In other years, your return is much smaller. When your portfolio is diversified across asset classes, the highs may not be so high – but the lows may not be so low, either. When things turn volatile, diversification may help insulate you from some of the ups and downs you go through as an investor.

Citations.

1 - seattletimes.com/business/5-steps-to-take-if-the-bull-market-run-has-you-thinking-of-unloading-stocks/ [8/25/18]

2 - forbes.com/sites/simonmoore/2018/08/05/how-most-investors-get-their-international-stock-exposure-wrong/ [8/5/18]

3 - thestreet.com/investing/stocks/dear-financial-advisor-why-is-my-portfolio-performing-so-14712955 [9/15/18]

4 - cnbc.com/2018/04/20/tech-dominates-the-sp-500-but-thats-not-always-a-bad-omen.html [4/20/18]

 

Preparing to Retire Single

Unmarrieds need to approach retirement planning pragmatically.

Provided by Lake Hills Wealth Management   

In an ideal world, it would be simple to prepare for a solo retirement. You would just save half as much as a couple saves, buy half as much insurance coverage, and expect to live on half the income. Reality dictates otherwise.

Real-world planning for a solo retirement begins with an assumption. You assume, at some point, that you will retire alone. You may be ready to make that assumption at age 40. Or, that distinct probability may emerge at age 55. These midlife assumptions aside, you should acknowledge the possibility that you may end up spending some of your retirement alone, even if you retire with a spouse or partner.

As a solo ager, your retirement becomes a test of self-reliance. As ABC News notes, the Elder Orphan Facebook Group recently polled its 8,500 members about the “safety net” they had and collected 500 responses. Thirty-five percent lacked “friends or family to help them cope with life’s challenges,” and 70% had no specific idea of who their caregiver would be in event of mental or physical decline.1

Think about what you do for your elderly parents or what you have done. Look ahead and consider who or what resource could provide that help to you someday.

Insuring yourself is critical before and after you retire. If you retire before becoming eligible for Medicare, could you lean on COBRA or remain on a group health plan a bit longer before having to find your own health insurance? Disability insurance is also important while you are still working, to protect your income. As Dave Ramsey says, your income is your most powerful wealth building tool. When you lose your income, that tool is broken, and that restricts your retirement savings effort.2  

How about long-term care insurance? Opinions are divided, and even affluent single retirees may find it hard to afford. Look into it, but also look at other possible methods for coming up with the money you may need for your eldercare. As for assistance with daily living, some creative seniors who age alone take in a younger relative, friend, or roommate who lives with them rent free in exchange for helping them with daily tasks.

It is also crucial for a solo ager to assign powers of attorney. Through a durable power of attorney for health care and a living will, you can respectively identify who will make medical decisions for you if you become incapacitated and the degree of care you want (or do not want) if that occurs. (Some states fuse both documents into one, called an advance directive.) There is also the matter of assigning a financial power of attorney. What trustworthy person can make good financial decisions on your behalf, if you are no longer capable of doing so?3   

Tax-favored investing is vital before and after retirement as well. As a single, childless person, you cannot qualify for federal tax breaks like the Child Tax Credit, and you will not gain the tax benefits that come with being a married, joint filer. Building up retirement savings in a workplace retirement plan and traditional IRA is good, because you can lower your taxable income through the pre-tax contributions and position the invested assets with taxes deferred.4  

You may want to consider partly or fully converting a traditional IRA to a Roth before retiring. Traditional IRA owners must take Required Minimum Distributions (RMDs) once they reach age 70½, and each RMD is taxed as regular income. For a single, retired taxpayer, that can be rough: you can find yourself tossed into a higher tax bracket, but without the tax breaks afforded to married couples. Original owners of Roth IRAs never need to take RMDs.4,5  

Want a larger monthly Social Security benefit? Then work longer and wait longer to claim Social Security. If you are divorced, and were married for ten years or longer, you are likely eligible for spousal benefits reflecting your former spouse’s income history. If your ex-spouse was a comparatively high earner, your total benefits could see a boost.4

In retiring solo, you do have a flexibility that married couples do not. If you feel like moving and downsizing, go right ahead. If you want to bring in roommates or decide you want to retire to French Polynesia, Chile, or Italy, the only “yes” you need is yours. If you decide to retire later or earlier, you can make that decision independent of spousal approval. All this freedom is nice, and it is perhaps the greatest retirement perk a single person has. Just be sure to prepare for the future pragmatically.

Citations.

1 - abcnews.go.com/Health/safety-net-kids-spouse-elder-orphans-fearless-fallback/story?id=58281018 [10/4/18]

2 - daveramsey.com/askdave/20-somethings/8431

3 - nolo.com/legal-encyclopedia/living-will-power-of-attorney-29595.html [10/4/18]

4 - wisebread.com/7-ways-retirement-planning-changes-when-youre-single [7/14/17]

5 - forbes.com/sites/catherineschnaubelt/2018/05/03/reducing-your-future-tax-burden-with-a-roth-ira-conversion/ [5/3/18]

 

Filling Out the FAFSA

There is really no reason to wait.  

Provided by Lake Hills Wealth Management

October is here – the ideal time for college students to apply for financial aid. October 1, in fact, marks the first day a current or future college student can submit a Free Application for Federal Student Aid, or FAFSA, for the 2019-20 academic year. Since some states offer aid on a first-come, first-serve basis, submitting a FAFSA as soon as possible is wise.1,2

You can even apply using your phone. Install the new myStudentAid app created by the Department of Education, available for iOS and Android operating systems. While filling out the FAFSA takes time whether you use a PC, tablet, phone, or pen, it may feel easier to start on a phone. In fact, Mark Kantrowitz, publisher of SavingForCollege.com, just remarked to CNBC that the mobile app was “much easier to use, even fun.” The FAFSA asks students and parents more than 100 questions, so any degree of “fun” is good. (Thanks to the new app, you can start filling out a FAFSA on a computer and finish it on a phone, and vice versa.)1,2

Due to the new phone app, more FAFSAs might be filed this year. Slightly more than 20 million FAFSAs were submitted for the 2014-15 award cycle; in contrast, just over 10 million were filed for 2018-19. This decline might reflect an improved economy and a boost in household wealth, but it may be temporary.2    

