Gifting Considerations During The Holiday Season

Contributed by: Nick Defenthaler, CFP®, RICP®

Giving is top of mind for many now that we are officially in the thick of the holiday season. Whether you’re shopping online or fighting crowds at the mall, there are other forms of gifting to consider – ones that would arguably have a much larger impact on your loved one's life.

Gift Tax Exclusion Refresher

The annual gift tax exclusion for 2020 is $15,000. This means you can give anyone a gift for up to $15,000 and avoid the hassle of filing a gift tax return. The gift, if made to a person and not a charitable organization, is not tax-deductible to the donor nor is it considered taxable income to the recipient of the gift. If you are single and wish to gift funds to your daughter and son-in-law, you can give up to $30,000, assuming the check issued is made out to both of them. Remember, the $15,000 limit is per person, not per household. For higher net worth clients looking to reduce their estate during their lifetime given estate tax rules, annual gifting to charity, friends, and family members can be a fantastic strategy. So what are some ways can this $15,000/person gift function? Does it have to be a gift of cash to a loved one’s checking or savings account? Absolutely not! Let’s look at the many options you have and should consider: 

1. Roth IRA funding 

If a loved one has enough earned income for the year, he or she could be eligible to fund a Roth IRA. What better gift to give someone than the gift of tax-free growth?! We help dozens of clients each year with gifting funds from their investment accounts to a child or grandchild’s Roth IRA up to the maximum contribution level of $6,000 ($7,000 if over the age of 50). Learn more about the power of a Roth IRA and why it could be such a beneficial retirement tool for younger folks. 

2. 529 Plan funding 

529 plans, also known as “education IRAs” are typically used to fund higher education costs. These accounts grow tax-deferred and if funds are used for qualified expenses, distributions are completely tax-free. Many states (including Michigan) offer a state tax deduction for funds contributed to the plan, however, there is no federal tax deduction on 529 contributions. Learn more about education planning and 529 accounts.

3. Gifting securities (individual stock, mutual funds, exchange-traded funds, etc.)

Gifting shares of a stock to a loved one is another popular gifting strategy. In some cases, a client may gift a position to a child who is in a lower tax bracket than them. If the child turns around and sells the stock, he or she could avoid paying capital gains tax altogether. As always, be sure to discuss creative strategies like this with your tax professional to ensure this is a good move for both you and the recipient of the gift.  

4. Direct payment for tuition or health care expenses

Direct payments for certain medical and educational expenses are exempt from the $15,000 gift tax exclusion amount. For example, if a grandmother wishes to pay for her granddaughter’s college tuition bill of $10,000 but also wants to gift her $15,000 as a graduation gift to be used for the down payment of a home, she can pay the $10,000 tuition bill directly to the school and still preserve the $15,000 gift exclusion amount. This same rule applies to many medical costs. 

For those who are charitably inclined, gifting highly appreciated stock or securities directly to a 501(c)(3) or Donor Advised Fund is a great strategy to fulfill philanthropy goals in a very tax-efficient manner. For those over 70 ½, gifting funds through a Qualified Charitable Distribution (QCD) could also be a great fit. Gifting funds directly from one’s IRA can reduce taxable income flowing through to your return which will not only reduce your current year’s tax bill but could also lower help lower your Medicare Part B & D premiums, which are determined by your income each year.  

As you can see, there are numerous ways to gift funds to individuals and charitable organizations. There is no “one size fits all” strategy when it comes to giving – the proposed solution will have everything to do with your goals and the need of the person or organization receiving the gift. On behalf of the entire Center family, we wish you a very happy holiday season, please reach out to us if we can be of help in crafting your gifting plan for 2020!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of earnings are permitted. Earnings withdrawn prior to 59 1/2 would be subject to income taxes and penalties. Contribution amounts are always distributed tax free and penalty free. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover educational costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.

Do You Know Why 2020 Is A Critical Year For Tax Planning?

Contributed by: Nick Defenthaler, CFP®, RICP®

It’s been quite the year, hasn’t it? 2020 has certainly kicked off the decade in an interesting fashion. In addition to the coronavirus quarantine, it’s also a year that required a significant amount of tax planning and forward-thinking. Why is this year so unique as it relates to taxes? Great question, let's dive in!

SECURE Act

The SECURE ACT was passed in late December 2019 and became effective in 2020. The most meaningful part of the SECURE Act was the elimination of the stretch IRA provision for most non-spouse IRA beneficiaries. Non-spouse beneficiaries now only have a 10-year window to deplete the account which will likely result in the beneficiary being thrust into a higher tax bracket. This update has made many retirees re-think their distribution planning strategy as well as reconsider who they are naming as beneficiaries on certain accounts, given the beneficiary’s current and future tax bracket. Click HERE to read more about this change. 

