Avoiding a partial government shutdown, a massive year-end spending bill was recently passed by Congress and signed into law by President Trump. Part of that bill, the Setting Every Community Up for Retirement Enhancement, or S.E.C.U.R.E. Act, will do more long-term good than harm. My assessment comes despite the sketchy grammar applied to naming this significant financial makeover.

While championed by the annuity industry, the Secure Act includes many changes to non-annuity forms of retirement accounts. Details of the Act are being continuously updated and published, and as they are, we will do our best to explain new provisions in understandable terms. Highlights include:

  • Repeal of Age Limits for Traditional IRA Contributions. Many Americans are working beyond age 70-1/2, and those workers were not able make Traditional IRA contributions until now; there is no longer an age limit.
  • Required Minimum Distribution (RMD) Age. Owners of Traditional IRAs and other tax-qualified retirement accounts were mandated to begin taxable withdrawals at age 70-1/2 (never mind what an idiotic age that was), but that has been changed to age 72. This affects anyone who was born in 1950 or later.
  • Loss of “Stretch IRAs” for Inherited Retirement Accounts. After 2019, there is no longer a stretch provision allowing an inherited retirement account to be distributed over the beneficiary’s lifetime. Instead, IRS no longer cares how quickly or slowly money is withdrawn and taxed, so long as it is fully withdrawn within 10 years following the year of death.
  • Smaller Required Minimum Distributions (RMDs). IRS has rewritten Life Expectancy Tables to reflect our increasing lifespans. Starting in 2021, less money will be required to be withdrawn every year, reducing taxable income and preserving assets for longer lives.
  • Universal application of lowered RMD. The Secure Act allows people who are already taking RMDs to use the new Life Expectancy Tables, reducing withdrawal amounts beginning in 2021.
  • Qualified Charitable Distributions (QCDs) were continued “as is,” meaning that people of age 70-1/2 and up can still make direct charitable donations without losing their tax deduction.
  • “Kiddie Tax” rates were restored to their pre-2018 level, corresponding to the parents’ tax rates, rather than the excessive Trust tax rates from the Tax Cut and Jobs Act of 2017.

A batch of the usual “tax-extenders” passed, as well. These are the small items that Congress is too unfocused to legislate, so they wait until year-end to “kick the can down the road’ another year at a time. Again, those provisions are numerous and affect relatively few people, so we will not address them here. The Secure Act presents a mixed bag, but all-in-all I give it a ‘thumbs up.”

Van Wie Financial is fee-only. For a reason.

Roth IRAs were invented in 1997 to supplement Traditional IRAs, and in some situations the Roth presents a better overall financial opportunity. There are many reasons to consider using a Roth IRA. Some people make too much money to deduct a Traditional IRA, but others (in low tax brackets) also favor using the Roth IRA. Investors just starting to save money may realize that a Roth IRA can be used for a variety of beneficial pre-retirement financial transactions not available using the Traditional IRA.

In appropriate circumstances, we are huge supporters of the Roth IRA. BUT, experience has shown us that far too many Roth IRA owners are under-utilizing their own wealth accumulation potential. Here are a few common errors:

  • Confusing the account with the investment. This is common in banks and credit unions, when the customer is convinced to open an IRA that simply winds up in an interest-bearing CD.
  • Investing too cautiously. Roth IRAs are perfect vehicles in which to maximize investment risk, as the returns over time, no matter how large, will never be taxed.
  • Failing to maximize contribution potential. Unlike Traditional IRAs, Roth IRAs can accept contributions after age 70-1/2, assuming that the owner (or the owner’s spouse) has sufficient earned income to cover the contribution.
  • No Required Minimum Distributions, or RMDs, need to be taken during the life of the owner. Beneficiaries will have to take RMDs after inheriting a Roth IRA, but the withdrawals will be small, and the proceeds will not be taxable.

The true wealth-building opportunity offered by a Roth IRA is unlocked by maximizing both lifetime contributions and investment risk. Every investor should understand the relationship between risk and reward. “No pain, no gain” is ubiquitous in the physical fitness industry, but is also applicable to investing. In both cases, more is gained over time by taking more risk, which means increasing the variability of returns in an IRA.

