Managing Finances for an Aging Parent

Contributed by: Josh Bitel, CFP®

Being a child of an aging parent can often come with some unexpected responsibilities. As the people in our lives start to get older, an unfortunate reality is that they may need some help with managing their money. Whether making decisions on behalf of a parent, helping organize and consolidate accounts, making sure debts are paid on time, or sorting out an estate – this duty may bring forth some difficult decisions. Below are some ideas to hopefully help make this transition a bit easier.

Consider Establishing Power of Attorney

A power of attorney is a legal document that allows someone else to act on your behalf. This document is one of the "Big Four" estate planning documents that financial planners recommend everyone to consider. This document can and should only be granted when a parent is competent and able to make the decision. It does not mean that a power of attorney has complete control of their lives, but having one in place can help save time and money for family members who would otherwise have to go to court and be appointed if mom or dad should become incapacitated.

Zoom Out and Think "Big Picture"

Seemingly small things that come easy to younger generations may not be commonplace with our parents. Simply switching bills to auto-pay or income to be directly deposited into a bank account can go a long way toward simplifying and organizing monthly cash flow for mom or dad. Aging parents likely also have different time horizons, goals, and liquidity needs than their children. These differences must be taken into consideration when beginning to manage a parent's assets – more stable, income-producing investments often make more financial sense than stocks for aging folks, for example.

Leverage Professionals

Mom and/or dad may work with a financial planner or CPA who has known them for long enough to help make sense of their situation. It is important to understand that handing over the reins of managing the financial household can be a stressful transition for parents; leveraging the individuals in their lives who they have trusted to oversee these matters in the past can help you piece together this puzzle. If mom/dad doesn't have a trusted advisor in their corner, consider using yours or hiring one to help. If your parents do not already have an estate plan in place (see the "big four" linked above), consider partnering with an estate planning attorney to draft these documents. This will allow mom and dad to make sure they are transferring their assets to exactly who they want, when they want, and how they want. Otherwise, the state will choose their estate plan for them!

Be Aware of Emotions

Not only can needing children to help manage the household finances be a stressful time for parents, but siblings can also have a hard time coming to grips with seeing their parent's age. When having these conversations with mom, dad, brother, or sister – consider leaning on the idea that this doesn't mean they are incapable of managing their own affairs, but simply that you want to help take the burden off so they can enjoy their later years and not worry about trivial matters like paying bills and managing income.

There is no sugarcoating these kinds of conversations with family. Proud, aging parents will want to be independent as long as possible, and siblings may not want to impose on mom and dad's financial matters. Leading with the right approach and a careful plan of action can help alleviate some of these stressors and help simplify life for all involved. If you are considering having these difficult discussions and are interested in guidance, I encourage you to contact a trusted advisor such as a Certified Financial Planner™.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

How to Use a 529 Plan to Fund a Roth IRA

Contributed by: Josh Bitel, CFP®

Before the passing of SECURE ACT 2.0 in late 2022, folks with unused funds sitting in a 529 account had a few options for using leftover 529 funds. Generally speaking, the most common options were: 

1. Save the funds for future educational use (either for the current or future beneficiary) or

2. Withdraw the money and pay federal income taxes and a 10% penalty on any gains within the account.

While these options may be feasible for some folks, others are left scratching their heads when they see leftover funds in a 529 plan when their child finishes college. This can also be a concern if a student wins a scholarship, attends a military academy, or receives unexpected gifts to help pay for school. 

Fortunately, among the legislative changes brought forth by SECURE ACT 2.0 is a solution to help ease some of these concerns. Starting in 2024, 529 account holders are permitted to roll excess college savings plan funds into a beneficiary’s Roth IRA without incurring taxes or penalties. Sounds great, right? Well, as with most new laws, there is some important fine print to understand before going forward with such a transfer:

• The 529 plan must have been open for at least 15 years before you can execute a rollover to a Roth IRA.

• Rollovers are subject to the annual Roth IRA contribution limit. For 2024, this limit is $7,000. Additionally, if the beneficiary makes any IRA contributions in a given year, the eligible 529 to Roth IRA rollover amount is reduced by the size of that contribution. For instance, if the beneficiary contributes $3,000 to an IRA in 2024, the eligible rollover amount decreases to $4,000, based on the 2024 total IRA contribution limit set by the IRS.

• 529-to-Roth rollovers are subject to a lifetime limit of $35,000 per beneficiary. So, if you wanted to roll over the entire $35,000, you would have to do it over five years under the current 2024 contribution limits. (Although IRA contributions limits tend to rise in most years with inflation).

• 529 plan contributions made in the last five years cannot be transferred to a Roth IRA (including any earnings accrued on those contributions).