CARES Act 

Fast forward to March, the CARES Act was passed. This critical stimulus bill provided direct payments to most Americans, extended and increased unemployment benefits, and outlined the parameters for the Paycheck Protection Program for small business relief. Also, another important aspect of the CARES Act was the suspension of Required Minimum Distributions (RMDs) for 2020. This isn’t the first time this has occurred. Back in 2009, RMDs were suspended to provide relief for retirees given the “Great Recession” and financial crisis. However, the reality is that for most Americans who are over 70 1/2 and subject to RMDs (RMDs now begin at age 72 starting in 2020 due to the SECURE Act), actually need the distributions for cash flow purposes. That said, for those retirees who have other income sources (ex. Social Security, large pensions, etc.) and investment accounts to cover cash flow and don’t necessarily “need” their RMD for the year for cash flow, 2020 presents a unique planning opportunity. Not having the RMD from your IRA or 401k flow through to your tax return as income could reduce your overall income tax bracket and also lower your future Medicare premiums (Part B & D premiums are based on your Modified Adjusted Gross Income). We have seen plenty of cases, however, that still make the case for the client to take their RMD or at least a portion of it given their current and projected future tax bracket. There is certainly no “one size fits all” approach with this one and coordination with your financial planner and tax professional is ideal to ensure the best strategy is employed for you. 

Lower Income In 2020

Income for many Americans is lower this year for a myriad of reasons. For those clients still working, it could be due to a pay cut, furlough, or layoff. Unfortunately, we have received several dozen calls and e-mails from clients informing us that they have been affected by one of the aforementioned events. In anomaly years where income is much less than the norm, it presents an opportunity to accelerate income (typically though IRA distributions, Roth IRA conversions, or capital gain harvesting). Every situation is unique so you should chat with your planner about these strategies if you have unfortunately seen a meaningful reduction in pay. 

Thankfully, the market has seen an incredible recovery since mid-March and most diversified portfolios are very close to their January 1st starting balances. However, income generated in after-tax investment accounts through dividends and interest are down a bit given dividend cuts by large corporations and because of our historically low interest rate environment. We were also were very proactive in March and April with a strategy known as tax-loss harvesting, so your capital gain exposure may be muted this year. Many folks will even have losses to carry over into 2021 and beyond which can help offset other forms of income. For these reasons, accelerating income could also be something to consider. 

Higher Tax Rates In 2021, A Very Possible Scenario 

Given current polling numbers, a Democratic sweep seems like a plausible outcome. If this occurs, many analysts are predicting that current, historically low rates could expire effective January 1, 2021. We obviously won’t know how this plays out until November, but if tax rates are expected to see a meaningful increase from where there are now, accelerating income should be explored. Converting money from a Traditional IRA to a Roth IRA or moving funds from a pre-tax, Traditional IRA to an after-tax investment account (assuming you are over the age of 59 1/2 to avoid a 10% early withdrawal penalty) eliminates the future uncertainty of the taxes on those dollars converted or distributed. Ever since the Tax Cuts and Jobs Act was passed in late 2017 and went into law in 2018, we have been taking a close look at these strategies for clients as the low tax rates are set to expire on January 1, 2026. However, if taxes have a very real chance of going back to higher levels as soon as 2021, a more aggressive income acceleration plan could be prudent. 

As you can see, there have been many moving parts and items to consider related to tax planning for 2020. While we spend a great deal of our time managing the investments within your portfolio, our team is also looking at how all of these new laws and ever-changing tax landscape can impact your wealth as well. In our opinion, good tax planning doesn’t mean getting your current year’s tax liability as low as humanly possible. It’s about looking at many different aspects of your plan, including your current income, philanthropy goals, future income, and tax considerations as well as considering the individuals or organizations that will one day inherit your wealth and helping you pay the least amount of tax over your entire lifetime.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

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All investments are subject to risk. There is no assurance that any investment strategy will be successful. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Beware Of This COVID-19 Scam

Contributed by: Nick Defenthaler, CFP®, RICP®

During times of uncertainty, it is common for adversaries to take advantage of global headlines in an attempt to get people to click malicious links, enter credentials on fraudulent websites, volunteer their personal information, download malicious software or fall for common interpersonal scams.  

Emerging Trend: Economic Impact Payment Scams

Congress recently passed a COVID-19 relief and stimulus package (click here to learn more about the “CARES Act”). As with other aspects of the COVID-19 pandemic, fraudsters are exploiting the relief and stimulus efforts to victimize the public. The latest scams optimize on these stimulus relief initiatives like Economic Impact Payments to trick individuals into providing financial and other personal information.

