Category Archives for "Retirement Planning"

7 Year-End Tax-Planning Strategies to Implement Now

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

We often review our tax situation at the end of the year because it is important! However, making a tax plan and carrying out this strategy may prove to be more critical than ever to your finances. 2020 is a historic year due to the pandemic, the resulting economic crisis, massive stimulus, and the presidential election settling into an administration change.

Good year-end tax planning has always been important, but never more so than now, when the administration change may cause changes with the Tax Code in the next several months .

Failing to Plan is Planning to Fail

You can potentially increase your tax savings (and minimize the federal income tax) in 2020 with the following six tax tips.

1. Review your IRA and 401(k) contributions

If you are not maxed out, consider contributing more. Many are expecting that taxes may go up in 2021 with the Biden administration. The Biden-Harris campaign took great pain to specify that the increased taxes they were planning were targeted to high earners. They emphasized that they were planning to spare lower earners. However, pundits have largely decided that we should expect increased taxes across the board. Of course, this is very hard to predict. 

However, if you believe that taxes will go up, you may want to consider contributing to a Roth IRA or 401(k) instead of a Traditional IRA or 401(k) to lock in long-term tax savings.

2. Take advantage of coronavirus -related distributions and waived RMDs in 2020

Under the CARES Act, people under 59½ who are “qualified individuals” may take up to $100,000 of coronavirus-related distributions (CRDs) from retirement plans. CRDs are exempt from the 10% early distribution penalty, and there is the option to spread the resulting taxable income over a three-year period.

The CARES Act passed earlier in 2020 waived RMDs for this year. The waiver applies to RMDs from retirement accounts, including IRAs, company plans, inherited IRAs, inherited Roth IRAs, and plan beneficiaries. If you have taken your RMDs already, you can still repay them if they are otherwise eligible for a rollover, which means that repayments must be made within 60 days of the distribution and are subject to the once-per-year rollover rule.  

However, if you happen to be a “qualified individual,” you don’t need to be concerned about the 60-day repayment deadline since you have three years to redeposit the distribution. However, for some people, it may make sense to take distributions anyway to take advantage of lower tax brackets and to maximize the value of the lower tax bracket in light of the expected increases. Any part of these tax savings not used will be lost forever, so you or your Certified Financial Planner professional or tax planner should perform an analysis to decide what makes the most sense for you.

3. Consider a Qualified Charitable Distribution 

Before the end of the year, you may want to consider a Qualified Charitable Distribution or QCD . This technique remains a significant tax break for charitably inclined IRA owners who are at least age 70½. They are eligible to transfer up to $100,000 directly to a charity from their IRA. QCDs can help to offset RMDs by lowering the IRA balance. They can also help to reduce taxable income (even though RMDs are waived for 2020). 

4. Charitable Contributions

Per the CARES Act, people can benefit from the $300 above-the-line charitable deduction for the 2020 tax year . By and large, charitable contributions lost much of their tax appeal in previous tax changes. However, the CARES Act opens up this opportunity for 2020.

5. Perform Roth conversions before December 31

If you have been hesitant to convert traditional IRAs or pre-tax 401(k) to Roth accounts, 2020 may be the year to make it happen finally. Even though people will be paying taxes on the conversion now, we are still in a low tax environment with the expectation that tax rates will increase. Besides, some people may have a lower 2020 taxable income because of income lost from the pandemic or reduced because of the waived RMDs. For them, a Roth conversion could be a silver lining in the pandemic cloud.

Because RMDs cannot be converted in a typical year, 2020 presents a one-time opportunity to optimize lifetime taxes. Perform this conversion before December 31 so that they will count towards the 2020 tax year.

Do you believe instead that your tax rate is likely to decrease? Then a Roth conversion would be increasing your lifetime taxes. So, don’t convert.

Sure or not, have a conversation with your Certified Financial Planner professional to help figure out your long term strategy.

6. Utilize the net unrealized appreciation strategy

For people who happen to have highly appreciated company stock within their 401(k), Net Unrealized Appreciation (NUA) can be a lucrative tax-planning tool. NUA allows an individual to transfer company stock out of the 401(k) and pay ordinary income tax on the value of the shares at the time of purchase (not the total value of the shares). The difference between the stock’s cost basis and the market value —the NUA— isn’t taxable until the shares are eventually sold. Then, they can be taxed at the lower long-term capital gains rates. 

Although the NUA strategy can be enticing, please remember that not counting a few exceptions, the employee’s entire retirement account should basically be emptied within one calendar year. Hence, to use this strategy, make sure that the lump sum distribution happens before December 31.

7. Reduce Estate taxes

If you are subject to a federal estate tax, gifting in your lifetime can be less expensive than distributing at your death because, within certain limits, gifts are tax-exclusive, whereas inheritances are tax-inclusive. The IRS allows a maximum of $15,000 for annual exclusion gifts per recipient and per donor. Therefore, a couple can give up to $30,000 to an individual or $60,000 to another couple (2 gifts of $15,000 per recipient or per donor). You can make these gifts to anyone every year tax-free, even if the exemption is used up. Also, the gifts do not reduce the gift-estate exemption.

Also, gifts for direct payments for tuition and medical expenses for loved ones are unlimited and tax-free. There is no limit for these gifts, and they can be made for anyone. They too do not reduce the lifetime gift/estate exemption. 

Lastly, the IRS has stated that there will be no claw back to the lifetime gift tax exemption ($11,580,000 per individual in 2020) if these exemptions are used this year, even if it is later reduced, as it is expected to be after Joe Biden is inaugurated as President. Therefore, you may want to use the lifetime exemption now or possibly lose it.

Failing to plan is planning to fail!

For many, these tax strategies could be a silver lining in an otherwise dreadful year. It is widely assumed that the new administration will push for higher taxes. So reviewing your tax situation is essential. 

Make a plan and take action that will make a difference.

How Can Divorced Women Claim Social Security?

By Chris Chen CFP | Divorce Planning , Retirement Planning

When the Social Security Act passed in 1935, it included benefits for workers, but not for their spouses. At the time, women who did not work outside of the home could not qualify for Social Security retirement benefits. A sweeping series of amendments enacted in 1939 extended Social Security to spouses and minor children. Wives who had not earned a social security retirement benefit or whose retirement benefit was less than 50% of their husbands qualified for the first time.

Catching up with a changing society, another reform extended Social Security retirement benefits to divorced wives in the cases when the divorce happened after a marriage longer than 20 years. The word “spouse” replaced the word “wife” in the 1970s, allowing husbands to collect retirement benefits on their ex-wives record.