• The beneficiary of the 529 plan must match the owner of the Roth IRA. For example, if you have a 529 for your grandson Teddy, you can only roll over any excess funds to a Roth IRA in Teddy’s name. 

• Just as when making a normal contribution to a Roth IRA, the owner must have earned income at least equal to the amount of the rollover. For example, if Teddy has a part-time job earning $4,000 in 2024, you may only roll over $4,000 in 529 funds to the Roth for that year.

• There are no income limits restricting a 529-to-Roth rollover for either the beneficiary or 529 owner. For someone contributing directly to a Roth IRA (not using 529 funds) they are not permitted to do so if they earned $161,000 or more in taxable income as a single person in 2024. This rule does not apply to 529-to-Roth rollovers, so it is an excellent way for high earners to get money into a Roth.

As you can see, there is a lot to know before performing one of these rollovers, but for the right person, this can be a great retirement savings option. A more concise flowchart can be found here to help determine if you or your beneficiary is eligible for this transfer.

Overall, this new provision is a great way for savers to utilize excess 529 funds penalty and tax-free. However, there are still many questions that remain unanswered as it pertains to SECURE ACT 2.0. We are continuing to monitor and research as more details emerge. We will provide additional information as it is available, but if you have any questions about how this could affect you, please contact your Financial Planner. We are always happy to help!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Keep in mind that, 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.

Any opinions are those of Josh Bitel and Center for Financial Planning, Inc., and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. 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, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or protect against a loss This material is general in nature and provided for informational purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

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 college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds and protection from creditors. The tax implications can vary significantly from state to state.

Impending Social Security Shortfall?

Contributed by: Josh Bitel, CFP®

About 1 in 4 married couples, and almost half of unmarried folks, rely on Social Security for a whopping 90% (!) of their retirement income needs. While the Social Security Administration recommends that no more than 40% of your retirement paycheck come from Social Security, the reality is that many Americans depend heavily on this benefit. The majority of Social Security funds come from existing workers paying their regular payroll taxes; however, when payroll is not enough to cover all claimants, we must then dip into the trust fund to make up the difference. According to the 2023 Social Security and Medicare Trustees Reports, the 'trust fund' that helps supply retirees with their monthly benefits is projected to run out of money by 2033. This estimate has many folks understandably worried, but experts have proposed several potential solutions that could help boost solvency.

One popular solution is to raise the age at which retirees are permitted to file for benefits. Currently, a claimant's full retirement age (the age at which you receive 100% of the benefits shown on a statement) is between 66 and 67. Studies published by the Congressional Budget Office show that raising by just two months per year for workers born between 1962 and 1978 (maxing out at age 70) could save billions of dollars annually in Social Security payments, thus helping cushion the trust fund by a substantial amount.

Another hotly debated solution is reducing annual cost-of-living adjustments (COLA) for claimants. As it currently stands, your Social Security benefit gets a bump each year to keep up with inflation (the most recent adjustment was 8.7% for 2023). This number is based on the consumer price index report and is a tool used to help retirees retain their purchasing power. Recent studies from the SSA show that if we reduced COLA by 0.5%, we could eliminate 40% of the impending shortfall. This goes up to 78% if we assume a 1.0% reduction in COLA. Neither of these solutions completely solves the shortfall, but a combination of COLA reductions and changes to FRA, as shown above, would go a long way toward solving this issue.

These are just a few of the several solutions debated by experts each year. It is important to note that even if no changes are made, current beneficiaries will continue to receive their payments. However, estimates show that if the trust fund ran completely dry, payments may be reduced by as much as 25%. While this is not an insignificant haircut, it is certainly better than cutting payments altogether.

The point is that Social Security is a crucial part of many retirees' livelihoods. It would be safe to assume that Congress would act and make changes before any major benefit cuts are required. These are several options to consider that would have varying impacts on not only solvency but also benefits themselves. If you are concerned about the role of Social Security in your personal retirement plan, discuss with your advisor how these changes may impact you.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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 Josh Bitel, CFP® and not necessarily those of Raymond James.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

How Having an Estate Plan Can Avoid a Major Headache for Heirs

Contributed by: Josh Bitel, CFP®

With the majority of 2023 already in the books, some procrastinators may have seen their New Year's resolutions come and go. Perhaps one of the most common areas of financial planning that clients drag their feet on is getting those pesky estate planning documents drafted. So let's talk about what happens if you don't have a valid will or trust in place when you pass away.

What Is Intestacy?

You are said to have died intestate if you pass without a valid will. Intestacy laws govern the property distribution of someone who dies intestate. Each of the 50 states has adopted intestate succession laws that spell out how this distribution is to occur, and although each state's laws vary, there are some common general principles. The laws are designed to transfer legal ownership of property that the recently deceased owned or controlled to the people the state considers their heirs. These laws also control how these individuals receive this property and when the property is to be distributed.

