In advanced mathematics, there is a tenet called Necessary and Sufficient. In financial planning, those terms are applicable to the relationships we maintain with clients, readers, listeners, and within our own business. As fiduciaries, we must always act in the best interests of our clients. As responsible broadcasters, we bring you the best we have every week.
This time every year, we trigger a series of activities falling under the necessary and sufficient umbrella. Necessary for owners of IRAs and other Qualified Retirement Accounts to ensure compliance with Required Minimum Distribution (RMD) rules for people in the affected age group. This includes account holders who reach age 73 in the year 2023. It is necessary to plan and execute their required withdrawals, but that alone is not sufficient. We also need to discuss with these people that they do not actually have to withdraw their first funds in calendar 2023, as their Required Beginning Date (RBD) is March 31, 2024.
For anyone opting to delay their first RMD until next year, it is also necessary to inform them that they will have to take a second RMD, prior to year-end 2024. But that alone still falls short of being sufficient, as we must also verify that their Beneficiary Designations are complete, accurate, up to date, and on file with the custodian of the account. Individual situations change throughout any calendar year, and we must take the initiative to complete our tasks, both necessary and sufficient.
Owners of small businesses have time remaining to adopt most forms of Retirement Plans for 2023, but for those who are best suited to a SIMPLE IRA Plan, it is necessary to have the Plan established by September 30, 2023, to be effective on January 1, 2024. Other successful small business owners (no employees other than the business owner and a spouse, if applicable) can open Individual 401(k) Plans, which offer significantly larger tax-deductible contributions but can be adopted next year, even for 2023.
For participants in existing 401(k) and similar Plans, whose salary deferral contributions are less than optimal so far this year, it is necessary to explain that, unlike IRA contributions, further 2023 salary deferrals must be made from paychecks in 2023. Employers are often slow to react to new requests, so time is of the essence. Opportunity Costs for missed deferrals are steep. Falling short means more income tax today and fewer tax-deferred contributions.
Next week we will discuss the complex topic of Roth Conversions, which can be used to reduce future taxable RMDs, but must be carefully planned and executed to avoid unintended consequences.
Van Wie Financial is fee-only. For a reason.
Last week we discussed the urgency of financial planning for 2024, and how it must start long before year-end 2023. Once the clock strikes midnight on December 31, it is too late to correct many oversights and/or errors. When dealing with tax-related items, some can be costly to taxpayers, while others manifest mostly as Opportunity Costs. Both deserve attention.
Opportunity Cost (OC) is likely the most self-explanatory technical term in the study of Economics. I like to think of it as woulda, coulda, shoulda, things we did not do (or did too early or too late). One of today’s largest OC examples is the failure of savers to take advantage of current high-interest rates on savings. Banks and Credit Unions do not normally pay more than a pittance of interest on funds held in checking and ordinary passbook savings accounts. Last week we discussed how to get better rates in our own accounts.
This week, we turn to taxes, a topic many people prefer to ignore. Ironically, ignoring your tax situation can lead to two types of losses: overpaying, and creating Opportunity Costs. There is no excuse for overpaying taxes, despite understandable IRS-induced paranoia in the public. Although itemizing tax deductions is becoming less common, those who do itemize frequently “save something for the IRS to find.” Why not just flush a couple of Benjamins down the toilet? You’d get the same result.
Opposite of overpaying is a combination of underpaying and/or paying late. These items will result in a bill for the tax due, a penalty for being late, and an interest charge on the entire amount. Worse yet is the penalty for intentionally underpaying, which can result in steep fines and interest charges, even if the IRS eventually owes you a refund.
Taxpayers with other than W-2 income may be legally subject to Quarterly Tax Deposits (Form 1040-ES), made in lieu of employer withholding deposits. Taxpayers with sporadic income must be diligent in making their quarterly deposits reflective of income spikes throughout the year. Failure to match income with tax payment timing can result in additional penalties and interest.