Later, the length of marriage required to qualify for benefits after a divorce was reduced to 10 years. When SCOTUS legalized same-sex marriage in 2015, survivor and divorce benefits extended to same-sex couples.

This short history of Social Security shows how it has evolved over time. Ex-wives and ex-husbands can now all receive retirement benefits based on an ex’s work record. However, qualifying conditions must be met.

The rules can be confusing and difficult to keep track of, especially for those who have had more than one marriage and divorce or those whose ex-spouse has died. 

Benefits for Divorced People

When a divorced spouse claims their benefit at full retirement age or later, they will qualify to receive 50% of their ex-spouse’s Primary Insurance Amount (PIA) , so long as they have not remarried before 60 years of age and do not qualify on their own record.

Let us take the case of Jack and Jill, who are divorced. Jack’s PIA is $2,800. In this example, Jill, who is an affluent woman with a 30 year marriage and a career raising children, does not qualify for a retirement benefit on her own record. As part of her retirement income planning, she files for her divorced-spouse benefit at her full retirement age of 66. She will qualify to receive 50% of Jim’s Primary Insurance Amount, $1,400, as her divorced-spouse benefit.

The earlier you claim your benefits, the less you will get, consistent with other Social Security benefits. Conversely, you will receive more if you claim it when you are older. To maximize Social Security benefits, you will need to delay them until 70 years of age.

However, divorced people who claim on their ex-spouse’s record will not get more if they delay their benefits until 70 years of age . They maximize them at full retirement age, 66 to 67, depending on the year of birth.

It’s worth noting that when Jill’s own benefit is more than 50% of Jack’s, she will receive her own Social Security retirement. She will not receive her benefit amount as well as 50% of Jack’s!

Sometimes people wonder how their age difference with their ex-spouse can affect their benefits. The good news is that the ex-spouse’s age when they claim is not relevant. As long as Jill claims at her full retirement age, she will receive her maximum benefit independently of the timing of Jack’s claim.

Who Qualifies?

A person who claims his or her benefits based on a former spouse’s record must be single at the time. So unfair, you say? If Jill, in our example, has remarried, generally she could get 50% of Jack’s benefits, or her own, if her own is greater than 50% of Jack’s.

Jack may be married or unmarried. It makes no difference. If Jack happens to be (re)married, Jill and the current wife could both get the 50% benefit from Jack’s record. For that matter, they can both get upgraded to the full benefit at full retirement age.

Suppose Jill, who receives the 50% benefit, remarries. In that case, her 50% benefit from Jack’s record stops, unless Jill’s new spouse also gets a divorced spouse benefit. That’s except if the remarriage occurs after age 60.

A marriage must have lasted for ten years or longer to claim Social Security retirement benefits on an ex-spouse’s record . Because of that requirement, sometimes people who think of divorce will delay until ten years of marriage are achieved. For example, if you’ve been married for 9.5 years, it may be worth it to wait another six months.

Sometimes people are not sure when they actually got divorced. People often mark their court appearance date as the divorce date. In most states, however, the real divorce date is later than the court appearance. For example, in Massachusetts, it is 90 or 120 days later, depending on the type of filing.

More Marriages and Divorces

People sometimes ask: what if you had two or more ten-year marriages?

Then, it can become complicated. Those who have divorced more than once from marriages of ten years or longer can choose the higher of the two divorced-spouse benefits, so long as they are currently unmarried.

For example, let’s suppose that Sheryl was married to Patrick for 20 years and John for 12. Sheryl has now divorced for the second time and has remained single for more than two years since her last divorce from John.

Patrick’s PIA is $2,600, and John’s PIA is $2,400. Let’s suppose again that Sheryl doesn’t qualify for a retirement benefit based on her own record. However, she is at full retirement age (66 or 67, depending on her birth year).

When Sheryl files, she can receive half of Patrick’s PIA because it is higher than half of John’s. And, no, she cannot get both Patrick’s and John’s retirement benefits!

If Sheryl divorced less than two years before, she must wait until her last ex, Patrick, in this case, has filed for his benefit. The worker on whose record the retirement benefit is claimed, Patrick, must have reached 62 years of age.

If they divorced more than two years before, Patrick’s filing status is irrelevant to Sheryl’s claim. Unless Sheryl tells him, Patrick will never know if his ex has claimed.

Let’s go over the case of Mike and Marie. They were married for more than ten years and divorced for more than two. Mike and Marie are both 62 years old. She has not remarried. Because she is single, Marie qualifies for a divorced-spouse retirement benefit based on Mike’s record, whether or not Mike has filed. It’s worth keeping in mind that the earlier someone claims, the less they get!

If Mike has passed away, Marie receives a divorced-spouse survivor benefit based on Mike’s record, if she is currently unmarried or, if remarried, remarried after age 60.

In addition, Marie’s benefit will be 100% of Mike’s Primary Insurance Amount (PIA), the amount that Mike would have received at full retirement age (66 or 67). In the case of Mike dying, Marie’s retirement benefits are capped to full retirement age.

What if the same two people have married, divorced, remarried, and divorced again? In that case, the length of the two marriages can be added together (including the time in between) to reach the ten years qualifying minimum. That is if the second marriage (the remarriage) happens before the end of the calendar year following the divorce!!

We can make sense of this chaos. Say Mike and Marie were married seven years from May 2002 to August 2009. They remarried in December 2010 and re-divorced in November 2013, for three years. The total for the two marriages is ten years. Mike and Marie meet the 10-year requirement because their second marriage happened before the end of the calendar year after the first divorce. If instead Mike and Marie had remarried in January 2011, the ten-year clock would have been reset to zero. 

Pension Repercussions

What if Jill, the person applying for the divorced-spouse retirement benefit, also worked for an employer not participating in the Social Security system? For example, many state and municipal governments are exempt from the Social Security system. If Jill worked for a local government, she could qualify for a pension from her employer. Then, her divorced-spouse Social Security benefit would be reduced by 2/3 of the amount of her pension because of the Government Pension Offset rule. Depending on the size of her pension, Jill’s Social Security benefit may be zero.

How would that work? Jill currently receives a $3,000 monthly pension from a police department in Texas. She has divorced from Jack after a marriage that was longer than ten years. Jack’s PIA is $2,800. Jill’s divorced-spouse benefit of $1,400 would be reduced by $2,000 (2/3 of $3,000), which reduces the benefit amount to zero.

If Jack dies, Jill becomes eligible for a divorced-spouse survivor benefit. After the GPO reduction she will receive $800 ($2,800 – $2,000 equals $800).