Riskier assets, such as stocks, have a track record of higher, but less predictable, returns. Money market funds, CDs, and the like offer predictable, but much smaller, returns. Over time, higher average returns from stocks should provide a more favorable outcome. With no required withdrawals, Roth IRAs may continue to grow throughout a lifetime, and then be inherited tax-free by beneficiaries.

The purpose of a Roth IRA (or any tax-qualified retirement account) is to grow it as much as possible over time. Retirement funds will help replace your income once you reach retirement. Invested properly, a Roth IRA is the perfect vehicle for aggressively growing retirement funds. Merely parking Roth IRA contributions in an interest-bearing account for years is tantamount to carrying buckets of water from one end of a swimming pool and dumping them into the other end. Why bother?

Van Wie Financial is fee-only. For a reason.

Every year I like to review my last year’s Congressional Financial Wish List, both to see what actually happened since last year, as well as to see what could be improved next year. Since passage of the Tax Cuts and Jobs Act of 2017, which took effect on January 1, 2018, a lot has changed. Many changes were positive for the majority of Americans, but much remains undone.

  • Wish # 1 – Income tax rates were lowered for individuals until 2026; the new rates need to be made permanent. (No progress in 2019, despite promises)
  • Wish # 2 – Reduce Capital Gains tax rates, which were not modified in the 2017 Act. (No progress in 2019; little help in sight)
  • Wish # 3 – Dramatically increase contribution limits for IRAs, which are currently only adjusted for inflation. (No progress in 2019; little or no change in sight)
  • Wish # 4 – Repeal all Estate and Gift Taxes. (No progress in 2019; not a whimper from Congress)
  • Wish # 5 – Eliminate the Clinton-era tax increase on Social Security benefits for certain income levels. (No progress in 2019; I may be the lone dissenter)
  • Wish # 6 – Eliminate the Alternative Minimum Tax (AMT) on individuals. (No progress in 2019; all talk, no action)

As is evident from the forgoing analysis, it appears that I am getting a legislative lump of coal in my 2019 stocking. In 2018, Republicans promised to pass Tax Cuts 2.0 before the end of the year. As is too often the case, that promise was hollow.

What, if anything, can we realistically expect Congress to address from this list? A good start would be passing Wish #1, which simply extends current tax rates into the future for individuals. Unfortunately, even that one is looking elusive. While the term “Do-Nothing Congress” has long been applicable, this past year must be a record.

Entering into an election year, perhaps some elected officials would like to make some actual improvements in the lives of average Americans. Only time will tell. I, for one, am not holding my breath. Nevertheless, we wish everyone a very Merry Christmas and an exceptionally Happy New Year.

Van Wie Financial is fee-only. For a reason.

In the closing hours of 2017, Congress promised to help most Americans financially. Given the track record of the past several Congresses, that would have required a 180-Degree course correction regarding taxation. Skeptical Americans (including this author) demanded that Congress and President Trump “Show Me.” Lo and behold, they did just that.

The Tax Cuts and Jobs Act of 2017, or TCJA, passed and was signed into law, then took effect for tax years beginning January 1, 2018. Tax Returns for that year were due on April 15, 2019, and offered automatic extensions until October 15, 2019, for those who needed more time. Those dates have passed, returns have been filed, and results are in. The Journal of Financial Planning, one of our industry’s most respected publications, compiled IRS statistics for Tax Year 2018, with the following results and comments:

  • Contrary to early media reports, the average tax refund was down only $29, or 1%, from Tax Year 2017
  • Payroll withholding tables were adjusted to withhold less tax from paychecks, causing a corresponding increase in “Take-Home Pay”
  • The combination of an increased paycheck and a similar refund amounted to 67% of taxpayers receiving a measurable tax cut in 2018
  • Only 6% of taxpayers actually paid more in 2018 than under the prior Tax Code, and a slightly larger percentage had no measurable effect
  • Some people owed more due to the new $10,000 annual limitation of State and Local Tax itemized deductions, or SALT, were negatively impacted
  • Only 10% of taxpayers itemized deductions, due to the new, larger Standard Deduction
  • Tax cuts due to TCJA were not skewed to favor “the rich”
  • 92% of taxpayers used e-file for 2018 Tax Returns, compared to 67% the prior year
  • Small businesses fared well under TCJA, thanks to Wisconsin Senator Ron Johnson, who convinced President Trump and the Congress that a provision had to made for “pass-through” businesses to equalize tax rates with larger companies