If you receive calls, emails, or other communications claiming to be from the Treasury Department, the IRS or other government agency offering COVID-19 related grants or stimulus payments in exchange for personal financial information, an advance fee, or charge of any kind, including the purchase of gift cards; do not give out your personal information.

Economic Impact Payment Scam Red Flags

• The use of words like "Stimulus Check" or "Stimulus Payment." The official term is Economic Impact Payment.

• The caller or sender asking you to sign over your Economic Impact Payment check to them.

• Asking by phone, email, text or social media for verification of personal and/or banking information, insisting that the information is needed to receive or speed up your Economic Impact Payment.

• An offer to expedite a tax refund or Economic Impact Payment faster by working on the taxpayer's behalf. This scam could be conducted by social media or even in person.

• Receiving a 'stimulus check' for an odd amount (especially one with cents), or a check that requires that you verify the check online or by calling a number.

Pandemic-Related Phishing Attempts

COVID-19-related email scams have become the largest collection of attacks united by a single theme. Adversaries continue to pose as the World Health Organization (WHO), the Centers for Disease Control and Prevention (CDC), and now government agencies like the IRS to obtain information. General COVID-19 red flags include:

• Urging people to click on links regarding “safety tips” to prevent sickness and to “view new cases around your city.”

• Posing as the CDC, WHO or other well-known health organizations.

• Posing as a medical professionals requesting personal information.

Protecting Senior Citizens

• ·Under normal circumstances, seniors are more likely to fall victim to scams. Preying on fear and isolation, fraudsters have no reservations about trying to take advantage of this section of the population even in the most desperate times.

• Additionally, as social distancing continues to be necessary, experts worry that social isolation will lead to depression, anxiety and ailing health for some seniors. These could lead to both cognitive decline and the desire to find social interaction online—easily leading senior and at-risk clients to fall victim to both COVID-19 scams and other common online, interpersonal or romance scams.

Security Recommendations

We recommend that you take the following actions if you receive a suspicious email or phone call:

• If you believe an email could be suspicious, do not click any links, reply or provide any information.

• Always confirm who you are receiving emails from. Thoroughly check the email sender and domain names to be sure that they are accurate before giving out any personal details or performing any requests.

• Be aware of common red flags such as a sense of urgency, posing as a person of authority, or even uncommon language coming from a person you speak to every day.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Beware of Social Security Phone Scams

Contributed by: Nick Defenthaler, CFP®

Identity theft scams threaten millions of Americans. Reports of phony phone calls continue to flood into the Social Security Administration (SSA) and its Office of the Inspector General (OIG). Scammers claim to be Social Security employees and mislead victims into giving out personal information or making cash/gift card payments. But don’t worry, with our tips you can stay sharp and protect yourself.

Social Security employees WILL occasionally contact people. The SSA contacts those who have ongoing business with the agency, by telephone. However, they will NEVER threaten you. They will NEVER promise a Social Security benefit approval or increase in exchange for information or money. In those cases, the call is 100% fraudulent and your only option is to hang up.

You will receive a legitimate call from the SSA if you recently applied for a benefit, require a record update, or, of course, had requested a phone call from the agency. Otherwise, it’s abnormal to receive a call from the agency.

Social Security employees will NOT:

• Suspend, revoke, or freeze your Social Security number

• Demand an immediate payment

• Ask you for credit or debit card numbers over the phone

• Require a specific means of debt repayment, like a prepaid debit card, a retail gift card, or cash

• Demand that you pay a Social Security debt without the ability to appeal the amount you owe

If there is a problem with your Social Security number or record, the SSA will, in most cases, mail a letter. If you need to submit payments to Social Security, the agency will send a letter with instructions and payment options. NEVER provide information or payment over the phone or Internet unless you are certain of who is receiving it.

There is also an email scam to lookout for. Victims have received emails that appear to be from the SSA or the OIG with attached letters and reports. These documents may seem real at first glance and may include official letterhead and government jargon. But look closer for spelling and grammar mistakes.

Unfortunately in today’s world, you need to have your guard up. Feel free to contact us at any time if you’re weary of a potential scam related to your financial plan – we are here to help any way we can.

If you’re interested in learning more, the SSA addresses the telephone impersonation scheme here.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

The SECURE Act: How it May Impact Your Retirement

Contributed by: Nick Defenthaler, CFP®

The Senate recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It’s a significant change in legislation for most Americans in or preparing for retirement.  

The SECURE Act is the second notable financial planning-related law change in only three years! The first was in 2017 when the Tax Cuts and Jobs Act (TCJA) significantly changed our tax code. Fast forward to 2019, the SECURE Act became law on December 20th, adjusting rules related to retirement accounts. To see just one meaningful adjustment to our tax code or retirement plan rules every 10-15 years is typical; so to see a major tax code overhaul and the implementation of the SECURE Act, all in a matter of only three years, is unprecedented. 