Suppose the spouse with benefit also qualifies for a pension from an entity that doesn’t pay into social security. In that case, the Windfall Elimination Program kicks in. That reduces the spouse with benefit’s payments, and the ex-spouse’s benefit adjusts downward as well.

How To Claim

To claim a divorced spouse retirement benefit, you need the name and Social Security number of your ex-spouse. You should also have the divorce decree. If you don’t have it, you could retrieve the ex’s Social Security number on an old document, such as a tax return.

When you don’t have your ex’s Social Security number, you may need more information, such as his birth date and previous addresses. In this case, the Social Security Administration won’t make the process easy.

Social Security remains a critical source of retirement income for divorced women, including affluent women. It is important to get this issue right as part of retirement income planning. or divorce planning. 

Check our other article on Social Security by Phil Bradford

Also check our Retirement Strategy or our Divorce Strategy pages.

Should you cancel your LTC insurance?

By Chris Chen CFP | Financial Planning , Retirement Planning , Risk Management

Long Term Care (LTC)

LTC can be a stressful subject to discuss, especially when costs are addressed. The reality is that Long Term Care is expensive. According to Genworth, a prominent provider of Long Term Care insurance, the median national cost of a stay at an assisted living facility is $48,000 annually in 2018. The total long term care costs, over someone’s lifetime, ends up being much larger depending on where and how long a person will be needing it.

For example, the median cost of assisted living in New Jersey in 2018 was $72,780, according to Genworth. If someone were to stay at an assisted living facility for three years, the cost would be in excess of $200,000. Nursing home care could be even more expensive.

Aside from overall unpleasantness, a key issue with planning for LTC is the uncertainty. 70% of Americans will need it. But how much, and for how long? LTC is often the most unpredictable expense of retirement, and the least planned for.

Even insurance companies have difficulty ascertaining the cost. Large long term care insurance companies such as John Hancock have left the field and no longer offer LTC policies to the general public. Others, including Genworth and Mass Mutual, have been struggling with State Insurance Commissions to increase premiums. Recently, Genworth was approved to increase premiums by 58% in 22 States.

According to the Federal Government, Long Term Care is the range of services and support you will need to meet health and personal care needs over a long period of time when you are unable to provide it for yourself. LTC is not medical care, but rather assistance with the basic personal tasks of everyday life.

The fact is that most of us will require some form of long term care usually toward the latter part of our lives . Given the high probability, and the high level of expense, it is something that needs to be addressed in our financial and retirement plans.

We have plenty of statistics on how LTC affects us as a whole, but very few on how it will affect us individually. Are we going to be part of the 70%, or can we avoid it and be part of the 30%. We just don’t have a very good way to predict how much long term care we will need, when we will need it, and how much it will cost. This is precisely why long term care planning is necessary as part of normal financial or retirement planning.

Who Pays for Long Term Care?

People often assume that Medicare or Medigap (the supplemental coverage for Medicare), or even regular health insurance will cover the cost of their Long Term Care facilities.

Unfortunately, that is incorrect. Medicare is set up to cover only direct medical expenses, such as doctor and hospital visits, tests, and medicine. When it comes to issues of old age care, Medicare is not involved.

In general, most people without a plan who need Long Term Care will pay for it out of their own assets. Once there is no money left, Medicaid will usually take over. This approach works best for people who have enough assets to cover the other foreseeable circumstances in their future.

It is good to know that Medicaid is there, should we need it. However, planning for Medicaid to take over is a backup plan at best.

How do I protect my assets from nursing homes?

A close alternative to spending your own money and then letting Medicaid take over is actually to plan for Medicaid to take over. That involves creating a trust in which to put your assets so they can be protected in the event that long term care is needed. When that happens, the assets remain safely in the trust, and Medicaid pays for your long term care. You should keep in mind that Medicaid is taxpayer-funded, and as with other government programs, it is periodically under stress for funding. In other words, it is not easy to predict with certainty that such a plan would work, especially if it is much in the future.

Long Term Care Insurance

For others, purchasing a long term care insurance policy may be a better alternative. In exchange for the premiums, the insurance company commits to pay the amount contracted for. Effectively, the policy covers a significant percentage of the uncertainty generated by long term care. That amount can vary to take into account your own circumstances.

Who needs Long Term Care Insurance?

Long Term Care Insurance can help to preserve assets for other goals, including for legacy . It can also help you determine the level of care that you would like when you have a need for long term care.

From a tax viewpoint, it is worth noting that some of the premiums for most standard LTC policies available today may be deductible from taxable income within the limits specified by the IRS, especially for business owners. Also, up to certain limits, benefits are not taxed as income. Take this favorable tax treatment as a sign that Uncle Sam would like to encourage you to be covered (and not use Medicaid)!

The challenge with LTC insurance is that insurance companies have miscalculated the premiums required to cover their costs. As a result, premium increases, including the one mentioned earlier from Genworth, have shocked pre-retirees and retirees alike, resulting in a considerable debate about whether to drop LTC insurance policies altogether.

The financial impact of premium increases is real. It is a painful hit on a sore subject. And as with any price increase like that, the impulse is just to cancel.

However, canceling would be a mistake for many people. The cost of LTC must be covered somehow, and if not through insurance, it is usually through your own assets. However, it does provide an opportunity to reconsider the issue with your financial planner. Most people affected by price increases bought their policy many years ago. It would be beneficial to re-analyze the LTC need and the benefits of the policy. You may find out that you are over-insured, or underinsured. And then you can figure out a way forward on how to right-size your coverage.

According to Tara Bernard at the New York Times analyzing your LTC coverage can even lead to a renegotiation of the policy, especially if you are reducing the benefits.

Long Term Care insurance helps pay for long term care expenses, helps preserve your assets and your legacy. Also, a portion of the premium is potentially tax-deductible. So why are so many people resistant to traditional Long Term Care insurance?

First, as we mentioned before, it is expensive. Although, it is worth noting that the cumulative cost of LTC insurance premiums is often less than the cost of Long Term Care itself!
Second, the possibility that the insurance policy may not be used, as in the case of death happening suddenly, is enough to stop many people from acquiring Long Term Care insurance. In this paradigm, the thought of paying premiums for years, and not collecting a benefit would make the insurance a waste.

Don’t Waste the Premiums

To counter this objection, the insurance industry has created products that allow you to “not waste the premiums.” These products allow you to purchase an annuity or a life insurance policy with a special “rider” that allows their conversion to an LTC policy should the need arise.

These products allow you to get Long Term Care coverage if needed, and allow repurposing the funds in case the Long Term Care benefit is not used. The details of these products are beyond the scope 0of this post. Suffice it to say, that these alternatives can provide a lot of flexibility, at a cost, in a financial plan. For people who have significant assets that are not needed for their retirement plan, these alternatives may be worth considering.