What should your student have handy while filling out the form? After creating an FSA ID (a username, a password), your student will need to reference all kinds of personal information, some of which will be yours. The FAFSA asks for birth dates, Social Security numbers, and driver’s license numbers. It asks for financial information: savings account balances, home values, investment account values. (It does not require you to report balances of workplace retirement plan accounts, pension plans, or IRAs.) Untaxed income must be figured; interest income and child support fall into that category.1

All FAFSAs now require federal tax information from the year that is two years prior to the current award cycle. In other words, on this year’s FAFSA, you need to include federal tax information from 2017. This may not be as arduous as it sounds because you can use the Internal Revenue Service Data Retrieval Tool (irsdataretrievaltool.com). This online tool lets you import your 2017 federal tax information straight into the FAFSA; it is accessed through a “Link to I.R.S.” button. (Information input into the Data Retrieval Tool must match what appeared in the federal tax return.)2,3

A FAFSA must list at least one college or university that the student currently attends or wants to attend. When multiple schools are listed, grant awards are made to the school listed first. (Colleges and universities can also be removed from a list of multiple schools.)1

Anyone who provides data for a FAFSA (a student, a parent, a college access advisor) must also sign that FAFSA. Without the appropriate signatures, the application is invalid. When it comes to these signatures, here is a tip all parents should remember: never hit the “Start Over” button when you log in to add your signature. If you accidentally click on that, all the information that your student has spent hours entering will be erased.1,2     

Financial questions should not be left blank on the FAFSA. If the answer to a question is “none,” put a zero instead of nothing at all. Every monetary amount that includes cents should be rounded to the nearest dollar.1 

Unsurprisingly, some families want help when filling out the FAFSA. Recognizing this, the Department of Education offers a 66-page guide to completing the form; you will find it at studentaid.ed.gov. It also provides a FAFSA hotline: (800) 433-3243. You may want to chat with a financial professional who focuses on college planning or a university financial aid officer for additional insight.1      

The FAFSA is often a pathway to considerable financial assistance: grants, work study programs, federal student loans. The average FAFSA applicant for the 2015-16 school year received roughly $8,500. A FAFSA costs nothing to fill out or send around, and there is absolutely nothing to lose in submitting one.2

Citations.

1 - tinyurl.com/yd7l9u9z [9/12/18]

2 - cnbc.com/2018/09/18/you-can-now-apply-for-financial-aid-on-your-phone.html [9/18/18]

3 - studentaid.ed.gov/sa/resources/irs-drt-text [9/27/18]

 

Smart Financial & Insurance Moves for New Parents

As you start a family, consider these ideas.  

Provided by Lake Hills Wealth Management

Being a parent means being responsible to a degree you never have been before. That elevated responsibility also impacts your financial decisions. You are now a provider and a protector, and that reality may make the following financial moves necessary.

Think about a budget. As a couple, you may have lived for years without budgeting. As parents, this may change. You will face new recurring costs: clothes, toys, diapers, food. Keeping track of weekly or monthly expenses will be handy. (The Department of Agriculture has an online calculator where you can estimate the total cost of raising a child to adulthood. The math may surprise you: the U.S.D.A. puts the average cost at $233,610 for a middle-income family.)1,2  

Take care of health and life insurance. Your child should be added to your health insurance plan quickly. Most insurance providers require you to notify them of a child’s birth within 30 days. You can get started before then; be aware that a Social Security number and birth certificate can take weeks to arrive in the mail. If you are in a group health plan, talk with the human resources officer or benefits administrator at work, and let them know that you want to add a dependent to your health care plan. (If you have coverage through a private plan, your premiums may go up after you notify the carrier.) Under the Affordable Care Act, a parent or legal guardian who has health coverage arranged through the federal or state Marketplace has 60 days from the date of birth or adoption to enroll a child as a dependent on their plan; once that is done, health care coverage for the child will apply, retroactively.3 

Term life insurance provides an affordable way for new parents to have some financial insulation against a worst-case scenario, and disability insurance (which may be available where you work) provides coverage in the event of an extended illness or injury that stops you from doing your job. If you have a Health Savings Account (HSA), you can contribute more per year when you have a child. The maximum annual contribution for a family is currently set at $6,850 (and for the record, the I.R.S. is allowing families to contribute up to $6,900 in 2018).4

Draft a will and review beneficiary designations. A will can do more than declare who receives your assets when you die. It can also name a legal guardian for your child in the event both parents pass away. Additionally, you can specify a guardian of your estate in your will, to manage the assets left to a minor child. While you may have named your spouse or partner as the primary beneficiary of your IRA or investment account, you may decide to change that or at least add your child as a contingent beneficiary.5  

See if you can save a little for college. The estimated cost of four years at a public university starting in 2036? $184,000, CNBC reports. That may convince you to open a 529 plan or have some other kind of dedicated college savings account with investment options. Most 529 plans require a Social Security number for a beneficiary, so they are commonly started after a child is born, rather than before.2,6   

Review your withholding status and tax forms. An addition to your family means changes. You may also become eligible for some federal tax breaks, like the Earned Income Tax Credit, the Adoption Tax Credit, the Child Tax Credit, and the Child & Dependent Care Credit.7

Keep the big picture in mind. You still need to build retirement savings; you still need to have an emergency fund. Becoming a family might make accomplishing those tasks harder, yet they remain just as important. 

After reading all this, you may feel like you need to be a millionaire to raise a child. The fact is, most parents are not millionaires, and they manage. Whether you are wealthy or not, you will want to take care of many or all of these financial and insurance essentials before or after you bring your newborn home.

Citations.

1 - cnpp.usda.gov/tools/CRC_Calculator/default.aspx [9/20/18]

2 - tinyurl.com/y8rlmm7w [2/26/18]

3 - healthcare.com/info/health-insurance/baby-health-insurance-newborn [10/18/17]

4 - tinyurl.com/ya5g75ez [5/1/18]

5 - everplans.com/articles/what-does-a-guardian-of-the-estate-do [9/20/18]

6 - cnbc.com/2018/05/07/this-is-how-much-parents-need-to-save-to-cover-college-bills-in-2036.html [5/7/18]

7 - efile.com/tax-deductions-credits-for-parents-with-children-dependents/ [9/20/18]

 

Retirees, Check Your Withholding

It may need to be adjusted due to the 2017 federal tax reforms.