Many tax preparers added a demonstration page to 2018 Tax Returns, showing what the taxpayer actually paid, against what would have been owed absent TCJA. If you used a professional to prepare your 2018 Tax Returns, you may be able to see for yourself how you fared under TCJA.

Congress has more to do if they truly aim to help the majority of taxpayers. Due to strange and outdated budgeting rules, personal tax rates expire after 10 years. Current reduced rates need to be made permanent. There are other areas Congress should address, such as encouraging higher retirement savings rates. Congressional Republicans have several proposals on the table, but the divided government has essentially ground to a halt. Only time will tell how this saga ends.

Van Wie Financial is fee-only. For a reason.

Keeping a home in the family after the owners’ death is a frequent desire. There are many ways to effect transfer of ownership within a family, and some are more cost effective than others. Expensive mistakes are all too common. Knowing the rules before acting is likely to result in a smoother and more efficient transaction.

We frequently hear phrases such as, “I put my kid’s name on the house,” or “I want to give my home to my kids to keep it in the family.” Hearing things like that makes us cringe. Most often, it is the exact wrong thing to do.

There is generally no actual advantage to accelerating the turnover of the property during the life of the owner, and in fact there are several potential pitfalls.

Remembering that we are not giving legal advice, but rather financial planning tips, here are some possibilities.

Let’s start easy. The simple way for a homeowner to transfer a property to heirs in to die with a valid Will. This may sound a little insensitive, but in plain English, it works. You will not be involved in any estate messes that may arise either, assuming you have prepared a valid Last Will and Testament.

Far too often, the owner believes that by waiting until death to transfer the home, they run the risk of the home being taken by a financial institution or the government. Many people believe that an additional name (or names) on the title will prevent that outcome. These are generally not valid assumptions.

If changing ownership while alive, and also remaining in your beloved home as long as possible are priorities, it can be done, but caution is advised. One easy way to keep a home in the family is through an outright gift. With the large gift tax exemption today, it will almost never trigger gift taxes. That sounds good enough, but there are some longer-term tax complications with this methodology, and it is almost never the best idea.

Another option is the Qualified Personal Residence Trust, or QPRT, designed to accommodate homeowners whose estates will be large enough to possibly trigger unwanted estate taxes when the owners pass. Again, these households are rare, due to current large estate tax exemption limits. QPRT rules are numerous and exacting, so professional legal help is a must.

Frequently, people ask us about selling their home to their beneficiaries for a bargain price. This is seldom a good idea, because taxation rules are complicated, and mostly work against the recipient of any gift or bargain. This method may also expose the original owner to unwanted displacement from the residence.

An alternative option is to sell your home to heirs at full price. You can hold a mortgage that way, charge a low interest rate (check IRS guidelines for the current minimum interest rate). This method may offer the best overall tax arrangement for the seller, but other family considerations must be meticulously examined.

An old saying reminds us that the road to Hell is paved with good intentions. Be very careful how “nice” you are with your most valuable assets, and especially your residence. Getting professional financial and legal guidance will likely save money and potential family turmoil.

Van Wie Financial is fee-only. For a reason.

Despite a robust economy, many people are feeling a pinch in their living standard. As prices rise steadily over time, wages (especially after-tax) haven’t risen with the same determination. Inflation is winning, and Americans are losing.

Inflation affects each and every one of us, so we should at least be able to understand how the rate of inflation is measured. The government’s measurement of general price levels and ongoing inflation rate is dubbed the “Consumer Price Index,” or CPI.

The very government that defined the term “inflation” (which is also the government that charged itself with calculating the rate of inflation), would be consistent in applying the inflation rate to its various functions. So it would seem, but reality is sharply different.