Needless to say, these changes have certainly kept your Center team on its toes! The SECURE Act contains almost three dozen sections, but for most of you, there are only a few adjustments that could impact your financial plan. Let’s dive in!   

Inherited Retirement Accounts & the End of ‘Stretch’ Distributions   

The new legislation changes how non-spouse account beneficiaries must distribute assets from inherited retirement accounts (IRAs) by removing the so-called ‘stretch’ provision. Most IRA beneficiaries will now have to distribute their entire inherited retirement account within 10 years of the year of death of the owner.

Tell me more…

When a non-spouse beneficiary inherited a retirement account such as an IRA, an annual Required Minimum Distribution (RMD) was required. Typically we think of RMDs occurring in our 70s and beyond but they are also present in many cases for beneficiaries of retirement accounts. If the RMD is not met by year-end, there is a stiff, 50% penalty on any funds that were not distributed that were supposed to be. When a spouse inherits a retirement account, however, there were (and still are) favorable rules in place, that in many cases, do not force the widowed spouse to take annual RMDs. 

Beneficiaries of retirement accounts were allowed to 'stretch' distributions over their lifetime which meant that the IRS only required a small portion of the account to be distributed from the retirement account each and every year.  For those who did not necessarily “need” the inherited dollars to live off of, this was a highly beneficial attribute of an inherited retirement account. Remember, when distributions are made from Traditional, pre-tax retirement accounts, the funds are considered taxable income to the owner and can impact one’s tax bracket for the year. However, if the beneficiary was only taking out the minimum distribution required by the IRS, the beneficiary typically did not have to worry about being pushed into a much higher marginal tax bracket. 

For example:

A 100 year old could name her 2 year old great-great grandchild as the beneficiary on her IRA. When the 100 year old client died, the great-great grandchild could stretch RMDs over their lifetime – which would result in a very small taxable event for the child each year given their age. To put it mildly, the IRS was not a fan of this because it essentially allowed families to turn retirement accounts into a very powerful, multigenerational wealth preservation tool that generated very little tax revenue over an extended period of time. 

How do the new rules work?

Moving forward, the ‘stretch’ provision has been eliminated for non-spouse account beneficiaries. For those beneficiaries who inherit a retirement account from an account holder who passes away in 2020 and beyond, the new standard under the SECURE Act will be the ’10-Year Rule’.   

Under this 10-Year Rule, the entire IRA must be emptied by the end of the 10th year following the death of the original account owner. Unlike like previous law under the ‘stretch’ provision, there is no annual RMD, the beneficiary has full control over how much they distribute from the account. As you might suspect, this will now require a high level of strategic tax planning as a retirement account beneficiary.

Questions to ask:

Does it make sense to take distributions evenly over that 10-year time frame if income is projected to be the same for the foreseeable future? Is the beneficiary’s income dramatically lower in a particular year? If so, could it make sense to take a sizeable distribution from the IRA so the taxable income from the account is taxed at a lower rate than most other years? In my humble opinion, this makes working with a comprehensive financial planner even more critical for IRA beneficiaries given all of the moving parts clients will now have to navigate from a tax standpoint. 

Roth IRA/401k/403b Accounts

We haven’t talked much about it yet but Roth IRA/401k/403b accounts are also subject to the 10-year rule, however, distributions to beneficiaries are NOT taxable. For those inheriting Roth accounts, waiting until the last minute and liquidating the account in year 10 could actually be a very smart move to take full advantage of the tax-free growth aspect of a Roth account. 

What if I already have an inherited IRA that I’m taking lifetime, stretch distributions from?  

If you inherited a retirement account from someone who passed away in 2019 or before, you are grandfathered into using the ‘stretch’ provision. The new, 10-year rule will NOT apply to you. 

Who is exempt from the new 10 year distribution rule?

• Spousal beneficiaries

• Individuals who are not more than 10 years younger than the decedent

• Disabled or chronically ill beneficiaries

• Certain minor children (of the original account owners) but only until the child attains age 18 or 21, depending on the state of residence

• 501(c)(3) charitable organizations

Possible planning strategies to consider given the new 10-year distribution rule:

• Roth conversions during the original account owners life to reduce taxable IRA assets.

• Using pre-tax retirement accounts for spending needs to reduce taxable IRA assets in the original account owner’s estate.

• If charitably inclined, the original account owner should consider utilizing the Qualified Charitable Distribution (QCD) from their IRA or name their favorite charity as the beneficiary on the pre-tax retirement account (remember, charities do NOT pay any tax when they inherit these funds).