Should I cancel my LTC insurance?

Because of the increases in premiums that are sweeping the LTC insurance industry, many people are wondering if long term care insurance is worth it and if they should cancel their policies . There is no easy answer to that question. The increased cost can be burdensome. But the other side to this question is if you cancel your insurance because of the premium increase, how are you going to pay for your Long Term Care expenses when they occur?

The answer is different for everyone. Being a financial planner and number geek, I believe that the answer for many resides in comparing the costs and the benefits. For most people that will result in keeping your insurance. If you are not sure, schedule a call with me, and we can review.

LTC can be a significant expense. As such, it needs to be factored into your overall retirement plan. The four approaches discussed (pay out of assets, Medicaid planning, traditional long term care insurance, and “not waste the premium” alternatives) all offer different benefits and should be matched to the right circumstance and individual preference.

In my experience, most people find it liberating to include LTC in a retirement plan formally, and know what is planned and how much is planned for. It then leaves greater flexibility to focus on the fun aspects of life!

If you need to figure out which option works best for you, schedule a conversation with me today!

 

Check our other posts on Long Term Care:

Planning For Long Term Care

Long Term Care Considerations for Retirement Planning

How Jill Can Plan To Pay for Long Term Care

 

Social Security

By Phil Bradford | Retirement Planning

Is Social Security Important

For most people, Social Security retirement benefits are a cornerstone of retirement income. Even for those who don’t rely solely on Social Security, it provides the foundation on which a financially happy retirement life is based.

Let us discuss some of its basic advantages for your post-retirement life along with clarifying a few things about Social Security.

Will waiting for more than 62 years help to receive more income?

You are usually entitled to receive Social Security retirement benefits at 62 years or older, if you have enough “work credits”. However, for your dependents, who are entitled to get benefits, it doesn’t fully depend on work credits.

A person needs to be a US citizen or a lawfully present person to claim the benefits. Coming back to the question, yes, waiting for a little more than 62 years can help you increase the percentage of monthly benefits you receive.

For example, if you wait till 63 years, you may receive about 8% more monthly benefits. Therefore, if you have other sources of income, it is wise to wait for a little longer even after your retirement for your to claim Social Security. The increased benefit that you get by delaying your Social Security claim can translate into significant additional income over your retirement life . You can maximize your monthly income if you wait till age 70 to collect your Social Security benefits.

Does Social Security help if the cost of living increases?

Many people are concerned about how to manage inflation post-retirement. Every year, the Social Security Administration decides how much to increase benefits because of Cost-of-Living increases.  The COLA or Cost-of-Living Adjustment has increased Social Security benefits by about 1.6% in January 2020. The maximum amount of your earnings that is subject to Social Security tax increased to about $137,700 for 2020 .

Can your Social Security income get suspended due to this pandemic?

It is a concern for many. But, the advantage of Social Security income is that your payments won’t be suspended due to the pandemic even if Social Security offices are closed to the public. The Inspector-General of the Social Security Administration has warned the public not to believe in such fraudulent letters or threats that Social Security income will get suspended.  The FTC also has warned people against believing similar frauds and Social Security scams related to the CoronaVirus pandemic. If required, you can communicate with your local Social Security Administration office over the telephone or fax to get the correct information.

Is Social Security just for your post-retirement life?

As you already know, Social Security income helps you with post-retirement income. Along with retirement benefits, you can get SSDI (Social Security Disability Insurance) protection and life insurance benefits.

According to the Social Security Administration,about 4.7% of people or their dependents claim Social Security disability benefits . The definition of Social Security itself states that it is a federal insurance scheme that provides benefits to pensioners as well as people who are disabled or unemployed.

However, to take advantage of disability benefits as well as unemployment benefits, you need to have worked for a certain number of years. The benefit amount is calculated on the basis of your pre-retirement paycheck and the age at which you’re claiming the benefit.

Also, as stated before, you may benefit from Social Security survivor benefits, too. How much benefit a survivor will receive depends on the age of the worker when he/she died along with his/her salary, along with the survivor’s age and relationship with the deceased person.

Of note, there are also Social Security spousal benefits. A person can get up to 50% of his or her spouse’s benefit at FRA or his/her own, whichever is higher.

In addition, divorced individuals may get Social Security retirement benefits on the basis of their ex-spouse’s record.

Is Social Security income taxable?

Depending on your other income, 0-85% of your Social Security retirement benefits may be taxable . In other words, 15%-100% may be tax-free.

Do you have to pay Social Security taxes even after retirement?

Unfortunately, income taxes still have to be paid in retirement. If you continue working past your Full Retirement Age or FRA, and have earned income, then you’ll have to pay Social Security taxes along with collecting your Social Security benefits. The additional taxes will help increase your monthly benefit depending on how much you had earned before and what amount you’re earning now.

You should note that if you collect Social Security before FRA and continue to work, your Social Security benefits will start at a lower level and may get reduced even more depending on your earned income. That is important because the lower level of benefits has a ripple effect throughout retirement. It may result in a significant reduction of your lifetime income. Hence, if you plan to work between 62 and your Full Retirement Age, there is an additional incentive to delay Social Security benefits.

Can your unpaid debt reduce your Social Security income?

Debt in retirement is a major concern for many people. However, usually, creditors or lenders can’t touch your Social Security payments. Therefore, your Social Security income will be untouched even if you have credit card debt or payday loan debt at retirement. But, certain debts, like federal debt, can reduce your Social Security payments. If you have unpaid federal taxes, the Treasury Department can levy a maximum of 15% of your Social Security benefit every month until the debt is paid off .

Therefore, it is advisable to repay your back taxes and other types of debts long before you reach Social Security retirement age. It is advisable not to resort to a payday loan because of its high-interest rates. However, if you’ve payday loans, it is better to repay them as soon as possible to avoid paying high interest. If your payday loans are legal, you can opt for payday loan debt consolidation or payday loan debt settlement to get rid of your debts. Also, try to repay your credit card debt as fast as possible so that you can save more every month towards a better financial future.

How can you increase your Social Security payments to the maximum?

Here are a few ways to maximize your Social Security income and secure your post-retirement life.

⦁    Try to work till 66 or 67 years to receive full payment. The longer you work, the greater your retirement benefit.

⦁    Try not to claim Social Security before 70 years of age. Delaying in claiming can help increase survivor’s benefits as well.

⦁    Increase your earnings as much as possible. In 2019, up to $132,900 were used to calculate your retirement payments. In 2020, it is $137,700.

