According to my calendar (which I thoroughly believe must be lying to me, because we can’t really be this close), there are only a couple of months left until Christmas, 2023. By then, most Americans are pretty much done making financial decisions for the year, not really thinking about business until sometime in January 2024. We have been stressing the need to complete a few financial items prior to singing along to Auld Lang Syne.
Deferring certain items past year-end may not cause actual harm to an investor, but too often it results in another year going by without reviewing, updating, correcting, or even initializing important details. Among our favorite pursuits, this time of year is encouraging clients and radio listeners to revisit their Beneficiary Designations before year-end. Failure to stay current can be disastrous, resulting in assets being distributed to unintended recipients.
Over half of adult Americans, including attorneys, do not have a Will and/or a Living Trust. If you have one or both, review the Beneficiary Designations at least annually. They need to reflect the life-altering changes we all periodically incur. If you don’t have at least a simple Will, make an appointment with an attorney to get it done. This should also include your medical directives and Powers-of-Attorney. Costs are reasonable and can be shopped around to find a good fit at a reasonable price.
Retirement Accounts, whether Pensions, IRAs, or Qualified Retirement Plans, pass at the owner’s death to Named Beneficiaries, which means those whose names appear in the Plan documents as being successor owners. Keep them current, starting right now, to avoid unintended consequences.
Account custodian changes, such as TD Ameritrade recently becoming Charles Schwab, often require new paperwork, and keeping Beneficiary Designations up to date will eliminate potential confusion later. This can also happen when you change financial advisors or begin working with an advisor.
Here’s one most people will never consider. Nearly 20% of assets in 401(k) (and similar) Plans belongs to ex-employees. Aside from being a poor investing strategy, how many of these old accounts are forgotten, and have never been reviewed for possible changes to Beneficiary Designations?
Life insurance and annuity contracts also need accurate Beneficiary Designations. Most people cannot even quickly produce their actual contracts, and may not realize that their Designated Beneficiaries may need updating.
Performing a complete review of Beneficiary Designations is an easy method of assuring an orderly transition of assets when the inevitable happens, either with warning or without. We can help.
Van Wie Financial is fee-only. For a reason.
Earlier this year, we posted a Blog expressing our disgust at the way Cost-of-Living Adjustments (COLAs) are applied to certain government functions that affect most Americans. The Department of Labor is charged with the annual task of determining the net increase in overall prices we all pay. Their results are published as the Consumer Price Index or CPI.
Failure to realize an increase in overall income results in erosion of buying power. In any given year, far too few Americans realize a sufficient increase in income. This pattern has been endemic in our society for longer than the entire life of the Social Security System.
In 2023, Social Security monthly benefits were raised by 8.75%, despite inflation well in excess of that figure. In November of 2022, the government-reported annual rate of inflation hit a multi-year high of 11.1%. Social Security benefits covered only 78% of our price level increases, resulting in a reduction of purchasing power.
As bad as that sounds, it gets worse, as recently released numbers plainly depict. Despite a 4.1% increase in our daily living costs (reported CPI change for 12 months), Social Security has announced a 2024 COLA of only 3.2%, leaving recipients a (pre-tax) shortfall of 0.9%. As usual, that is only the tip of the iceberg. Misapplication of COLA adjustments in other aspects of our financial lives exacerbates the problem.
A large percentage of Social Security recipients are covered by Medicare. Whenever a Medicare participant is also receiving Social Security monthly benefits, Medicare premiums are deducted from benefits payments. Wouldn’t it be logical to assume that one inflation rate would apply to all government functions equally? In that case, Medicare premiums would also be increased by 3.2% for 2024, just like the reported CPI. But no, Medicare premiums are going up by 5.9%, leaving individuals to cover the extra 2.7%. One more decrease in our standard of living, compliments of “Uncle Sam.”
Adding proverbial insult to injury, higher-income Americans have long been subjected to surcharges for monthly Medicare premiums. Dubbed IRMAA, for Income-Related Monthly Adjustment Amounts, affected Americans will also find IRMAA costs rising faster than inflation.
But wait, there’s more! Medicare-covered payments (usually 80% of your actual costs) kick in only after an increased annual deductible amount has been met. In the coming weeks, the IRS will release many more “inflation adjustments,” and we will explain them to you.
Van Wie Financial is fee-only. For a reason.