• If you have multiple beneficiaries, be strategic with who you name as the beneficiary of the various accounts you own (ex. Consider leaving pre-tax assets to a son who is in a low tax bracket but leave your Roth IRA to your daughter who is in a high bracket).   

Required Minimum Distributions Age Increase

Another major headline from the SECURE Act is moving the age one must begin taking Required Minimum Distributions (RMDs) from age 70 ½ to age 72.

This gives account owners an extra 18 months of tax-deferred growth if they don’t immediately need to tap into their retirement accounts.

Keep in mind, this new rule only applies to those who turn 70 ½ in 2020 or later. If you have already attained age 70 ½ and started taking RMDs, you are still required to do so under previous rules.

Although the age for RMDs is being pushed out a bit, the age at which IRA account owners can utilize the Qualified Charitable Distribution (QCD) strategy remains unchanged at age 70 ½. Given recent tax reform and its impact on charitable planning, we were happy to hear this news.   

Eliminates the age limit for making Traditional IRA contributions

The SECURE Act also lifts the age restriction on who can contribute to a Traditional IRA. Previously, once an individual reached age 70 ½, they were no longer able to contribute directly. This rule always puzzled me, because with Roth IRAs, anyone, regardless of age, could contribute to the account as along as he or she had earned income from working and was eligible to do so based on certain income limits. 

While we don’t foresee this affecting a large number of Center clients, it’s on our radar, especially as this rule relates to "back-door" Roth IRA conversions.   

In summary… 

As with any law change affecting personal financial planning, there are still areas we are staying on top of with continued IRS guidance (ex. A 10-year rule on retirement accounts that name a trust as a beneficiary).  We are committed to keeping you informed and up to speed on these changes.   

Our financial planning team looks forward to having individual conversations with you soon to explain how the SECURE Act will impact your own personal financial situation.  At our 2020 Economic & Investment Update Event in February, we will spend roughly 15 minutes on the SECURE Act and provide even further commentary beyond the detailed summary above. Be sure to sign up if you haven’t already. 

As always, please feel free to reach out to your advisor if you have specific questions. On behalf of the entire Center team, we wish you a very Happy New Year and look forward to helping guide you and your family through the ever changing financial landscape!   

Nick Defenthaler, CFP®, RICP®

Partner and CERTIFIED FINANCIAL PLANNER™ 

Nick Defenthaler, CFP®, RICP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Retirement Plan Contribution Limits and Other Adjustments for 2020

Contributed by: Nick Defenthaler, CFP®

Last month, the IRS released updated retirement account contribution and income limit figures for 2020. Like the recent Social Security cost of living adjustment, these adjustments are minor, but certainly worth noting.

Employer Retirement Plans (401k, 403b, 457, and Thrift Savings Plans)

• $19,500 annual contribution limit (up from $19,000 in 2019)

• $6,500 “catch-up” contribution for those over the age of 50 (up from $6,000 in 2019, and the first increase since 2015 for this contribution type)

• Total amount that can be contributed to a defined contribution plan, including all contribution types (employee deferrals, employer matching and profit sharing), increases to $57,000 (up from $56,000 in 2019) or $63,500 for those over the age of 50 ($6,500 catch-up)

o   Consider contributing after-tax funds, if available and cash flow allows for it.

It’s also worth noting that contribution limits to Traditional IRAs and Roth IRAs were left unchanged moving into 2020 ($6,000 under age 50, $7,000 over age 50).

In addition to the increased contribution limits for employer-sponsored retirement plans, the IRS adjustments provide other increases that can help savers in 2020. A couple of highlights include:

Traditional IRA deductibility income limits:

Contributions to a Traditional IRA may or may not be tax deductible, depending on your tax filing status, whether you are covered by a retirement plan through your employer, and your modified adjusted gross income (MAGI). The deductible amount of your Traditional IRA contribution is reduced (“phased out”) as your MAGI approaches the upper limits of the phase-out range. For example:

• Single

  • Covered under an employer-sponsored retirement plan
    2020 phase out: $65,000 - $75,000

• Married filing jointly

  • Spouse contributing to the IRA is covered under an employer-sponsored retirement plan
    2020 phase out: $104,000 - $124,000

  • Spouse contributing is not covered by an employer-sponsored plan, but the other spouse is covered under an employer-sponsored retirement plan
    2020 phase out: $196,000 - $206,000

Roth IRA contribution income limits:

Whether or not you can make the maximum contribution to a Roth IRA depends on your tax filing status and your MAGI. The contribution you are allowed to make is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range.

• Single

  • 2020 phase out: $124,000 - $139,000

• Married filing jointly

  • 2020 phase out: $196,000 - $206,000

If your income is over this limit, and you cannot make a regular annual contribution, you might consider a popular planning tool known as the “back-door” Roth conversion.