Provided by Lake Hills Wealth Management

The Internal Revenue Service has a message for you. You may need to adjust the amount withheld from your paycheck or the size of your estimated tax payments because the agency is using new withholding tables this year. Should you underpay your taxes for 2018, you could be hit with a tax penalty in 2019.1

If you are retired or about to retire, you should take note of this announcement. While it may seem aimed at salaried employees and small business owners, the changes to the withholding tables also impact you.   

Many retirees work in the gig economy. They walk dogs, drive for ridesharing companies, serve as home health aides, and act as management, marketing, legal, and health care consultants. The common thread here is self-employment. Self-employment means making estimated tax payments. This is a new experience for some baby boomers.2

If you have started freelancing or started a part-time business, you must join their ranks. You must file like a business owner even if you have an informal business venture that has lost money; if there is a profit motive, the I.R.S. considers that self-employment.2,3  

Double-check your withholding even if you do not work part time. Paying estimated taxes is normal after you retire, whether you work or not; an employer no longer files a Form W-4 for you. Your retirement income probably comes from multiple sources and includes Social Security benefits, mandatory annual retirement account withdrawals, and maybe pension income from a past employer or a pension-like income arranged through a private contract.4   

Part of your Social Security income can be subject to federal income taxes if your “combined income” exceeds a certain level. “Combined income” = adjusted gross income + non-taxable interest + 50% of your Social Security benefits. If you are single and your combined income falls between $25,000-$34,000, you may see up to 50% of your benefits taxed; the limit is 85% when your combined income tops $34,000. If you and your spouse file jointly and have a combined income between $32,000-$44,000, as much as 50% of your benefits may be taxable; above $44,000, the ceiling is 85%. Some states also tax Social Security benefits.4,5  

Given all this, Form W-4V may be handy. You can file it to withhold a flat percentage from each Social Security payment: 7%, 10%, 12%, or even 22%.4,5

Do you receive a pension or pension-style income? Then you may want to file Form W-4P, which withholds taxes from those payments (you can indicate the number of allowances you wish to claim; the more you claim, the less money you withhold).4

Regarding the Required Minimum Distributions (RMDs) you must take annually from traditional IRAs and other qualified retirement accounts after age 70½, you have an interesting option if you are wealthy enough not to need 100% of the money. You can tell the custodian of your IRA (or other retirement account) that you want taxes withheld from the RMD, effectively taking care of the quarterly estimated tax payments you would otherwise make on the RMD amount.4  

To help with all this, the I.R.S. offers an online withholding calculator. This is a feature of its Paycheck Checkup campaign. You can find it at irs.gov/individuals/irs-withholding-calculator.1     

Be sure to consult a tax professional about your withholding. Fine print may need to be studied. For example, not all income is subject to withholding; some forms of self-employment income, income derived from rental activities, and income from jobs in the sharing economy may be exempt. Have this conversation before 2019 arrives.1

    

Citations.

1 - irs.gov/newsroom/avoid-penalty-for-underpayment-of-taxes-irs-says-check-withholding-make-estimated-payments [9/6/18]

2 - irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center [12/14/17]

3 - irs.gov/businesses/small-businesses-self-employed/business-activities [4/23/18]

4 - cnbc.com/2018/09/12/the-irs-is-warning-retirees-of-this-impending-surprise-tax.html [9/12/18]

5 - kiplinger.com/article/retirement/T051-C000-S004-retiree-tax-tip-tally-taxes-on-social-security.html [9/5/18]

 

Getting Your Personal Finances in Shape for 2019

Fall is a good time to assess where you stand and where you could be. 

Provided by Lake Hills Wealth Management 

You need not wait for 2019 to plan improvements to your finances. You can begin now. The last few months of 2018 give you a prime time to examine critical areas of your budget, your credit, and your investments.

You could work on your emergency fund (or your rainy day fund). To clarify, an emergency fund is the money you store in reserve for unforeseen financial disruptions; a rainy day fund is money saved for costs you anticipate will occur. A strong emergency fund contains the equivalent of a few months of salary, maybe even more; a rainy day fund could contain as little as a few hundred dollars.   

Optionally, you could hold this money in a high-yield savings account. A little searching may lead to a variety of choices; here in September, it is not hard to find accounts offering 1.5% or more annual interest, as opposed to the common 0.1% or less. Remember that a high-yield savings account is intended as a place to park money; if you make regular deposits and withdrawals to and from it and treat it like a checking account, you may incur fees that diminish the savings progress you make.1

Review your credit score. Federal law entitles you to a free copy of your credit report at each of the three nationwide credit reporting firms (Equifax, TransUnion, and Experian) every 12 months. Now is as good a time as any to request these reports; visit annualcreditreport.com or call 1-877-322-8228 to order them. At the very least, you will learn your credit score. You may also detect errors and mistakes that might be harming your credit rating.2  

Think about the way you are saving for major financial goals. Has your financial situation improved in 2018, to the extent that you could contribute a little more money to an IRA or a workplace retirement plan now or next year? If you are not contributing enough at work to receive a matching contribution from your employer, maybe now you can.

Also, consider the way your invested assets are held. What are your current and future allocations? Some people have heavy concentrations of equities in their workplace retirement plan, IRA, or brokerage account due to Wall Street’s long bull market. If this is true for you, there may be some pain when the next bear market begins. Check in on your portfolio while things are still bullish.

Can you spend less in 2019? That might be a key to saving more and putting more money into your rainy day or emergency funds. If your pay has increased, your discretionary spending does not necessarily have to increase with it. See if you can find room in your budget to possibly cut an expense and redirect the money into savings or investments. 

You may also want to set some near-term financial goals for yourself. Whether you want to accomplish in 2019 what you did not quite do in 2018, or further the positive financial trends underway in your life, now is the time to look forward and plan.

Citations.

1 - thesimpledollar.com/best-high-interest-savings-accounts/ [8/31/18]

2 - ftc.gov/faq/consumer-protection/get-my-free-credit-report [9/6/18]

 

5 Retirement Concerns Too Often Overlooked

Baby boomers entering their “second acts” should think about these matters.