⦁    Work for at least 35 years to get maximum Social Security benefits.

It should be clear now how important Social Security is for our post-retirement life. However, it is advisable not to rely only on Social Security income for your golden years. You should have other income streams post-retirement. If your company offers a 401(k) retirement account, then contribute into that account. You can also contribute into an IRA (Individual Retirement Account) to make your golden years financially secure.

 

This article may or may not reflect the views of Insight Financial Strategists.

What’s After The Bear Market?

By Chris Chen CFP | Financial Planning , Investment Planning , Portfolio Construction , Retirement Planning , Sustainable Investing

What's After The Bear Market?

For the month ending 3/20/2020, the S&P 500 has been down almost 32%. Maybe it is because it’s happening right in front of us, but, somehow, the drawdown feels worse compared to history’s other bear markets.

According to Franklin Templeton, there have been 18 bear markets since 1960 which is about one every 3.1 years . The average decrease has been 26.3%, taking a little less than a year from top to bottom.  

Financial planners often work with averages. But the reality is that each bear market will be different from the norm. At the time that I write this, the depth of this particular drawdown does not even rank with the worst in history. Sure, it may still get worse, but that’s where we are today. 

We may not want to hear about how things will get better, because the situation with the Covid-19 pandemic and its resulting prescription of social isolation and market downdrafts is scary. But, eventually, things will get better. 

Keep in mind that things may get worse before they get better. The count of people with the virus will almost certainly increase. If you don’t have a source yet, you can keep up with it over here. But eventually, the Coronavirus epidemic will run out of steam. We will get back to our places of work. Kids will go back to school. Financial markets will right themselves out. We will revert to standard toilet paper buying habits. We will start going out to eat again. Life will become normal again. 

Financially, the question is not just how bad will things get, but how long it will take for our nest eggs to rebuild, so we can put our lives back on tr

Historically, since WWII, it has taken an average of 17 months for the S&P 500 to get back to its peak before a bear market .

The longest recovery since we have had reliable stock market records has been the Great Depression. The longest recovery post-WWII was in the wake of the dot-com crash at the beginning of this century. That took four years. The stock market recovery following the Great Recession of 2008 and 2009 took only 3.1 years . 

Hence, it could take us a while before we make it back to the previous market peak. However, we may want to look at the data differently. This graph shows that, historically, we have needed to achieve a return of 46.9% to recover from a bear market .  According to Franklin Templeton calculations, these numbers can look daunting. However, they have been achieved and exceeded after every past downturn. While there is no guarantee, these numbers suggest that there will be strong returns once we have reached the bottom of the market. I like to think of this as an opportunity.  

With the time that it takes for investments to grow and get your money back, there is time to take advantage of higher expected returns. For those who have resources available, this means that there is time to deploy your money at lower prices than has been possible in recent months.

Those of us who have diversified portfolios and are not in a position to make new investments, the opportunity is to rebalance to benefit from a faster upswing. 

We know from history that every US stock market downturn was followed by new peaks at some point following.

Could this time be different? 

Of course, that too is possible.

I like to think that the future will be better. We will still wake up in the morning looking to improve ourselves, make our lives better, and achieve our goals. We are still going to invent new technologies, fight global warming, and struggle for a more equitable society. 

We are living through difficult times right now. Losses in our brokerage and retirement accounts are not helping. But we will get through this. Please reach out to me if you have specific questions or concerns.

Saving Taxes with the Roth and the Traditional IRAs

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

How does the SECURE Act affect you?

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

After several months of uncertainty, Congress finally passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, with President Trump signing the new Act into law on December 20, 2019. The SECURE Act introduces some of the most significant changes in retirement planning in more than a decade.

The SECURE Act makes several changes to the Internal Revenue Code (IRC) as well as the Employee Retirement Income Security Act (ERISA) that are intended to expand retirement plan coverage for workers and increase savings opportunities. The SECURE Act also radically changes several techniques used for retirement and tax planning. 

Some of the key provisions affecting employer retirement plans, individual retirement accounts (IRAs), and Section 529 Plans included in the SECURE Act are as follows.

IRA Contributions

Starting in 2020, eligible taxpayers can now make Traditional IRA contributions at any age. They are no longer bound by the previous limit of age 70 ½ for contributing to a Traditional IRA.  As a result, individuals 70 ½ and older are now eligible for the back-door Roth IRA .

As an aside, anyone who satisfies the income threshold and has compensation can fund a Roth IRA.

In addition, graduate students are now able to treat taxable stipends and non-tuition fellowship payments as earned income for IRA contribution purposes . I have a graduate student, so I understand that their stipend income may not allow them to contribute to retirement. However, that is something that forward-thinking parents and grandparents can consider as part of their own estate planning.

Required Minimum Distributions

As our retirement age seems to push into the future steadily, so are Required Minimum Distributions under the SECURE Act. This provision, which applies to IRAs and other qualified retirement plans (401(k), 403(b), and 457(b)) allows retirees turning 70 ½ in 2020 or later to delay RMDs from 70 ½ years of age to April 1 of the year after a retiree reaches age 72 . In addition, the law allows people who own certain plans to delay it even further in the case that they are still working after 72. Unfortunately, the provision does not apply to those who have turned 70 ½ in 2019. Natalie Choate, an estate planning lawyer in Boston, says in Morningstar, “no IRA owner will have a beginning RMD date in 2021”.

This RMD provision is part of the good news in the SECURE Act. It will allow retirees more time to reach their retirement income goals. For many, it will enable better lifetime tax planning as well.

End of the “Stretch” IRA

Prior to the SECURE Act, the distributions on an inherited IRA could be “stretched” over the expected lifetime of the inheritor. That was a staple tool of estate and tax planning. 

No more. With a few exceptions, such as for the spouse, the “stretch” is now effectively crunched into ten years. Accounts inherited as of 12/31/2019 are now expected to be distributed over ten years, without a specific annual requirement.

The consequence of this provision of the Act is likely to result in larger tax bills for people inheriting . This makes planning for people who expect to leave IRAs, as well for inheriting them, more important than ever. 

Qualified Birth or Adoption Distribution

The new law allows a penalty-free distribution of up to $5,000 from an IRA or employer plan for a  “Qualified Birth or Adoption Distribution.” For a qualified distribution, the owner of the account must take the distribution for a one-year period starting on (1) the date of birth of the child or (2) the date when the adoption becomes final (individual must be under age 18). The law permits the IRA owner who took the distribution to pay it back to the plan or IRA at a later date. However, these distributions remain subject to income taxes.