As we enter 2020, these updated figures will be on the forefront when updating your financial game plan. However, as always, if you have any questions surrounding these changes, feel free to reach out to our team!

Nick Defenthaler, CFP®, RICP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to itsx own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Retiring? Here’s How to Maximize Your Last Year of Work

Contributed by: Nick Defenthaler, CFP®

So you’ve decided to hang ‘em up – congratulations! Retirement is an extremely personal decision made for a multitude of reasons.

Some of our clients have been able to afford to retire for several years and have reached a point where the weekly grind isn’t as enjoyable as it once was. Probably dozens of thoughts are running through your head. What will life look like without work? How will I spend my days? Where do I/we want to travel? Do I want to work part-time or volunteer?

With so many emotions and thoughts churning, you might easily miss potentially good opportunities to really maximize your final year of full-time work. In this blog, I’ll touch on planning concepts you should consider to get the most “bang for your buck” as you close out your full-time career:

Maximizing Employer Retirement Plans (401k, 403b, etc.)

If you aren’t already doing so, consider maximizing your company retirement plan. If you are retiring mid-year, if appropriate, adjust your payroll deduction to make sure you are contributing the maximum ($25,000 for those over the age of 50 in 2019) by the time you retire. If monthly cash flow won’t allow for it, consider using money in a checking/savings or taxable account to supplement your cash flow so you can max out the plan. Making pre-tax contributions to your company retirement plan is something you should consider.  

“Front-Load” Charitable Contributions

If you are charitably inclined and plan to make charitable gifts even into retirement, you might consider “front-loading” your donations. Think of it this way: If you are currently in the 24% tax bracket, and you will drop into the 12% bracket once retired, when will making a donation give you the most tax savings? The year you are in the higher bracket, of course! So if you donate $5,000/year to charity, consider making a $25,000 contribution (ideally with appreciated securities and possibly utilizing a Donor Advised Fund) while you are in the 24% bracket.

This strategy has become even more impactful given recent tax law reform and the increase in the standard deduction. (Click here to read more.) This would satisfy five years’ worth of donations and save you more on your taxes. As I always tell clients, the more money you can save on your tax bill by being efficient with your gifts, the less money in the IRS’s pocket and more for the organizations you care about!

Health Care

This is typically a retiree's largest expense. How will you and your family go about obtaining medical coverage upon retirement? Will you continue to receive benefits on your employer plan? Will you use COBRA insurance? Will you be age 65 soon and enroll in Medicare? Are you retiring young and need to obtain an individual plan until Medicare kicks in?

No matter what your game plan, make sure you talk to the experts and have a firm grip on the cost and steps you need to take so that you don’t lose coverage and your insurance is as affordable as possible. We have trusted resources to help guide clients with their health care options.  

Those are just a few of many things you should be thinking about prior to retirement. With so many moving parts, it really makes sense to have someone in your corner to help you navigate through these difficult, and often confusing, topics and decisions. Ideally, seek out the help of a Certified Financial PlannerTM (CFP®) to give you the comprehensive guidance you need and deserve!

Nick Defenthaler, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Generally, if you take a distribution from a 401k prior to age 59 ½, you may be subject to ordinary income tax and a 10% penalty on the amount that you withdraw, in addition to any relevant state income tax. Contributions to a Donor Advised Fund are irrevocable. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

The Power of Working Longer

Contributed by: Nick Defenthaler, CFP®

Saving 1% more towards retirement for the final 10 years of one’s career has the same impact as working one month longer.

Yes, you read that correctly. Saving 15% in your 401k instead of 14% for the 10 years leading up to retirement has the same impact as delaying retirement by only 30 days! Hard to believe but that’s exactly what the National Bureau of Economic Research found in their 2018 research paper titled “The Power of Working Longer”. To make your eyes pop even more, consider that saving 1% more for 30 years was shown to have the same impact as working 3-4 months longer. Wow!

If you’re like me, you find these statistics absolutely incredible. This clearly highlights the impact that working longer has on your retirement plan. As we’re getting very close to retirement (usually five years or less), most of us won’t be able to make a meaningful impact on our 25-35 year retirement horizon by increasing our savings rate. At this point in our careers, it just doesn’t move the needle the way you might think it would.  

Without question, the best way you can increase the probability of success for your retirement income strategy in the latter stages of your career is to work longer. But when I say “working longer”, I don’t necessarily mean working longer on a full-time basis.  

A trend I am seeing more and more, one that excites me, is a concept known as “phased retirement”. This essentially means that you’re easing into retirement and not going from working full-time to quitting work cold turkey. We as humans tend to view retirement as “all on” or “all off”. If you ask me, that’s the wrong approach. We need to start thinking of part-time employment as part of an overall financial game plan.  