Provided by Lake Hills Wealth Management 

Retirement is undeniably a major life and financial transition. Even so, baby boomers can run the risk of growing nonchalant about some of the financial challenges that retirement poses, for not all are immediately obvious. In looking forward to their “second acts,” boomers may overlook a few matters that a thorough retirement strategy needs to address.

RMDs. The Internal Revenue Service directs seniors to withdraw money from qualified retirement accounts after age 70½. This class of accounts includes traditional IRAs and employer-sponsored retirement plans. These drawdowns are officially termed Required Minimum Distributions (RMDs).1   

Taxes. Speaking of RMDs, the income from an RMD is fully taxable and cannot be rolled over into a Roth IRA. The income is certainly a plus, but it may also send a retiree into a higher income tax bracket for the year.1 

Retirement does not necessarily imply reduced taxes. While people may earn less in retirement than they once did, many forms of income are taxable: RMDs; investment income and dividends; most pensions; even a portion of Social Security income depending on a taxpayer’s total income and filing status. Of course, once a mortgage is paid off, a retiree loses the chance to take the significant mortgage interest deduction.2 

Health care costs. Those who retire in reasonably good health may not be inclined to think about health care crises, but they could occur sooner rather than later – and they could be costly. As Forbes notes, five esteemed economists recently published a white paper called The Lifetime Medical Spending of Retirees; their analysis found that between age 70 and death, the average American senior pays $122,000 for medical care, much of it from personal savings. Five percent of this demographic contends with out-of-pocket medical bills exceeding $300,000. Medicines? The “donut hole” in Medicare still exists, and annually, there are retirees who pay thousands of dollars of their own money for needed drugs.3,4 

Eldercare needs. Those who live longer or face health complications will probably need some long-term care. According to a study from the Department of Health and Human Services, the average American who turned 65 in 2015 could end up paying $138,000 in total long-term care costs. Long-term care insurance is expensive, though, and can be difficult to obtain.5

One other end-of-life expense many retirees overlook: funeral and burial costs. Pre-planning to address this expense may help surviving spouses and children.

Rising consumer prices. Since 1968, consumer inflation has averaged around 4% a year. Does that sound bearable? At a glance, maybe it does. Over time, however, 4% inflation can really do some damage to purchasing power. In 20 years, continued 4% inflation would make today’s dollar worth $0.46. Retirees would be wise to invest in a way that gives them the potential to keep up with increasing consumer costs.4

As part of your preparation for retirement, give these matters some thought. Enjoy the here and now, but recognize the potential for these factors to impact your financial future.

Citations.

1 - thebalance.com/required-minimum-distributions-2388780 [6/3/18]

2 - kiplinger.com/slideshow/taxes/T064-S003-how-10-types-of-retirement-income-get-taxed/index.html [3/27/18]

3 - forbes.com/sites/nextavenue/2018/06/28/the-truth-about-health-care-costs-in-retirement/ [6/28/18]

4 - mdmag.com/physicians-money-digest/practice-management/four-big-retirement-threats-and-how-to-protect-yourself [8/2/18]

5 - money.usnews.com/money/personal-finance/saving-and-budgeting/articles/2018-04-13/6-ways-to-pay-for-long-term-care-if-you-cant-afford-insurance [4/13/18]

 

Under Appreciated Options for Building Retirement Savings

More people ought to know about them.

Provided by Lake Hills Wealth Management

There are a number of well-known retirement savings vehicles, used by millions. Are there other, relatively obscure retirement savings accounts worthy of attention? Are there prospective benefits for retirement savers that remain under the radar?

The answer to both questions is yes. Consider these potential routes toward greater retirement savings.     

Health Savings Accounts (HSAs). People enrolled in high-deductible health plans (HDHPs) commonly open HSAs for their stated purpose: to create a pool of money that can be applied to health care expenses. One big perk: HSA contributions are tax deductible. Another, underappreciated perk deserves more publicity: the federal government permits the funds within HSAs to grow tax free. Just ahead, you will see why that is important to remember.1,2

While 96% of HSA owners hold their HSA funds in cash, others are investing a percentage of their HSA money. Tax-free growth is nothing to sneeze at: an HSA owner who directs 100% of the maximum $3,450 yearly account contribution into investments returning just 4% annually could have an HSA holding more than $200,000 in 30 years. Prior to age 65, withdrawals from HSAs are tax free if they are used for qualified medical expenses. After that, withdrawals from HSAs may be used for any purpose (i.e., for retirement income), although they do become fully taxable.1,2

In 2018, an individual can direct $3,450 into an HSA; a family, $6,900. Additional catch-up contributions are allowed for HSA owners aged 55 and older.1,2

“Backdoor” Roth IRAs. Some people make too much money to open a Roth IRA. That does not mean they are barred from having one. Anyone can convert all or part of a traditional IRA to a Roth, and pre-retirees with high incomes and low retirement savings occasionally do. Why? A Roth IRA offers the potential for future tax-free withdrawals. Roth IRA owners also never have to take Required Minimum Distributions (RMDs). A Roth conversion is typically a taxable event, and it cannot be undone. The IRA owner may enter a higher tax bracket in the year of the conversion, so anyone considering this should speak with a tax professional beforehand.3      

Cash value life insurance. Permanent life insurance policies often have the capability to build cash value over time, and high-income households sometimes purchase them with the goal of achieving more tax efficiency and using that cash value to supplement their retirement incomes. Cash value accounts within these policies are designed to earn interest and grow, tax deferred. Withdrawals lower the cash value of the policy, but are untaxed up to the total amount of premiums you have paid. Tax-free, low-interest loans may also be taken from these policies; unrepaid loans, though, lower a policy’s death benefit. The big risk here? If you have an outstanding policy loan, you could potentially face huge income taxes if you run into a situation where you must surrender the policy or are unable to pay the premiums.4    

Cash balance pension plans. Many small business owners need to accelerate the pace of their retirement saving. A cash balance plan, when wedded to a standard workplace retirement plan that features profit sharing, may enable a business owner to save much more for retirement annually than the low contribution limits of an IRA would ever allow. If contributions are very large, the yearly tax savings linked to the plan could even reach six figures.1 

The Saver’s Credit. Lastly, the federal government provides a significant tax credit to encourage low-income and middle-income households to save for retirement. The Saver’s Credit can be as large as $2,000 each year. Joint filers with adjusted gross income (AGI) of $63,000 or less, heads of household with AGI of $47,250 or less, and other filers with AGI of $31,500 or less may be eligible for the credit, which equals either 50%, 20%, or 10% of their annual workplace retirement plan or IRA contribution, depending on their respective AGI level. Taxpayers contributing to ABLE accounts are also eligible to take the Saver’s Credit, so long as they are the designated beneficiary for that account.5

Citations.