Generally speaking, we at Insight Financial Strategists think that people in this situation should avoid availing themselves of this new wrinkle in the law. In our experience, a distribution from retirement accounts before retirement can have profound impacts on retirement income security. 

529 Plans

It may sound off-topic, but it is not. The SECURE Act also addresses 529 plans. For students and their parents, the SECURE ACT allows tax-free 529 plans to pay for apprenticeship programs if they are registered and certified by the Department of Labor.

This provision will be helpful for those people who have children headed to vocational track programs.

In a very partial solution to the student loan crisis, savings in 529 plans can now be used to pay down a qualified education loan, up to $10,000 for a lifetime . Technically, the law makes this provision effective as of the beginning of 2019. 

Given how students and parents scramble to meet the challenge of the cost of higher education, I do not forecast that most 529 plans have much left over to pay off loans!

Business Retirement Plans

(Part-Time) Employee Eligibility for 401(k) Plans – In most 401(k) plans, participation by part-time employees is limited. The SECURE Act enables long-time part-time workers to participate in 401(k) plans if they have worked for at least 500 hours in each of three consecutive 12-month periods. Long-term part-time employees who become eligible under this provision may still be excluded from eligibility for contributions by employers.

Delayed Adoption of Employer Funded Qualified Retirement Plan – Beginning in 2020, a new plan would be treated as effective for the prior tax year if it is established later than the due date of the previous year’s tax return. Notably, this provision would only apply to plans that are entirely employer-funded (i.e., profit-sharing, pension, and stock bonus plans).

403(b) Custodial Accounts under Terminated Plans are allowed to be Distributed in Kind – Subject to US Treasury Department guidance, the SECURE Act allows an individual 403(b) custodial account in a terminating plan to be distributed “in-kind” to the participant. The account distributed in this way would retain its tax-deferred status as a 403(b). 

Establish Open Multiple Employer Plans (MEPs) – Employers may now join together to create an “open” MEPs, referred to in the legislation as “Pooled Plans.” This will allow small employers to join together and share the costs of retirement planning for their employees, such as through a local Chamber of Commerce or other organization, to start a retirement plan for their employees. 

Increased Tax Credits – The tax credit for small employers who start a new retirement plan will increase from $500 to $5,000. In addition, small employers that add automatic enrollment to their plans also may qualify for an additional $500 annual tax credit for up to three years.

There are many more provisions in the SECURE Act. While some of them are useful for taxpayers, it is worth noting the observation by Ed Slott, a tax expert and sometimes wag: “whatever Congress names a tax law, it does the opposite .”  This is worth keeping in mind as you mull the implications of this law. With the SECURE Act now the law, it may be time to check in with your fiduciary financial planner and revise your retirement income and estate plans.

Year End Tax Planning Opportunities

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

The Tax Cut and Jobs Act of 2017 (TCJA) was the most consequential tax reform package in this generation. It changed many of the ways that we think about reducing taxes.

According to the Tax Policy Center, we know that about 80% of taxpayers pay less income tax in 2018 than before the TCJA , about 5% pay more, and the balance of taxpayers pay about the same amount. On balance, the TCJA seems to have delivered on its promises.

A key item of the TCJA is that it increased the standard deduction, reducing the impact of the elimination of State and Local Taxes (SALT) under $10,000 and the elimination of personal deductions. As a result, about 84% of taxpayers claim the standard deduction and do not itemize. By comparison, about 56% of taxpayers itemized before the enactment of the TCJA. The vast majority of taxpayers are no longer subject to the Alternative Minimum Tax (AMT), since two of its key drivers, the deductibility of state and local taxes and personal deductions, are no longer a practical issue for most people. And in 2018, only 1,700 estates were subject to the federal estate and gift tax. So for most people, the TCJA has made taxes simpler to deal with. What’s there not to like about a simpler tax return ?

Source: Congressional Budget Office

Impact of the TCJA on the Federal Deficit

As predicted, the TCJA worsened the federal deficit bringing it to nearly a trillion dollars in fiscal year 2019. That was in spite of an increase in tax revenue due to the continuing improvement in the economic climate. Of course, the federal deficit continues to be driven by federal spending on the sacred cows of modern US politics: Defense, Social Security, and Medicare. Interest on the federal debt is also a major budget item that needs to be paid. While our continuing regime of low interest rates is helping control the interest on the debt, it is clear that the future may change that.

What will happen to tax rates?

Tax rates are lower now than they have been since the 1970s and 80s. Hence, industry insiders tend to think that tax rates have nowhere to go but up.  That is also what’s is predicted by the TCJA, which is largely designed to sunset in 2025. Should the American people turn on Republicans at the 2020 election, it’s possible that the TCJA will see a premature end. However, it seems that the possibility that the American people might elect a progressive in 2020 is largely discounted when it comes to tax rate forecasting: most people assume that tax rates will increase.

Year-End Planning

Political forecasting aside, there are still things that we can do to lower our taxes . It should be noted that many of the techniques in this article are not limited to the year-end. Furthermore, we all have different situations that may or may not be appropriate for these techniques. 

Tax Loss Harvesting

Even though we have had a pretty good year overall, many of us may still have positions in which we have paper losses. Tax-loss harvesting consists of selling these positions to realize the losses. This becomes valuable when you sell the equivalent amount of shares in which you have gains. So if you sell some shares with $10,000 in losses, and some with $10,000 in gains, you have effectively canceled out the taxes on the gains.

You then have to reinvest the shares sold into another investment. Be careful not to buy back the exact same shares that you sold. That would disallow the tax loss harvesting!

At the same time, it makes sense to review your portfolio and see if there are other changes that you would like to make. We are not fans of frequent changes for its own sake. However, periodically our needs change, the markets change, and we need to adapt.

Income Tax Planning

While tax loss harvesting is mostly about managing Capital Gains taxes, it is also important to keep an eye on income tax planning . This is a good time of year to estimate your income and your taxes for the year. When comparing your estimated Adjusted Gross Income with the tax tables, you will see if you might be creeping up into the next tax bracket. For instance, if you are single and your estimated AGI is $169,501 (and you have no other complexity), you are right at the 32% tax bracket (after you remove the $12,000 standard deduction).  In this example, that means that for every dollar above that amount you would owe 32 cents in federal income tax, and a little bit more for state income tax, if that applies to you.

If your income is from a business, you may possibly defer some of that income to next year. If your income comes from wages, another way to manage this is to plan an additional contribution to a retirement account. In the best of cases your $1,000 contribution would reduce your taxes by $320, and a little bit more for state taxes.