Many Americans fail to realize that all income tax owed for a calendar year is due and payable no later than the next year’s filing date, generally April 15. This is true for everyone, including those who file for an automatic filing extension to October 15. If your tax situation is at all complex, hire qualified help in the form of a CPA or other professional preparer (we are not qualified preparers, but we do assist with tax planning for clients).
Next week we will continue our year-end planning series, addressing further topics and opportunities.
Van Wie Financial is fee-only. For a reason.
From the perspective of a professional financial planner, 2023 is nearly over. From the standpoint of elected federal officials, 2023 is waning, with far too much business remaining undone (as usual). How many of our individual businesses would survive if we operated the way the federal government runs our nation’s business? Elected officials hold power over your money to a degree that concerns, and frequently infuriates, most Americans.
One important aspect of the relationship Adam and I, as Certified Financial Planners® enjoy, with both clients and radio listeners involves year-end planning. Although many weeks remain in 2023, time seems to accelerate between now and New Year’s Eve. Several important items need to be addressed in remaining 2023. Most obvious are Required Minimum Distribution (RMD) requirements for Retirement Accounts.
People who turn 73 this year (2023) are subject to RMD rules for the first time. They are not, however, required to take their first actual distribution in 2023. Instead, IRS allows these people to delay their first RMD until the end of March, 2024. The catch (there’s always a catch) is that those people will have to take a second RMD before 12/31/2024. This decision, like others in the RMD discussion, should be based on taxes and other individual concerns.
Also available in the RMD planning arena is the Qualified Charitable Deduction (QCD), which allows anyone who has attained age 70-1/2 to donate directly from a Retirement Account to a qualified charity, while satisfying RMD requirements for the QCD amount(s). Doing so prevents the taxpayer from having to claim the distribution as taxable income. This process reduces current income tax, even for taxpayers electing the Standard Deduction.
A third consideration is the Qualified Longevity Annuity Contract (QLAC), which can be used to defer RMDs on a portion of a Qualified Retirement Account. The deferral can be as short as a single year, or up to age 85. This novel concept recently became even more interesting, as the upper limit was recently raised to $200,000. QLACs are complex planning tools, and should only be exercised following a careful review of income needs. Qualified financial advisors understand the rules, and can assist decision making.
Next week we will continue our year-end planning series, tackling (among other topics) the necessity of paying timely tax deposits during the year. More complex than it seems, depositing sufficient funds with IRS should be measured against over-depositing, which results in an interest-free loan to IRS. We can help.
Van Wie Financial is fee-only. For a reason.
According to a recent study, about 20% of Americans’ massive investments in 401(k) accounts belong to ex-employees. Enough of these accounts are neglected or forgotten that the government has established a National Registry of Unclaimed Retirement Benefits (unclaimedretirementbenefits.com) to assist former employees in reclaiming their accounts, which average about $55,000 each. Those accounts, properly integrated into individual retirement plans, would enhance post-retirement lifestyles.
Historically, smaller 401(k) accounts (generally under $5,000) have been distributed to ex-employees via mailing a check to their last known address. These distributions are usually spent, meaning that they are also taxable income for the year of distribution. Deferring those funds into a qualified retirement account is far more additive to the account owner’s future.
In our day jobs, and on the radio, we have always advocated taking control of your 401(k) accounts upon severing ties with an employer. Rather than cashing out, these funds can be rolled, tax-free, into Individual Retirement Accounts (IRAs), or even into 401(k) Plans with the new employer, if allowed. We prefer taking control by opening a self-directed IRA. Forgotten and ignored accounts can be declared dormant, and may become frozen.
Forgotten money is not the only opportunity cost for many savers. For over a decade, savers were punished with near-zero interest rates on their new or renewed Certificates of Deposit (CDs). Longer-maturity CDs issued in those years have time remaining to maturity, and virtually no interest is being paid until renewal.
Experienced savers know that CDs cashed in prior to maturity have a penalty feature, generally 3 months of interest. What is not so intuitive is that these near-zero CD penalties are hardly worth considering. For instance, on a 5-year, $10,000, 1% yield CD, three months of interest (the penalty) amounts to a whopping $25. Annual interest is a mere $100. Today’s $10,000 CDs earn closer to 4.6%, meaning three months of interest would pay $115. That means the break-even point is a mere 3 weeks. You would earn more interest every month than in a whole year at the old rate. The increase is “found money.”