There are many designated governmental applications for the CPI, including granting cost-of-living wage increases to government employees, Social Security recipients, and government contractors. We call that the “income side” of the CPI. There is also a “tax side” use for the CPI. Most income tax calculations and rules are also indexed to changes in the CPI.

In recent days, the government has released significant new data for the upcoming 2020 Tax Year. The application that affects most Americans is the modifications to the Income Tax Brackets for all taxpayers. Tax Brackets have been expanded by 3.68% to prevent what is called “bracket creep” among taxpayers. In other words, inflationary wage increases do not push the taxpayer into a higher marginal tax bracket.

Affecting a significant portion of the population is the cost-of-living increase for Social Security recipients and various types of government employees and contractors. Based on the CPI change being applied to income tax brackets, these people could be expected to receive a pay increase of 3.68%. Right?

Wrong! The government employees’ pay increase for 2020 will be 1.6%, which is less than half of the tax bracket increase. What’s up with that? I thought the CPI was a fixed, calculated number, didn’t you? Adding insult to injury for “Seasoned Citizens,” your Medicare premiums are rising 7%, eating up a good chunk of the Social Security increase. Worse yet, Medicare (out-of-pocket) deductibles are also rising by 7%. Pay more, get less – what a deal!

For years now, it has been apparent to me that the government’s calculation of the inflation rate has dramatically under-reported the true cost of living. Most people seem to agree, but one of them did something about it. Several years ago, Ed Butowsky, a well-known financial advisor, developed an index of his own, and dubbed it the “Chapwood Index.” His methodology remains consistent over time, and his price level tracking has shown the government’s CPI measure to have dramatically understated the rising cost of living.

The Chapwood Index, which is computed twice annually, has been released for 2019’s first six months. The Chapwood Index conclusion is mind boggling, showing the average price level rise in the USA to be 9.8% for 6 months.

In the meantime, couldn’t we at least ask for consistency among the government’s applications of the CPI? Somehow, the system seems to be working against our best interests. The 3.68% expanded tax brackets are welcome, but the 1.6% “cost-of-living” increase seems a bit paltry by comparison. Neither respects the Chapwood Index’s 9.8% increase for only 6 months.

For more information, go to the Chapwood Index website and read the history, methodology, and results. It is an eye-opener.

Van Wie Financial is fee-only. For a reason.

Rather than a traditional blog post, I thought we’d share a correspondence sent to our clients and friends this week. The topics are timely and important.

To our valued clients and friends,

Monday, all three of the major stock market indices (DJIA, S&P500, and NASDAQ Composite) reached new highs; both intra-day and at the close. This Bull Market, the second-longest in history, is alive and well. With all the negativity clouding the media and politics, it may seem surprising that the market has turned a deaf ear. In reality, though, it is easily explained.

Remember our prior communication regarding politics and economics? In the long-term, economics drive markets, and right now our economy is strong. Political influences are primarily short-term aberrations. Investors understand this and are signaling their support of the economy by driving markets upward. Where will it end? When will it end? Nobody knows, despite the propensity of “talking heads” to prognosticate.

This is the season when financial advisors turn their thoughts to RMDs – the often-dreaded Required Minimum Distributions. Many of you have made plans with us as to the timing and taxation of your RMDs, and we are merely counting days until mid-December to make the actual distributions. Retirement account owners who turned 70-1/2 this year, or anyone who inherited retirement accounts last year (or even this year), should be planning RMDs at this time.

After Thanksgiving, and throughout the rest of the year, everyone gets busy, and could easily overlook these necessary transactions. For that reason, we make sure that every client’s annual RMD obligation, if any, is satisfied. The consequence of a missed RMD is a tax penalty of 50%. That is unacceptable.

For the charitable among the group, remember (or learn) the Qualified Charitable Distribution, or QCD. Using this tool, donations are made directly from the account custodian to the qualified charity, bypassing the account owners 1099. This means that no income is reportable for the amount of the QCD, and no tax is due, even if the donor does not itemize tax deductions.