In some cases, you might have a significant dip in income. Perhaps if you have a business, you reported some large purchases, or you booked a loss or just had a bad year for income. It may make sense at this point to take advantage of your temporarily low tax rate to do a Roth conversion. Check with your wealth manager or tax preparer.

If your income does not straddle two tax brackets, the decision to invest in a Traditional IRA or a Roth IRA is still worth considering.

Charitable Contributions

By increasing standard deductions, the TCJA has made it more difficult for people to deduct charitable contributions . As a result, charitable contributions bring few if any tax benefits for most people.

One way around that situation is to bundle or lump charitable gifts. Instead of giving every year, you can give 2, 3 or more years worth of donations at one time. That would allow your charity to receive the contribution, and, potentially, for you to take a tax deduction. 

Pushing the bundling concept further, you could give even more to a Donor Advised Fund (DAF). With that option, you could take a tax deduction, and give every year from the DAF. That allows you to control your donations, reduce your income in the year that you donate, and potentially reduce income taxes and Medicare premiums. Consult your wealth strategist to ensure that taxes, income, and donations are optimized.

Retirement Accounts

First, it is important to review Required Minimum Distribution (RMDs). Anyone who is 70 ½ years of age or older is subject to RMDs. Please make sure to connect with your financial advisor to make sure that the RMD is properly withdrawn before the year-end.

The RMD is a perennial subject of irritation for people . Obviously, if your retirement income plan includes the use of RMDs, it’s not so much of an issue. However, if it is not required, it can be irritating. That is because RMD distributions are subject to income taxes that may even push you into the next tax bracket or increase your Medicare premium. There are, however, some ways that you can deal with that.  

For instance, if you take a Qualified Charitable Distribution (QCD) from your IRA and have the distribution given directly to a charity, the distribution will not be income to you. Hence you won’t pay income taxes on that distribution, and it will not be counted toward the income used to calculate your Medicare premium. However, it will fulfill your RMD, thus taking care of that pesky issue.

Generally, we advocate planning for lifetime taxes rather than for any one given year. Lifetime financial planning has the potential to result in even more benefits. It should be noted that many of the possibilities outlined in this article can be used throughout the year, not just at year-end. We encourage you to have that conversation with your wealth management team to plan for the long term!

Seven Year End Wealth Strategies

By Chris Chen CFP | Financial Planning , Investment Planning , Retirement Planning , Tax Planning

As we approach the end of the year, there is still time to improve your financial position with a few well-placed year-end moves.
Maybe because we are working against a deadline, many year-end planning opportunities seem to be tax-related. Tax moves, however, should be made with your overall long-term financial and investment planning context in mind. So make sure to check in with your financial and tax advisors.
Here are seven important moves to focus your efforts on that will help you make the best of the rest of your financial year.

1) Harvest your Tax Losses in Your Taxable Accounts

As of October 22, the Dow Jones is up 16.57%, and the S&P500 is up just 21% for the year. Unfortunately, there are still stocks and mutual funds that are down for the year. Therefore you are likely to have some items in your portfolio that show up in red when you check the “unrealized gains and losses” column on your brokerage statement.
You can still make lemonade out of these lemons by harvesting your losses for tax purposes. However, the IRS individual deduction for capital losses is limited to a maximum of $3,000 for 2018. So, if you only dispose of your losers, you could end up with a tax loss carryforward, i.e., tax losses you would have to use in future years. This is not an ideal scenario!
However, you can also offset your losses against gains. For example, suppose you were to sell some losers and hypothetically accumulate $10,000 in losses. In that case, you could then also sell some winners. Then, if the gains in your winners sold add to $10,000, you have offset your gains with losses, and you will not owe capital gain taxes on that joint trade!
This could be a great tool to help you rebalance your portfolio with a low tax impact. Beware though, you have to wait 30 days before buying back the positions you have sold to stay clear of the wash sale rule.

2) Reassess your Investment Planning

Tax-loss harvesting is a great tactic to use for short-term advantage. However, as an important side benefit, it allows you to focus on more fundamental issues. So why did you buy these securities that you just sold? Presumably, they played an important role in your investing strategy. And now that you have accumulated cash, it’s important to re-invest mindfully.
You may be tempted to stay on the sideline for a while and see how the market shakes out. Although we may have been spoiled into complacency after the Great Recession, the last month has reminded us that volatility happens.
No one knows when the next bear market will happen if it has not started already. Therefore, it is high time to ask yourself whether you and your portfolio are ready for a significant potential downturn.
Take the opportunity to review your goals, ensure that your portfolio risk matches your goals, and your asset allocation matches your risk target. Then, reach out to your Wealth Strategist about that.

3) Check on your Retirement Planning

It is not too late to top out your retirement account! In 2021, you may contribute a maximum of $19,500 from your salary, including employer match to a 401(k), TSP, 403(b), or 457 retirement plan, subject to the terms of your plan. In addition, those who are age 50 or over may contribute an additional $6,500 for the year.

If you have contributed less than the limit to your plan, there may still be time! You have until December 31 to maximize contributions for 2021, reduce your 2021 taxable income (if you contribute to a Traditional plan), and give a boost to your retirement planning.

Alternatively to deferring a portion of your salary to your employer’s Traditional plan on a pretax basis, you may be able to contribute to a Roth account if that is a plan option for your employer. As with a Roth IRA, contributions to the Roth 401(k) are made after-tax, while distributions in retirement are tax-free.

Many employers have added the Roth feature to their employee retirement plans. If yours has not, have a chat with your HR department!

Although the media has popularized the Roth account as tax-free, bear in mind that it is not. Roth accounts are merely taxed differently. Check-in with your Certified Financial Planner practitioner to determine whether electing to defer a portion of your salary on a pretax basis or to a Roth account on a post-tax basis would suit your situation better.

4) Roth Conversions

The current tax environment is especially favorable to Roth conversions. Under the current law, income tax rates are scheduled to go back up in 2026; hence Roth conversions could be suitable for more people until then. And, of course, it is possible that Congress will vote for tax rates to go up before the end of the year.
With a Roth conversion, you withdraw money from a Traditional retirement account where assets grow tax-deferred, pay income taxes on the withdrawal, and roll the assets into a Roth account. Once in a Roth account, the assets can grow and be withdrawn tax-free, provided certain requirements are met. If you believe that your tax bracket will be higher in the future than it is now, you could be a good candidate for a Roth conversion.