A saver desiring to earn even higher interest rates today might consider a shorter-duration CD. Our recent inverted interest rate curve is offering rates up to about 5% for holding periods of 2 or 3 years. Each investor has the option to choose a rate, based on the actual time to maturity.
Performing a thorough financial assessment for yourself will enhance your future financial comfort. Take control. We can help.
Van Wie Financial is fee-only. For a reason.
Social Security and Medicare are going broke. Our elected officials readily admit the problem. What they won’t do is seriously discuss how to avoid an impending default. Every day, the problem escalates. Instead, when any brave politician mentions the need to repair the wounded system, political competitors point fingers and assure immediate political destruction. In this case, which side of the aisle a politician favors is irrelevant. Worse yet, voters of all ages tend to fear any proposed change.
Framing the problem, no insurance plan can exist forever if premiums (inflows) are constantly less than benefits (outflows). That is precisely where we find Social Security today. The magnitude of the problem is so large, and so pressing, that no simple solution will suffice.
Last time the Social Security System was updated to extend its life was in the Reagan Administration when the Full Retirement Age (FRA) was gradually raised for younger workers. From the original 65, FRA was slowly indexed up to 67, depending on the year of birth. My generation was given ample fair warning.
Today, Social Security is referred to as the “third rail of politics.” This refers to the electrified third rail of a subway train, which cannot be touched without grave danger. So it is in politics. The subject is politically lethal. It is so bad that when Gov. Ron DeSantis announced that he’d like to save the Social Security System, the Donald Trump PAC accused DeSantis in TV commercials of wanting people to pay more and get less. Imagine trying to get two differing political parties together!
Without updating (fixing) the System, monthly benefits for all Americans, including current recipients, will drop by at least 23%, beginning in 2032 or 2033. Since many older Americans are living on Social Security benefits, many would find themselves in financial trouble. And, because Senior Citizens tend to vote in very high percentages, politicians everywhere would be summarily voted out of office. The irony is palpable.
As 2032 looms, the country is faced with a dilemma of its own making. Someone needs to step up, inform the public as to the impending danger, and risk political suicide. Who that someone will be is unclear at this moment.
Social Security is a contract made with Americans decades ago, and it must be kept. Every day that goes by without a fix makes the problem more difficult. Regardless of party affiliation, politicians are afraid to address the issue. Any long-term solution will require political cooperation. When will the public demand action, rather than threatening the careers of their elected representatives? No longer can that be treated as a rhetorical question.
Van Wie Financial is fee-only. For a reason.
For the second straight week, a winning Lottery ticket was sold in a Publix in the Jacksonville area. Although the recent prize is “only” about $36 Million (significantly less than the prior week’s $1.5+ Billion), congrats to our winners.
The two winners are classic examples of Sudden Wealth. Every day, a few Americans of various ages and locations are confronted with Sudden Wealth. Some inherit assets, while others score a big promotion, a big win in the Stock or Real Estate Market, or, as recently happened in Jacksonville (twice), a winning Lottery Ticket.
Sudden Wealth does not have to be in the Tens of Millions; it doesn’t even have to be over $1 Million. Wealth is relative, and Sudden Wealth means that it is most likely more money than the person has possessed at one time. Baby Boomers have already begun the transfer of assets to subsequent generations, which is resulting in frequent examples of Sudden Wealth. Without proper preparation, few people will be adequately equipped to make the most of their windfall.
In our day jobs as Certified Financial Planners®, we have met people whose Retirement Planning is limited to buying lottery tickets. With winning odds of one in a few hundred million, that is not sufficient Retirement Planning. Similarly, many people believe that they might receive a large inheritance. That is also not solid Retirement Planning. Toward the end of their lives, people generally incur large expenses, especially for medical needs, and can disappoint designated beneficiaries who planned (or hoped) to receive a substantial inheritance.