1 - forbes.com/sites/davidrae/2018/07/23/10-retirement-accounts-you-should-know-about/ [7/23/18]

2 - money.usnews.com/investing/buy-and-hold-strategy/articles/2018-03-09/the-big-mistake-youre-making-with-your-hsa [3/19/18]

3 - morningstar.com/articles/852597/ira-conversion-fact-sheet.html [2/27/18]

4 - cnbc.com/2018/08/17/this-source-of-tax-free-cash-can-sweeten-or-ruin-your-retirement.html [8/17/18]

5 - irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit [8/6/18]

 

Tax Moves to Consider in Summer

Now is a good time to think about a few financial matters.

Provided by Lake Hills Wealth Management  

Making changes earlier rather than later. If you own a business, earn a good deal of investment income, are recently married or divorced, or have a Flexible Savings Account (FSA), you may want to think about making some tax moves now rather than in December or April.   

Do you now need to pay estimated income tax? If you are newly self-employed or are really starting to see significant passive income, you may need to quickly acquaint yourself with Form 1040-ES and the quarterly deadlines. Every year, estimated tax payments to the Internal Revenue Service are due on or before the following dates: January 15, April 15, July 15, and October 15. (These deadlines are adjusted if a due date falls on a weekend or holiday.) It might seem simple just to make four consistent payments per year, but your business income may be inconsistent. If it is, and you fail to adjust your estimated tax payment per quarter, you may be setting yourself up for a tax penalty. So, confer with your tax professional about this.1 

Has your household size changed? That calls for a look at your pre-tax withholding. No doubt you would like to take home more money now rather than wait to receive it in the form of a tax refund later. This past April, the I.R.S. said that the average federal tax refund was $2,864 – the rough equivalent of a month’s salary for many people. Adjusting the withholding on your W-4 may bring you more take-home pay. Ideally, you would adjust it so that you end up owing no tax and receiving no refund.2

Think about how you could use your FSA dollars before the end of the year. The Tax Cuts & Jobs Act changed the rules for Flexible Spending Accounts (FSAs). The I.R.S. now permits an employer to let an employee carry up to $500 in FSA funds forward into the next calendar year. Alternately, the employer can allow the FSA accountholder extra time to use FSA funds from the prior calendar year (up to 2.5 months). Companies do not have to allow either choice, however. If no grace period or carry-forward is permitted at your workplace, you will want to spend 100% of your FSA funds in 2018, for you will lose those FSA dollars when 2019 begins.3

You could help your tax situation by contributing to certain retirement accounts. IRAs and non-Roth workplace retirement plans are funded with pre-tax dollars. By directing money into these retirement savings vehicles, you position yourself for federal tax savings in the year of the contribution. If you make the maximum traditional IRA contribution of $5,500 in 2018, and you are in the 24% tax bracket, that translates to a $1,320 federal tax deduction for 2018.4

While Summer may seem far from April, this is an excellent time to think about tax-saving possibilities. You and your tax professional have plenty of time to explore the options.

Citations.

1 - irs.gov/faqs/estimated-tax/individuals/individuals-2 [2/20/18]

2 - fortune.com/2018/04/16/tax-day-2018-refund/ [4/16/18]

3 - cnbc.com/2017/12/29/how-to-use-your-flexible-spending-account-funds-at-the-last-minute.html [12/29/17]

4 - usatoday.com/story/money/taxes/2018/07/20/70-of-households-are-missing-out-on-this-important-tax-break/36835905/ [7/20/18]

 

Are Changes Ahead for Retirement Accounts?

A bill now in Congress proposes to alter some longstanding rules.

Provided by Lake Hills Wealth Management

Most Americans are not saving enough for retirement, despite ongoing encouragement to do so (and recurring warnings about what may happen if they do not). This year, lawmakers are also addressing this problem, with a bill proposing big changes to IRAs and workplace retirement plans.   

The Retirement Enhancement and Savings Act (RESA), introduced by Senator Orrin Hatch, would amend the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) in some significant ways.1     

Contributions to traditional IRA accounts would be allowed after age 70½. Today, only Roth IRAs permit inflows after the owner reaches this age.2 

An expanded tax break could lead to more multiple-employer retirement plans. If small employers partner with similar companies or organizations to offer a joint retirement savings program, the RESA would boost the tax credit available to them to offset the cost of starting up a plan. The per-employer tax break would rise from $500 to $5,000. A multiple-employer plan could be attractive to small companies, for it might mean lower plan costs and administrative fees.2 

Portions of federal tax refunds could even be directed into workplace plans. The RESA would allow employees to preemptively assign some of their refund for this purpose.2 

Retirement income projections could become a requirement for plans. Not all monthly and quarterly statements for retirement accounts contain them; the RESA would make them mandatory. It would oblige financial firms providing investments to employer-sponsored plans to detail the amount of cash that the current account balance would generate per month in retirement, as if it were fixed pension income. Plans might also be permitted to offer insurance products to retirement savers.2,3    

A new type of workplace retirement account could emerge if the RESA passes. So far, this account has been described vaguely; the phrase “open-ended” has been used. The key feature? Employees could take loans from it without penalty.2,3 

Whether the RESA becomes law or not, the good news is that more of us are saving. In the 2016 GoBankingRates Retirement Survey, 33.0% of respondents said that they had saved nothing for retirement; in this year’s edition of the survey, that dropped to 13.7%, possibly reflecting the influence of auto-enrollment programs for workplace plans, the emergence of the (now absent) myRA, and improved economic ability to build a retirement fund. (In the 2018 edition of the survey, the top reason people were refraining from saving for retirement was “I don’t make enough money.”)4  

Could the RESA pass before Congress takes its summer recess? Good question. Senate and House lawmakers have many other bills to consider and a short window of time to try and further them along. The bill’s proposals may evolve in the coming weeks.