2019 has been a solid year in the markets, erasing the dramatic downturn of last December, and charging ahead to set multiple new records throughout the year. Hurdles remain, as always, including the impeachment mess, remaining trade deals that include USMCA and China, the cloud overhanging Brexit, and a host of others. On any given day, one or more of these may add more volatility to the market. Expect and embrace volatility, and pay attention to the real economy, job creation, and the factors that drive markets over time.

As always, we will be here reporting what is actually happening and doing our best to guide our clients through the volatility.

Please accept our heartfelt wishes for a safe and happy Holiday Season, and a healthy, prosperous New Year.

The intermittent chill in the air reminds us that summer is gone, and autumn is gaining hold, even here in North Florida. As year-end 2019 approaches, the financial planning community turns to Tax Planning and Required Minimum Distributions. Today we will concentrate on a portion of Tax Planning called “Buying a Dividend.”

Dividends are nice, as they give us positive financial feedback that our investments are working for us. Sometimes, however, good tax planning would have us avoid a dividend in order to reduce our potential taxable income. Avoiding a dividend is sometimes as easy as postponing an intended equity purchase.

When a company pays a dividend, it is taxable to the owner of the shares on which the dividend was paid. If the owner has the asset in a tax-deferred account, no current tax will be due, as it will be delayed until money is drawn from the account. If the owner of the shares is a mutual fund, the funds keeps a record of the dividend, and at least once per year pays the accumulated dividends to the shareholders of the fund.

There is no avoiding taxation of dividends forever, except to hold the shares in a Roth IRA or Roth 401(k). Note that taxpayers who are in the lowest two tax brackets are taxed on dividends at a rate of zero, essentially eliminating the tax. They do need to include the dividends in computing their total income, so the dividends are included in the tax formula.

Understanding the term “Buying a Dividend” requires understanding the steps that lead to a dividend being paid:

  • The Board of Directors determines (“declares”) the amount and payment date of a dividend on the Declaration Date
  • The Board then determines the Record Date, when owners of shares at the close of businesses will qualify to receive the dividend when it is paid
  • The day following the Record Date is called the Ex-Dividend Date, meaning that buyers of new shares beginning that day will not receive the dividend just declared
  • Finally comes the Payment Date, which is the day on which the actual dividend will paid to shareholders at the close of the Record Date

On the Ex-Dividend Date, the opening market price of the share is reduced from the previous closing by the amount of the dividend. For example, if a $20.00 per share stock or mutual fund declares a $1 dividend, on the Ex-Dividend Date (the first day that a purchase will not earn you the dividend), the market share opens at $19.00. For example, Purchaser “A” buys a $20.00 share on the Record Date, andon the next day owns a $19.00 share and a $1.00 Dividend, which will be paid on the upcoming Payment Date. Notably, that purchaser also has a tax bill for the $1.00 dividend.

Purchaser “B” buys a share on the Ex-Dividend Date, and only pays $19.00, the opening price, but has no $1.00 dividend, and no tax bill. Both “A” and “B” have the amount paid, except “A” has incurred a tax liability.

If Purchaser “A” bought the share in a tax-deferred account, there is no problem. However, if “A” bought the share in a taxable account, taxes will be owed for the year of the dividend. Only if the dividend is paid to “A” in cash will the money be available. If, instead, the dividend is reinvested in fractional shares, the tax money will have to come from another source. “A” just Bought a Dividend, and should have planned and executed the purchase on the Ex-Dividend Date, rather than the Record Date. What a difference 24 hours would have made.

Determining the ex-dividend date is as easy as going to the website of the stock or mutual fund and looking for the notice of size and date of coming distributions. Most funds have not yet determined that date for 2019, but through periodic checking, a potential buyer will be able to time the purchase after the announcement is made.

We have seen many examples of investors getting stung by a large tax bill from mis-timing purchases of mutual funds. Of course, once investors own the shares, the next dividend will be an unavoidable taxable event. Just don’t add insult to injury by getting an unwanted distribution “up front.”

Van Wie Financial is fee-only. For a reason.