The U.S. Tax Code is a behemoth, and little understood. It is enforced by a [service-oriented] Department of the Federal Government. The Internal Revenue Service, or more commonly IRS, has the ability to ruin lives, and the American people rightly fear and loathe the “Service.” It is little wonder to me, as I share most Americans’ feelings about the way IRS operates. IRS is the only department of the U.S. Government that places the burden of proof on the accused. In other words, once a charge is levied against a taxpayer, it is incumbent on that taxpayer to prove innocence.
Reducing fear (if not loathing) involves gaining an understanding of the Tax Code as it applies to your personal financial situation, yet most people tune out at the very mention of IRS, the most hated of all Washington acronyms.
We must point out that Van Wie Financial is not a tax preparer. We offer education and planning for those interested in learning how they are taxed, and we can work with your Tax Preparation professionals.
Understanding how to utilize the Tax Code for your personal best result requires an understanding of Tax Brackets. Brackets are presented in an IRS-published chart, which is updated annually to reflect inflation and Congressional modifications. Brackets are misunderstood by many Americans, so today we hope to clarify application of Tax Brackets.
Any individual’s Marginal Tax Bracket is the one his or her next dollar earned falls on the chart. But not every dollar of Taxable Income is taxed at the same rate. Everyone receives full benefit from each of the lower tax brackets up to the Bracket limits.
Due to the effects the Trump-era Tax Cuts and Jobs Act of 2017(TCJA), Brackets currently carry historically low Tax Rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%), as well as being applicable to a large share of Taxable Income. TCJA changes have encouraged taxpayers and financial planners to set targets for Taxable Income, attempting to minimize total tax each and every year.
Within reason, taxpayers get to influence their own tax rates, whether by earning more or less money, or by creating more deductions and exemptions. One favored Taxable Income reduction strategy is to make deductible contributions to Retirement Accounts. Conversely, taxable Roth IRA Conversions can increase Taxable Income within your current Tax Bracket.
For today, remember that creeping into a higher Tax Bracket does not punish your Total Taxable Income. We can help you plan.
Van Wie Financial is fee-only. For a reason.
Traditional IRA vs. Roth IRA – easy choice? Not so much. Add in Roth IRA Conversions (from Traditional IRAs), and year-end 2023 financial planning gets even more complicated. Yet, the long-term consequences of these conversions, positive or negative, are serious. Consequently, Van Wie Financial is already involved in our clients’ year-end planning. Naturally, it gets more intense as the remaining days of 2023 wane.
Among the most complex topics in Retirement (and year-end) Planning is Roth Conversions. Traditional IRA assets get converted to Roth IRA assets in taxable transactions, but will not be taxed when removed later in life. Today, Roth Conversions are more complicated than in the past. A few short years ago, all or part of a Roth Conversion could be reversed (Recharacterized) in the year following, so any undesired overages were easily corrected. That privilege was short-lived, and the only substitute today is better planning.
Today’s U.S. Tax Code is marked by lower tax rates and wider tax brackets than existed only a few years ago. Most taxpayers attempt to stay in one of the lower brackets by managing total annual income. Savvy taxpayers will simultaneously attempt to push income up against the next higher tax bracket, without going over by so much as a dollar. Needless to say, that presents an estimating and planning challenge.
Roth IRAs are not subject to Required Minimum Distributions (RMDs) until the account has been inherited from the original owner. Further, funds withdrawn later in life are not considered taxable income to the owner. Hence the growing popularity of Roth IRAs, which provide ultimate flexibility for income and tax planning. Thousands of taxpayers are entering into Roth Conversion Plans, many of which will span several years.
For people who don’t expect to need their entire future taxable RMDs, Roth Conversions provide one alternative. The downside lies in current tax bills, which will be incurred by the conversion. Managing those amounts is the essence of year-end income planning, and hence tax planning. But it is not the only method of reducing RMDs.
Qualified Longevity Annuity Contracts, or QLACs, are insurance products that can be purchased within taxable Retirement Accounts. With an upper limit of $200,000, the QLAC reduces the IRA account balance, thereby deferring that portion of the associated RMD. QLACs are flexible as to size within the limit and duration, from 1 year to age 85. While there is no annual return on the QLAC funds, deferring that portion of taxable income provides tax savings for the QLAC owner. To the right candidate, a QLAC is valuable.
Van Wie Financial is fee-only. For a reason.
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.