Citations.

1 - congress.gov/bill/115th-congress/senate-bill/2526 [7/3/18]

2 - fool.com/retirement/2018/07/22/heres-what-the-proposed-retirement-savings-changes.aspx [7/22/18]

3 - marketwatch.com/story/proposed-changes-to-your-401k-retirement-plan-could-be-promising-or-not-2018-07-18 [7/18/18]

4 - gobankingrates.com/retirement/planning/why-americans-will-retire-broke/ [3/6/18]

 

Save & Invest Even if Money Is Tight

For millennials, today is the right time.

Provided by Lake Hills Wealth Management 

If you are under 30, you have likely heard that now is the ideal time to save and invest. You know that the power of compound interest is on your side; you recognize the potential advantages of an early start.

There is only one problem: you do not earn enough money to invest. You are barely getting by as it is.

Regardless, the saving and investing effort can still be made. Even a minimal effort could have a meaningful impact later. 

Can you invest $20 a week? There are 52 weeks in a year. What would saving and investing $1,040 a year do for you at age 25? Suppose the invested assets earn 7% a year, an assumption that is not unreasonable. (The average yearly return of the S&P 500 through history is roughly 10%; during 2013-17, its average return was +13.4%.) At a 7% return and annual compounding, you end up with $14,876 after a decade in this scenario, according to Bankrate’s compound interest calculator. By year 10, your investment account is earning nearly as much annually ($939) as you are putting into it ($1,040).1,2

You certainly cannot retire on $14,876, but the early start really matters. Extending the scenario out, say you keep investing $20 a week under the same conditions for 40 years, until age 65. As you started at age 25, you are projected to have $214,946 after 40 years, off just $41,600 in total contributions.2

This scenario needs adjustment considering a strong probability: the probability that your account contributions will grow over time. So, assume that you have $14,876 after ten years, and then you start contributing $175 a week to the account earning 7% annually starting at age 35. By age 65, you are projected to have $1,003,159.2

Even if you stop your $20-per-week saving and investing effort entirely after 10 years at age 35, the $14,876 generated in that first decade keeps growing to $113,240 at age 65 thanks to 7% annual compounded interest.2    

How do you find the money to do this? It is not so much a matter of finding it as assigning it. A budgeting app can help: you can look at your monthly cash flow and designate a small part of it for saving and investing.

Should you start an emergency savings fund first, then invest? One school of thought says that is the way to go – but rather than think either/or, think both. Put a ten or twenty (or a fifty) toward each cause, if your budget allows. As ValuePenguin notes, many deposit accounts are yielding 0.01% interest.3       

It does not take much to start saving and investing for retirement. Get the ball rolling with anything, any amount, today, for the power of compounding is there for you to harness. If you delay the effort for a decade or two, building adequate retirement savings could prove difficult.

Citations.

1 - nerdwallet.com/blog/investing/average-stock-market-return/ [2/28/18]

2 - bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx [7/26/18]

3 - valuepenguin.com/average-savings-account-interest-rates [7/26/18]

 

Leaving a Legacy to Your Grandkids

Now is the time to explore the possibilities.

Provided by Lake Hills Wealth Management

Grandparents Day provides a reminder of the bond between grandparents and grandchildren and the importance of family legacies.  

A family legacy can have multiple aspects. It can include much more than heirlooms and appreciated assets. It may also include guidance, even instructions, about what to do with the gifts that are given. It should reflect the values of the giver.

What are your legacy assets? Financially speaking, a legacy asset is something that will outlast you, something capable of producing income or wealth for your descendants. A legacy asset might be a company you have built. It might be a trust that you create. It might be a form of intellectual property or a portfolio of real property. A legacy asset should never be sold – not so long as it generates revenue that could benefit your heirs.

To help these financial legacy assets endure, you need an appropriate legal structure. It could be a trust structure; it could be an LLC or corporate structure. You want a structure that allows for reasonable management of the legacy assets in the future – not just five years from now, but 50 or 75 years from now.1  

Think far ahead for a moment. Imagine that forty years from now, you have 12 heirs to the company you founded, the valuable intellectual property you created, or the real estate holdings you amassed. Would you want all 12 of your heirs to manage these assets together?  

Probably not. Some of those heirs may not be old enough to handle such responsibility. Others may be reluctant or ill-prepared to take on the role. At some point, your grandkids may decide that only one of them should oversee your legacy assets. They may even ask a trust officer or an investment professional to take on that responsibility. This can be a good thing because sometimes the beneficiaries of legacy assets are not necessarily the best candidates to manage them.      

Values are also crucial legacy assets. Early on, you can communicate the importance of honesty, humility, responsibility, compassion, and self-discipline to your grandkids. These virtues can help young adults do the right things in life and guide their financial decisions. Your estate plan can articulate and reinforce these values, and perhaps, link your grandchildren’s inheritance to the expression of these qualities.

You may also make gifts with a grandchild’s education or retirement in mind. For example, you could fully fund a Roth IRA for a grandchild who has earned income or help an adult grandchild fund their Roth 401(k) or Roth IRA with a small outright gift. Custodial accounts represent another option: a grandparent (or parent) can control assets in a 529 plan or UTMA account until the grandchild reaches legal age.3

Make sure to address the basics. Is your will up to date with regard to your grandchildren? How about the beneficiary designations on your IRA or your life insurance policy? Creating a trust may be a smart move. In fact, you can set up a living irrevocable trust fund for your grandkids, which can actually begin distributing assets to them while you are alive. While you no longer own assets you place into an irrevocable trust (which is overseen by a trustee), you may be shielded from estate, gift, and even income taxes related to those assets with appropriate planning.4

This Grandparents Day, think about the legacy you are planning to leave. Your thoughtful actions and guidance could help your grandchildren enter adulthood with good values and a promising financial start.

Citations.