Any time you are notified of significant money coming your way, start interviewing Certified Financial Planners® immediately. Be prepared and comfortable with your selection. Know what you will receive, and have a plan to put it to work for you. That is smart Retirement Planning.
With our considerable experience in (other peoples’) Sudden Wealth, we have developed some relatively simple guidelines for the fortunate group. Foremost, the way to stay wealthy is to not spend the principle. Invest well and live off the returns.
We suggest that any newly wealthy American adopt the mindset of a corporate CEO with a single shareholder. Manage your own assets like a business you already admire. Imitation is indeed the sincerest form of flattery.
Personal safety is paramount for significant (lottery?) winners. Financial safety is equally important. Seek qualified, honest professionals, and follow their advice. We suggest finding a fiduciary, fee-only Certified Financial Planner®.
Few people appreciate how important it is to sign your own checks. The best way to know where your money is, and where it is going, is to retain control of the process. Only you should be able to sign checks written on your account.
Anyone who believes the old saying that money can’t buy happiness has likely never tried it. Plan first, and then act. You have the rest of your life to pursue happiness.
Van Wie Financial is fee-only. For a reason.
Summer 2023 is over for most people, and year-end is looming for Financial Planners. Topics we address during the final months of each year include Required Minimum Distributions (RMDs) from Retirement Plans, establishing new Retirement Plans for individuals and small companies, Roth Conversion Planning, and (non-CPA) tax planning.
Less likely to be on the Planning radar screen is filing for Social Security benefits. There are some Social Security provisions that most people, and indeed many Financial Advisors, do not adequately address. Claiming Social Security benefits is very complicated. Assuming goals of maximizing lifetime benefits, reducing taxes, and minimizing the cost of Medicare, good timing decisions are critical. These goals are affected by the claiming decision, which is too often allotted only cursory attention.
Claiming at Full Retirement Age (FRA). Most Americans prefer waiting to file for Social Security monthly benefits until (at least) their FRA, which is determined by date of birth (67 maximum). From the earliest allowable claiming age of 62, monthly benefits increase 8% annually until filing. Cost of Living Adjustments (COLAs) are applied annually as well. Many beneficiaries believe that they must be receiving benefits in order to participate in COLAs, but that is incorrect, as the only requirement is having attained age 62.
Delaying filing past FRA. Waiting to file until after FRA (but not later than age 70) increases monthly benefits by 8% annually, plus the COLAs mentioned above. Depending on recipients’ longevity, waiting may increase lifetime benefits, and furnish a more significant retirement income.
Upon initial filing any time after FRA, retroactive benefits are available for up to 6 months, including the FRA month. Many people claim benefits as they retire. Those whose birthday falls in the last half of the year can delay filing until the next January. At the same time, the claimant can claim up to 6 months in arrears. Consider that “back pay,” accrued into the next calendar year, when income is likely to be lower. Deferring benefits collection until January of the next year will reduce retirement year income (hence the income tax due), and possibly avoid or reduce Income-Related Monthly Adjustment Amounts (IRMAA charges) for Medicare, as they are based on income.
Age 70+ filing. Everything so far is pretty much common sense, but there is an additional twist. Anyone waiting to file until age 70 is advised to file for the birthday month, because no further benefit increase is accrued after that birthday. However, those with birthdays after June 30 can defer benefits until January to file, including the “back pay.” Again, for these people, income and taxes may be lowered, and Medicare costs may avoid IRMAA, or at least reduce the IRMAA bracket. Planning is the key, and we can help.
Van Wie Financial is fee-only. For a reason.
For Americans, the likely most familiar reference to Malta is from the 1941 movie, the Maltese Falcon. This fictitious tale of a stolen bejeweled statue was custom made for a classic mystery thriller in black and white. The story, from the imagination of Dashiell Hammett, featured his famous gumshoe character, Sam Spade. Today, Malta is a vacation destination for people around the world, and some choose to retire in the independent island nation.
A member of the European Union (EU), Malta is a cluster of 5 islands off the coast of Sicily in the Mediterranean Sea. Unknown to most Americans, Malta is the home of some of the world’s most ancient and best-preserved ruins.