Let’s look at a real-life client I recently encountered (whose name was changed to protect identity):

Mary, age 62, came in for her annual planning meeting and shared with me that the stress of her well-paying sales position was completely wearing her down. At this stage in her life and career, she no longer had the energy for the 50-hour work weeks and frequent travel. Now a grandmother of three, she wanted to spend more time with her kids and grandkids but feared that retiring at 62, compared with our plan of 65, would impact her long-term financial picture.  

The more we talked, the more clear it became that Mary did not want to completely stop working; she just could not take the full-time grind anymore. When we put pen to paper, we concluded that she could still achieve her desired retirement income goal by working part-time for the next three years (to get her to Medicare age). Her income would drop to a level that would not allow her to save at all for retirement, but believe it or not, that had no meaningful impact on her long-term plan. Earning enough money to cover virtually all of her living expenses and not dipping into her portfolio until age 65 was the key factor.

Having conversations around your desired retirement age is obviously a critical component to your overall planning. However, a sometimes overlooked question is, “WHY do you want to retire at that age?”. As a society, we do a good job of creating social norms in many aspects of life, and retirement is not immune to this. I’ve actually heard several clients respond to this question with, “Because that’s the age you’re supposed to retire!”. When I hear this, I get nervous, because these folks usually make it three months into the retirement transition, only to find they are not truly happy. They found purpose in their careers, they enjoyed the social aspects of their jobs, and they loved keeping busy, whether or not they realized it at the time.

The bottom line is this: Don’t discount the effectiveness of easing into full retirement, both from a financial and lifestyle standpoint.

Some clients have found a great deal of happiness during this stage of life by working less, trying a different career, or even starting a small business they’ve dreamed about for years. The possibilities are endless. Have an open mind and find the balance that works for you, that’s what it’s all about.

Nick Defenthaler, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.

Can you roll your 401k to an IRA without leaving your job?

Contributed by: Nick Defenthaler, CFP®

Typically, when you hear “rollover,” you think retirement or changing jobs. For the vast majority of clients, these two situations will be the only time they complete a 401k rollover. However, another option for moving funds from your company retirement plan to your IRA — the “in-service” rollover — is an often overlooked planning opportunity. 

Rollover Refresher

A rollover is simply the process of moving your employer retirement account (401k, 403b, 457, etc.) to an IRA over which you have complete control, separate from your ex-employer. If completed properly, rolling over funds from your company retirement plan to your IRA is a tax- and penalty-free transaction, because the tax characteristics of a 401k and an IRA generally are the same.  

What is an “in-service” rollover?

Unlike the “traditional” rollover, an “in-service” rollover is probably something unfamiliar to you, and for good reason. First, not all company retirement plans allow for it, and second, even when it’s available, the details may confuse employees. The bottom line: An in-service rollover allows an employee (often at a specified age, such as 59 ½) to roll a 401k to an IRA while employed with the company. The employee may still contribute to the plan, even after the completed rollover. Most plans allow this type of rollover once per year, but depending on the plan, you potentially could complete the rollover more often for different contribution types at an earlier age (sometimes as early as 55).

Why complete an “in-service” rollover?

While unusual, this rollover option offers some benefits:

More investment options: Any company retirement plan limits your investment options. You can invest IRA funds in almost any mutual fund, ETF, stock, bond, etc. Having options and investing in a way that aligns with your objectives and risk tolerance may improve investment performance, reduce volatility, and make your overall portfolio allocation more efficient.

Coordination with your other assets: Your financial planner can coordinate an IRA with your overall plan with much greater efficiency. How many times has your planner recommended changes in your 401k that simply don’t get completed? When your planner makes those adjustments, they won’t fall off your personal “to do” list.

Additional flexibility: IRAs allow penalty-free withdrawals for certain medical expenses, higher education expenses, first time homebuyer allowance, etc. that aren’t available with a 401k or other company retirement plan. Although this should be a last resort, it’s nice to have the flexibility.

Exploring “in-service” rollovers

So what now? First, always keep your financial planner in the loop when you retire or switch jobs to see whether a rollover makes sense for your situation. Second, let’s work together to see whether your current company retirement plan allows for an in-service rollover. That typically involves a 5-10 minute phone call with us and your company’s Human Resources department.

With your busy life, an in-service rollover may fall close to the bottom of your priority list. That’s why you have us on your financial team. We bring these opportunities to your attention and work with you to see whether they’ll improve your financial position! 