1 - forbes.com/sites/danielscott1/2017/09/04/three-common-goals-every-legacy-plan-should-have/ [9/4/17]

2 - wealthmanagement.com/high-net-worth/key-considerations-preparing-family-legacy-plan [3/27/17]

3 - marketwatch.com/story/whats-next-after-planning-your-retirement-help-your-children-and-grandchildren-plan-for-theirs-2017-10-17 [10/17/17]

4 - investopedia.com/articles/pf/12/set-up-a-trust-fund.asp [1/23/18]

 

Tax Changes Around the Home

How the Tax Cuts & Jobs Act impacted three popular deductions.  

Provided by Lake Hills Wealth Management 

Three recent tax law changes impact homeowners and home-based businesses. They may affect your federal income taxes this year.  

The SALT deduction now has a $10,000 yearly limit. You can now only deduct up to $10,000 of some combination of (a) state and local property taxes or (b) state and local income taxes or sales taxes, annually. (Taxes paid or accumulated due to trade activity or business activity are exempt from the $10,000 limit.)1,2

If you have itemized for years and are continuing to itemize this year, this $10,000 cap may be irritating, especially if there is no state income tax or a very high state income tax where you live. In the state of New York, for example, taxpayers who took a SALT deduction in 2015 deducted an average of $22,169.1,2  

Connecticut, New Jersey, and New York all recently passed laws in reaction to the new $10,000 limit, essentially offering taxpayers a workaround – cities and townships within those states may create municipal charities through which residents may receive property tax credits in exchange for charitable contributions.2

So far, the Internal Revenue Service is not fond of this. I.R.S. Notice 2018-54, released in May, warns that “despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” Both the I.R.S. and the Department of the Treasury are preparing rules to respond to these state legislative moves.2,3 

The interest deduction on home equity loans is not quite gone. The Tax Cuts & Jobs Act seemed to suspend it entirely until 2026, but this winter, the I.R.S. issued guidance noting that the deduction still applies if a home equity loan is arranged to help a taxpayer “buy, build or substantially improve” the involved house. So, you may still deduct interest on a home equity loan if your receipts show that the borrowed amount is used for a new 30-year roof, a kitchen remodel, or similar upgrades. Keep in mind that the Tax Cuts & Jobs Act lowered the limit on the total home loan amount eligible for the interest deduction each year – it is now set at $750,000. That cap applies to the combined home loans a taxpayer takes out for both a primary and secondary residence.1,4,5   

The home office deduction is gone, unless you are self-employed. Before 2018, if you dedicated an area of your home solely to business use and defined it as your principal place of business to the I.R.S., you could claim a home office deduction on Schedule A. This was considered a miscellaneous itemized deduction. Unfortunately, the Tax Cuts & Jobs Act did away with miscellaneous itemized deductions. If you work for yourself, though, you can still claim the home office deduction using Schedule C, the form used to report income or loss from a business activity or a profession.5  

Are you strategizing to maximize your 2018 federal tax savings? Are you looking for ways to legally reduce your federal and state tax obligations? Talk to a financial professional to gain insight and plan for this year and the years ahead.    

Citations.

1 - investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]

2 - cnbc.com/2018/05/23/irs-treasury-have-set-their-sights-on-blue-states-tax-workarounds.html [5/23/18]

3 - irs.gov/pub/irs-drop/n-18-54.pdf [5/23/18]
4 - nytimes.com/2018/03/09/your-money/home-equity-loans-deductible.html [3/9/18]

5 - fool.com/taxes/2018/05/20/say-goodbye-to-the-home-office-deduction-unless-yo.aspx [5/20/18]

Should You Use 529 Plan Funds on K-12 Education?

Should You Use 529 Plan Funds on K-12 Education?

Federal law says you can, but you may want to think twice about it.

Provided by Lake Hills Wealth Management

When President Trump signed the Tax Cuts & Jobs Act into law late in 2017, new possibilities emerged for the tax-advantaged investment vehicles known as 529 college savings plans. Funds from these accounts may now be used to pay for qualified elementary and secondary school expenses under federal law.1    

Unfortunately, some state laws for 529 college savings plans are just catching up with federal law or treat such withdrawals differently from a tax standpoint. Hopefully, these differences will be resolved with time.2     

Federal law permits you to spend up to $10,000 of 529 funds on K-12 tuition per year. Under the Tax Cuts & Jobs Act, you can use these funds to pay tuition at private and public elementary and secondary schools. If you do this, the withdrawal from your 529 plan is tax free or at least free from federal taxation.1 

The question is how the state hosting the 529 account treats the withdrawal. Some states, such as Missouri and Tennessee, quickly indicated they would allow 529 plan withdrawals for qualified K-12 education expenses and treat the withdrawals in the same fashion as the new federal law. Other states took a different approach. Louisiana’s state legislature, for instance, complemented the state’s 529 college savings plan with new K-12 education savings accounts in June.3  

While your state’s 529 plan may allow you to withdraw funds to pay for qualified K-12 education expenses, the state and federal tax treatment of the withdrawal may differ. The distribution could be taxed at the state level, even if untaxed at the federal level. That is the case in Oregon, for example.2,4

You may or may not want to use 529 plan funds in this way. The Tax Cuts & Jobs Act basically redefined 529 savings plans as education savings accounts rather than solely college savings accounts. The added versatility is nice, but chances are, you have been saving money for a college education in a 529. Do you really want to draw down a tax-favored account capable of compounding to pay K-12 education expenses today instead of college costs tomorrow? Like an early withdrawal from a retirement account, this may be a decision that you come to regret.   

If you are independently wealthy or anticipate having the financial ability to cover college costs in some other way, then partly or wholly reducing your 529 plan balance might be bearable. If your household is middle class, it could simply be a bad idea.  

Of course, 529 plans are just one of the ways available to save for college. You should explore your options to build education savings. A chat with a financial professional well versed on the topic may give you some ideas.

Citations.

1 - cpapracticeadvisor.com/news/12416531/section-529-plans-can-now-be-used-for-private-elementary-and-high-schools [6/12/18]

2 - forbes.com/sites/megangorman/2018/03/08/navigating-the-new-529-rules-the-land-of-wealth-transfer-piggy-backs-and-donor-advised-funds/ [3/8/18]

3 - nola.com/politics/index.ssf/2018/06/new_law_creates_k-12_savings_a.html [6/14/18]

4 - oregonlive.com/business/index.ssf/2018/03/oregon_wont_allow_529_tax_brea.html [3/8/18]

Should You Leave Your IRA to a Child?