Read more about the new tax law and Roth conversions

5) Pick your Health Plan Carefully

It is health insurance re-enrollment season! The annual ritual of picking a health insurance plan is on to us. This could be one of your more significant financial decisions for the short term. Not only is health insurance expensive, it is only getting more so.
First, you need to decide whether to subscribe to a traditional plan with a “low” deductible or a high deductible option. The tradeoff is that the high deductible option has a less expensive premium. However, should you have a lot of health issues, you might end up spending more. High deductible plans are paired with Health Savings Accounts (HSA).
The HSA is a unique instrument. It allows you to save money pretax and to pay for qualified healthcare expenses tax-free. In addition, unlike Flexible Spending Accounts (FSAs), balances in HSAs may be carried over to future years and invested to allow for potential earnings growth. This last feature is really exciting to wealth managers: in the right situation, clients could end up saving a lot of money.
If you pick a high deductible plan, make sure to fund your HSA to the maximum. Employers will often contribute also to encourage you to choose that option. If you select a low deductible plan, make sure to put the appropriate amount in your Flexible Spending Account. FSAs are used to pay for medical expenses on a pretax basis. Unlike with an HSA, you cannot roll over unspent amounts to future years.

6) If you are past 70, plan your RMDs

If you are past 70, make sure to take your Required Minimum Distributions (RMDs) each year. The 50% penalty for not taking the RMD is steep. You must withdraw your first minimum distribution by April 1 of the year following the year in which you turn 70 ½, and then by December 31 for each year after.
Perhaps you don’t need the RMD? Instead, you may want to redirect the money to another cause. For instance, you may want to fund a grandchild’s 529 educational account. 529 accounts are tax-advantaged accounts for education. Although contributions are post-tax, growth and distributions are tax-free if they are used for educational purposes.
Or, you may want to plan for a Qualified Charitable Distribution from the IRA. The distribution must be directly from the IRA to the charity. It is excluded from taxable income and can count towards your RMD under certain conditions.

7) Plan your charitable donations

Speaking of charitable donations, they can also reduce taxable income and provide financial planning benefits. However, due to the Tax Cut and Jobs Act of 2017 (TCJA), it may be more complicated than in previous years. One significant difference of the TCJA is that standard deductions are $12,550 for individuals and $25,100 for joint filers. So, practically, what that means is that you need to accumulate $12,550 or $25,100 of deductible items before you can feel the tax savings benefit.
In other words, if a married couple filing jointly has $8,000 in real estate taxes and $5,000 of state income taxes for a total of $13,000 of deductions, they are better off taking the standard $24,000 deduction. They would have to donate $7,000 before they could start to feel the tax benefit of their donation. One way to deal with that is to bundle your gifts in a given year instead of spreading them over many years. Or, within certain limits, to give directly from your IRA.
For instance, if you plan to give in 2021 and also in 2022, consider bundling your donations and giving just in 2021. In this way, you are more likely to be able to exceed the standard deduction limit.
If your thinking wheels are running after reading this article, you may want to check in with your Wealth Strategist or financial planner: there may be other things that you could or should do before the end of the year!

 

Check these other wealth management posts:

Is the TCJA an opportunity for Roth conversions?

New Year Resolution

How to Implement a New Year Resolution

Tax Season Dilemna: Invest ina Traditional IRA or a Roth IRA 

Note: The information herein is general and educational in nature and should not be construed as legal, tax, or investment advice. We make no representation as to the accuracy or completeness of the information presented.  To determine investments that may be appropriate for you, consult with your financial planner before investing. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions.We make no representation as to the completeness or accuracy of information provided at the websites linked in this newsletter. When you access one of these websites, you assume total responsibility and risk for your use of the websites to which you are linking. We are not liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information, and programs made available through this website.  

Financial Planner or Estate Planner: Which Do You Need?

By Anna Byrne | Financial Planning , Retirement Planning , Tax Planning

Financial Planners and Estate Planners are two different professions that are often confused. There is some overlap between professionals in these fields, but their roles are rather distinct. When you are striving to make a long-term plan for a strong financial future, both financial planners and estate planners play a crucial role.

In fact, when you consider some of the most recent personal finance statistics, it becomes very clear that many Americans could really benefit from retaining the services of both a financial planner AND an estate planner. For instance, 33% of Americans have no money saved for retirement, 60% lack any form of an estate plan, and only 46% have money saved for emergencies. Better planning starts with understanding what both types of planners do.

What is a Financial Planner?

A financial planner is a professional who offers a wide range of services that can assist both individuals and businesses to accomplish their long-term financial goals and accumulate wealth. They fall into two categories:

• Registered Investment Advisor
• Certified Financial Planner

Certified Financial Planners (CFP) are required to comply with the Certified Financial Planner Board of Standards, which means they have a basic level of expertise backed by a larger organization. Ethically they have to work in your best interest.

Services provided by both financial advisors and CFPs include:

• Insurance and tax planning
• Financial risk management
• Retirement planning
• Investment planning
• Cash flow management

What is an Estate Planner?

The goal of a financial planner is to assist with wealth accumulation. On the other hand, an estate planner can help you to make financial plans associated with your passing, which includes protecting the wealth that you have accumulated .

While you might believe only wealthy individuals need to work with an estate planner, you should consider the fact that everything you have accumulated in your life comprises your estate. Accumulated assets such as vehicles, furniture, bank accounts, life insurance, your home, and other personal possessions are all included in your estate.

Your assets become the property of the state if you die without a will or an estate plan in place , and your family members will not be able to claim them without paying legal fees and taxes. They will also have to face the stress of potential disagreements with other family members over how your property should be divided.

Besides planning for your passing, estate planning also involves creating a clear plan for your care if you become disabled , and it also covers naming guardians for underage children. Estate planning is a way to protect your family and your assets while reducing taxes and legal fees .

Which Do You Need?

The roles of financial planners and estate planners are unique, and for this reason, you will benefit from working with both . While your financial planner helps you accumulate wealth, he or she can also prepare you for a meeting with an estate planner as part of your long-term strategy. This includes providing the estate planner with lists of beneficiaries, tax return documentation, lists of investments and a breakdown of income and expenses.

When you work with both a financial planner and an estate planner, they will keep you accountable by periodically reviewing your documentation and beneficiaries and making sure everything is updated and reviewed as necessary. By taking the time to work with both these professionals, no important decisions will be overlooked, and you will take control of your financial future.

 

Note: This article was authored by Kristin Dzialo, a partner at Eckert Byrne LLC, a Cambridge, MA law firm that provides tailored estate planning. Eckert Byrne LLC and Insight Financial Strategists LLC are separate and unaffiliated companies. This article is provided for educational and informational purposes only. While Insight Financial Strategists LLC believes the sources to be reliable, it makes no representations or warranties as to this or other third party content it makes available on its website and/or newsletter,  nor does it explicitly or implicitly endorse or approve the information provided.