While Malta welcomes tourism, it also caters to potential retirees, but with many strings attached. Residency is only open to self-sufficient foreign expats. For those who qualify, the Maltese Government has established guidelines for potential retirees, depending on their country of origin. People from other EU countries abide by one set of rules, while those from non-EU countries have different sets of rules.
Malta has a Tax Treaty with the U.S., strictly defining U.S. taxation for permanent residents in Malta. When there are Treaties and Tax Agreements, scammers follow. Scams attract IRS interest, and Malta poses no exception. In fact, Maltese Retirement Scams made the 2023 IRS “Dirty Dozen” Scams list.
The general nature of the Maltese Retirement Scam is to promise Americans they can donate appreciated assets to certain Maltese pension funds, and when the pension plan sells the assets, proceeds are distributed to the American donor, all tax-free. That sounds too good to be true; because it is.
Full disclosure – I have not been to Malta, and have no plans to visit. I checked with friends who have spent time there, and they do not feel the need to return. For those of you who do, prepare to experience beautiful scenery, mild weather, and many friendly expats. That information comes from Maltese officials, but appears to be fairly accurate. In addition to native Maltese, English is the accepted language on the islands. Anyone interest in a possible Maltese retirement should seek advice from other Americans, the Tourism Bureau in Malta, and qualified tax counsel here in the U.S.
This Blog is not intended as a travel tip bonanza. Our purpose here is to alert Americans about potential tax scams that can prove expensive if undetected. Go if you wish, but don’t believe that our IRS has a benevolent heart where Malta is concerned. IRS will always get their due. Right now, IRS is investigating taxpayers who fell for this, but they are truly only interested in catching the scammers. Help if you can.
Van Wie Financial is fee-only. For a reason.
See the link to check out the CBS News article on “Tips for Maximizing You Savings“! Our very own Adam Van Wie is quoted in the article.
Comprehensive personal financial planning begins with just plain getting organized. The best way to start is to prepare a Personal Net Worth Statement. Conceptually, that is as simple as listing all your assets, and subtracting from that total all your liabilities (debts). This produces a snapshot of your financial position at one point in time, called your Net Worth, or your wealth. In corporate accounting, the equivalent process produces a Balance Sheet.
In financial media and politics, wealth is often mis-defined using income. A millionaire has a Net Worth of $1,000,000+, but too often the term is applied to someone with a Million Dollar annual income. Many wealthy Americans have low incomes, because they own assets that do not provide income, preferring assets with a good chance of increasing in value (growth assets). Conversely, many high-income Americans have a low (or even negative) Net Worth, because their assets are burdened with mortgages or other liabilities. Wealth refers to Net Worth, whether individual or corporate.
A reasonable goal when entering into a Comprehensive Financial Plan is to establish a Net Worth target. Whether working with a competent financial advisor, or simply playing the home game, deciding on a target is vital to beginning a plan to achieve the goal of Financial Independence.
Problematic for many people is identifying and valuing all assets. Home values change over time, bank accounts and brokerage accounts fluctuate, and many forget to count items such as life insurance and annuity contracts. Others have old 401(k) accounts they left behind and rarely think to include those values as assets. Competent financial planners will remind clients to dig through everything to find forgotten assets. Old insurance policies, annuity contracts, and 401(k) Plans may be valuable, and must be included.
Thanks to various pension reform legislation, accounts can generally be rolled over into self-directed IRAs, to be invested in a manner consistent with reaching defined goals. In our “day jobs” as Certified Financial PlannersÒ, we have assisted many clients in finding and regaining control of forgotten (or even ignored) assets. Annuities are classic examples, as most underperform market-based portfolios over time. Depending on the individual annuity and the nature of the ownership, most can be incorporated into a comprehensive investment plan.
Every retiree needs a level of lifetime income, which can include Social Security, pensions (public or private), and annuities. Loads of annuities have been sold over many decades to unsuspecting Americans who do not need them. Many of those can be converted to more productive uses. We can help.
Van Wie Financial is fee-only. For a reason.