What you should know about naming a minor as an IRA beneficiary.

Provided by Lake Hills Wealth Management   

Can a child inherit an IRA? The answer is yes, though they cannot legally own the IRA and its invested assets. Until the child turns 18 (or 21, in some states), the inherited IRA is a custodial account, managed by an adult on behalf of the minor beneficiary.1,2  

IRA owners who name minors as beneficiaries have good intentions. Their idea is to “stretch” a large Roth or traditional IRA. Distributions from the inherited IRA can be scheduled over the (long) expected lifetime of the young beneficiary, with the possibility that compounding will partly or fully offset them.2  

Those good intentions may be disregarded, however. When minor IRA beneficiaries become legal adults, they have the right to do whatever they want with those IRA assets. If they want to drain the whole IRA to buy a Porsche or fund an ill-conceived start-up, they can.2 

How can you have a say in what happens to the IRA assets? You could create a trust to serve as the IRA beneficiary, as an intermediate step before your heir takes possession of those assets as a young adult.

In other words, you name a trust as the beneficiary of your IRA, and your child or grandchild as a beneficiary of the trust. When you have that trust in place, you have more control over what happens with the inherited IRA assets.2

The trust can dictate the how, what, and when of the income distribution. Perhaps you specify that your heir gets $10,000 annually from the trust beginning at age 30. Or, maybe you include language that mandates that your heir take distributions over their life expectancy. You can even stipulate what the money should be spent on and how it should be spent.2

A trust is not for everyone. The IRA needs to be large to warrant creating one, as the process of trust creation can cost several thousand dollars. No current-year tax break comes your way from implementing a trust, either.2

In lieu of setting up a trust, you could simply name an IRA custodian. In this case, the term “custodian” refers not to a giant investment company, but a person you know and have faith in who you authorize to make investing and distribution decisions for the IRA. One such person could be named as the custodian; another, as a successor custodian.2

What if you designate a minor as the beneficiary of your IRA, but fail to put a custodian in place? If there is no named custodian, or if your named custodian is unable to serve in that role, then a trip to court is in order. A parent of the child, or another party who wants guardianship over the IRA assets, will have to go to court and ask to be appointed as the IRA custodian.2

You should also recognize that the Tax Cuts & Jobs Act reshaped the “kiddie tax.” This is the federal tax on a minor’s net unearned income. Required minimum distributions (RMDs) from inherited IRAs are subject to this tax. A minor’s net unearned income is now taxed at the same rate as trust income rather than at the parents’ marginal tax rate.3,4

This is a big change. Income tax brackets for a trust or a child under age 19 are now set much lower than the brackets for single or joint filers or heads of household. A 10% rate applies for the first $2,550 of taxable income, but a 24% rate plus $255 of tax applies at $2,551; a 35% rate plus $1,839 of tax, at $9,151; a 37% rate plus $3,011.50 of tax, at $12,501 and up.3,5

While this is a negative for middle-class families seeking to leave an IRA to a child, it may be a positive for wealthy families: the new kiddie tax rules may reduce the child’s tax liability when compared with the old rules.4

One last note: if you want to leave your IRA to a minor, check to see if the brokerage holding your IRA allows a child or a grandchild as an IRA beneficiary. Some brokerages do, while others do not.1       

Citations.

1 - investopedia.com/articles/retirement/09/minor-as-ira-beneficiary.asp [6/19/18]

2 - kiplinger.com/article/retirement/T021-C000-S004-pass-an-ira-to-young-grandkids-with-care.html [5/17]

3 - forbes.com/sites/ashleaebeling/2018/05/08/the-kiddie-tax-grows-up/ [5/8/18]

4 - tinyurl.com/y7bonwzx [5/31/18]

5 - forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/ [3/7/18]

 

Why Do People Put Off Saving for Retirement?

A lack of money is but one answer.

Provided by Lake Hills Wealth Management 

Common wisdom says that you should start saving for retirement as soon as you can. Why do some people wait decades to begin?

Nearly everyone can save something. Even small cash savings may be the start of something big if they are invested wisely.

Sometimes, the immediate wins out over the distant. To young adults, retirement can seem so far away. Instead of directing X dollars a month toward some far-off financial objective, why not use it for something here and now, like a payment on a student loan or a car? This is indeed practical, and it may be necessary. Even so, paying yourself first should be as much of a priority as paying today’s bills or paying your creditors.

Some workers fail to enroll in retirement plans because they anticipate leaving. They start a job with an assumption that it may only be short term, so they avoid signing up, even though human resources encourages them. Time passes. Six months turn into six years. Still, they are unenrolled. (Speaking of short-term or transitory work, many people in the gig economy never get such encouragement; they have no access to a workplace retirement plan at all.)

Other young adults feel they have too little to start saving or investing. Maybe when they are further along in their careers, the time will be right – but not now. Currently, they cannot contribute big monthly or quarterly amounts to retirement accounts, so what is the point of starting today?   

The point can be expressed in two words: compound interest. Even small retirement account contributions have potential to snowball into much larger sums with time. Suppose a 25-year-old puts just $100 in a retirement plan earning 8% a year. Suppose they keep doing that every month for 35 years. How much money is in the account at age 60? $100 x 12 x 35, or $42,000? No, $217,114, thanks to annual compounded growth. As their salary grows, the monthly contributions can increase, thereby positioning the account to grow even larger. Another important thing to remember is that the longer a sum has been left to compound, the greater the annual compounding becomes. The takeaway here: get an early start.1  

Any retirement saver should strive to get an employer match. Some companies will match a percentage of a worker’s retirement plan contribution once it exceeds a certain level. This is literally free money. Who would turn down free money? 

Just how many Americans are not yet saving for retirement? Earlier this year, an Edward Jones survey put the figure at 51%. If you are reading this, you are likely in the other 49% and have been for some time. Keep up the good work.2

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx [6/21/18]

2 - forbes.com/sites/kateashford/2018/02/28/retirement-3/ [2/28/18]