Advisors throughout the Financial Planning Industry utilize many business models, with the Registered Investment Advisor, or RIA, being one of the fastest-growing formats. Van Wie Financial is organized as an RIA, which means that we are fee-only and serve our clients as fiduciaries. Our primary services include comprehensive personal financial planning and asset management. We do not sell any products, nor do we accept any commissions.

There is little regulation regarding use of terminology in the financial services industry. Insurance salespeople, stockbrokers, mutual fund representatives, and various other practitioners are allowed to claim the “financial planner” title, but the most comprehensive service is provided by Certified Financial Planners™ operating as independent Registered Investment Advisors (RIAs).

Rising popularity among clients for the RIA model is spearheading an explosion of firms adopting the fiduciary RIA business model. But despite the popularity and growth of this industry, shortages of qualified advisors exist, and there appears to be no end in sight to opportunities for growth and expansion.

Young people seeking a rewarding career should be aware of opportunities available in the field of financial planning. Yet, in a recent survey, only 37% of those surveyed knew of the profession. Once informed, 63% claimed to be interested in taking a further look.

Not many years ago, young people with an interest in becoming independent financial planners had little no opportunity to be compensated while learning the job. Existing businesses were unwilling to pay an aspiring planner to acquire on-the-job training. In economic terms, barriers to entry were high. Those barriers have been coming down as the industry recognizes the need for new talent. Internships (paid) are now available for new candidates, providing better opportunities for students trying to enter the industry.

What does it take to become a success in the arena of modern-day financial planning? At a minimum, solid math and computer skills, people skills, a college degree, and good character are required. Experience, however, is an absolute prerequisite for independent success. Look for internships and entry-level jobs in the financial planning arena, where valuable experience can be gained.

Having advised many people as to the best preparation for a career as a financial planner, I always suggest starting with a career in another endeavor. Becoming successful elsewhere enables a good planner to approach the business with a client-centric orientation. Understanding both points of view (client and adviser) is critical to success as an independent financial adviser professional.

What do successful RIAs have in common? Most are owned and operated by Certified Financial Planner™ (CFP®) professionals, who have been certified competent and ethical by the premier worldwide organization.

Interested people of any age can go to the CFP Board website (www.cfp.net) to learn more.

Van Wie Financial is fee-only. For a reason.

Garnishment is an avenue of last resort for creditors. Most of us would be less than thrilled to take a person’s income against their will, much less have our own earnings taken away. Real people don’t take the income from of another person’s labors, unless necessary. I am not so naive as to believe that there has never been anyone who didn’t need to be treated harshly.

Knowing that garnishment is an option for people in financial trouble, it is also important for everyone to understand that the law is not so harsh as to take every penny of a person’s livelihood. This is more so for the nation’s senior citizens, and even more so for people in Florida.

Today’s subject, garnishment of Social Security, is a particularly touchy subject. Far too many American seniors are totally dependent on Social Security for their financial independence. For those people, taking all or part of their monthly benefit would assure that they became wards of the State. Fortunately, Federal and State laws have considered that very possibility.

I am just going to throw this into the mix, but in my opinion, Florida has done an excellent job over several decades to make the lives of older people more comfortable by protecting necessary assets and income. By doing so, more of Florida’s retirees are self-sufficient, and less of a societal burden because of these protections. Can you poke a hole in that system? I cannot.

Since we are writing to a mostly-Florida audience, I decided to concentrate on Florida’s laws. This topic came up recently because my Research Department found an article that indicated something I did not know or understand. The article said that only $750 of monthly Social Security is protected from garnishment. Could that be true?

Checking the articles’ veracity, here is what I found:

  • First, no creditor can simply garnish any of your income; they must first sue you, and they have to win
  • In all states, Social Security is at least partially exempt from garnishment
  • Usually, Social Security can only be garnished for child support, alimony, and (you probably guessed it) federal taxes.
  • Florida is more protective than most States, and protects all Social Security retirement benefits (as well as most Social Security Disability payments)

As if we needed another reason to live in Florida, this can be added to the list. Senior financial protection is a complex problem, and scammers are everywhere. We appreciate any and all help the State of Florida provides.

Van Wie Financial is fee-only. For a reason.