Nick Defenthaler, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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Rolling over your retirement assets to an IRA can be an excellent solution. It is a non-taxable event when done properly - and gives you access to a wide range of investments and the convenience of having consolidated your savings in a single location. In addition, flexible beneficiary designations may allow for the continued tax-deferred investing of inherited IRA assets. In addition to rolling over your 401(k) to an IRA, there are other options. Here is a brief look at all your options. For additional information and what is suitable for your particular situation, please consult us. 1. Leave money in your former employer's plan, if permitted Pro: May like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event. 2. Roll over the assets to your new employer's plan, if one is available and it is permitted. Pro: Keeping it all together and larger sum of money working for you, not a taxable event Con: Not all employer plans accept rollovers. 3. Rollover to an IRA Pro: Likely more investment options, not a taxable event, consolidating accounts and locations Con: usually fee involved, potential termination fees 4. Cash out the account Con: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to re tax or legal matters with the appropriate professional. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 70.5.

Consider these options and strategies to pump up your Social Security benefits

Contributed by: Nick Defenthaler, CFP®

As a frequent speaker on Social Security, I’ve had the pleasure of educating hundreds of retirees on the nuances and complexities of this confusing topic. Over the years, I’ve come to realize that, unfortunately, many of us do not take the decision about when to file as seriously as we should.

In 2018, the average annual Social Security benefit was roughly $17,000. Assuming a retiree lives for 20 years after receiving that first benefit check, you’re looking at a total of $340,000 in lifetime benefits – and that’s not accounting for inflation adjustments along the way!

We work to help our clients receive nearly double that amount each year – $33,500 – which is close to the maximum full retirement age (FRA) benefit one can receive. Assuming the same 20-year period means nearly $700,000 in total lifetime benefits. It’s not unreasonable for a couple with earnings near the top of the Social Security wage base to see a combined, total lifetime benefit amount north of $1,500,000 as long as you are award of the decision process.

As you can see, the filing decision will be among the largest financial decisions – if not THE largest – you will ever make!

Longevity risk matters

Seventy-five percent of Americans will take benefits prior to their full retirement age (link #1 below) and only 1 percent will delay benefits until age 70, when they are fully maximized. In many cases, financial and health circumstances force retirees to draw benefits sooner rather than later. But for many others, retirement income options and creative strategies are oftentimes overlooked, or even taken for granted.

In my opinion, longevity risk (aka – living a really long time in retirement) is one of the three biggest risks we face in our golden years. Research has proven, time in and time out, that maximizing Social Security benefits is among the best ways to help protect yourself against this risk, from a retirement income standpoint. Each year you delay, you will see a permanent benefit increase of roughly 8 percent (up until age 70). How many investments offer this type of guaranteed income?

Let’s look at the chart below to highlight this point.

You can see a significant difference between taking benefits at age 62 and at age 70 – nearly $250,000 in additional income generated by delaying! Keep in mind, this applies for just one person. Married couples who both had a strong earnings history or can take advantage of the spousal benefit filing options receive even more benefits.

Mark’s story

I’ll never forget a conversation I had with a gentleman named Mark after one of my recent educational sessions on Social Security. As we chatted, he made a comment along the lines of, “I have just close to $1.5 million saved for retirement, I just don’t think Social Security really matters in my situation.” I asked several probing questions to better understand his earnings record and what his benefit would be at full retirement age.

We were able to determine that at age 66, his benefit would be nearly $33,000. Mark was 65, in good health, and mentioned several times that his parents lived into their early 90s. Longevity statistics suggest that an average 65-year-old male has a 25 percent chance of living until 93. However, based on Mark’s health and family history, he has a much higher probability of living into his early to mid-90s!

If Mark turned his benefits on at age 66, and he lived until age 93, he would receive $891,000 in lifetime benefits. If he waited until age 70 and increased his annual benefit by 32 percent ($43,500/yr.), his lifetime benefits would be $1,000,500 (keep in mind, we haven’t even factored inflation adjustments into the lifetime benefit figures).

I then asked, “Mark, if you had an IRA with a balance of $891,000 or even $1,000,000, could we both agree that this account would make a difference in your retirement?” Mark looked at me, smiled, and nodded. He instantly understood my point. Looking at the total dollars Social Security would pay out resonated deeply with him.

All too often, we don’t fully appreciate how powerful a fixed income source can be in retirement. It’s astounding to see the lifetime payout provided by Social Security. Regardless of your financial circumstance, it will always make sense to review your options with someone who understands the nuances of Social Security and is well educated on the creative ways to draw benefits. Don’t take this decision lightly, too many dollars are at stake!

Feel free to reach out to us if you’d like to talk through your plan for Social Security and how it will fit into your overall retirement income strategy.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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Sources: 1) https://www.ssa.gov/planners/retire/retirechart.html 2) https://money.usnews.com/money/retirement/social-security/articles/2018-08-20/how-much-you-will-get-from-social-security The information herein has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation. You should discuss any tax or legal matters with the appropriate professional.