Example:

John is a Michigan resident and is married with two minor children. He keeps meaning to write his will but has yet to get around to it. One day, John gets hit by a truck while crossing Telegraph and passes away instantly. Because he has no will, the intestate succession laws of Michigan govern how his property is distributed. Under Michigan law, 50 percent of John's property passes to his wife, and 50 percent passes to John's two minor children (25 percent each). Had John had a will, he could have left everything to his wife.

Technical Note:
Real property is distributed under the intestacy laws of the state in which it is located. Personal property is distributed under the state's intestacy laws in which you are domiciled at the time of your death.

Why Should You Avoid Intestacy?

• Cost

  • Intestacy can be more costly than drafting and probating a will. In most states, an administrator must furnish a bond, where you can often waive this requirement in your will. Also, an administrator's powers are limited, and they must get permission from the court to do many things. The cost of these proceedings is paid by your estate.

• You can't decide who gets your property

  • State intestacy laws will determine who receives your property. These laws divide your property among your heirs, and if you have no heirs, the state will claim your property.

  • Unlike beneficiaries under your will, who can be anyone to whom you wish to leave the property, heirs are defined as your legal spouse and specific relatives in your family. If the state can find no heirs, it could claim the property for itself (the property escheats to (goes to) the state). The laws of your state determine the order in which heirs will receive your property, the percentage that each will receive, and in what form they will receive it, whether in cash, property, lump sum, annuity, or other form.

• Special needs are not met

  • State intestacy laws are inflexible. They do not consider the special needs of your heirs. For example, minor children will receive their share with no strings attached, whether they are competent to manage it or not.

• Heirs may be short-changed

  • The predetermined distribution pattern set out by state law can end up giving a larger portion of your estate to an heir than you intended for them to have. It may also leave one of your heirs with too little.

• You can't decide who administers your estate

  • If you die intestate, the probate court will name an administrator to manage your estate. You will have no say in who settles your estate.

• You have no say in who becomes a guardian for your minor children

  • A court will appoint personal and property guardians for your minor children since you didn't specify otherwise. You will also expose the assets you leave your child to the management skills of someone you may not approve of.

• Relations take priority over friends and others

  • State intestacy laws will distribute your property to family members in a preset pattern. These laws do not consider your relationship with your family when dividing up your estate. As a result, that brother you may not have spoken to in 20 years may end up with a portion of your assets that you'd rather he not have.

• Tax planning options are eliminated

  • Without a will or some other means of disposing of your property, you can't plan to minimize or provide payment of income or estate taxes.

How Is Property Distributed Under Intestacy?

The pattern of distribution varies immensely from state to state. You must check with your state to find out what its intestate's will looks like. Generally, the rules are as follows:

• If you leave a spouse but no children, the spouse takes the entire estate.

• If you leave a spouse and children, each takes a share.

• If you leave children and no spouse, the children take the entire estate in equal shares.

• If you leave no spouse or children, the entire estate goes to your parents.

• If you leave no spouse, children, or parents, the entire estate goes to your siblings (or your siblings' descendants).

• If you leave none of the above, the entire estate goes to your grandparents and their descendants (your aunts, uncles, and cousins).

• If you leave no heirs, the next takers are your deceased spouse's heirs.

• If there are no heirs on either side, the next to take is your next of kin, those who are most nearly related to you by blood.

• If there are no next of kin, your estate escheats to the state

So as you can see, it pays to have your estate planning documents drafted. Not only can they provide you with peace of mind, but they can also save your heirs time and headaches when dealing with your estate. Talk to your advisor today to see whether or not you are properly covered!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. While we are familiar with the legal and tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on legal or tax matters. These matters should be discussed with the appropriate professional.

How Can I Estimate Retirement Income Needs?

Contributed by: Josh Bitel, CFP®

Planning for retirement is on everyone's mind at some point in their career. But figuring out where to begin to project how much income will be needed can be a tall task. Sure, there are rules of thumb to follow, but cookie-cutter approaches may only work for some. When estimating your retirement needs, here is a quick guide to get you started.

Use Your Current Income as a Starting Point

One popular approach is to use a percentage of your current working income. Industry professionals disagree on what percentage to use; it could be anywhere from 60% to 90% or even more. The appeal of this approach lies in its simplicity and the fact that there is a fairly common-sense analysis underlying it. Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect that there will be certain expenses you will no longer have is a good way to sustain a comfortable retirement.

The problem with this approach is that it does not account for your unique situation. For example, if you intend to travel more in retirement, you might need 100% (or more) of your current income to accomplish your goals. 

Estimate Retirement Expenses

Another challenging piece of the equation is figuring out what your retirement expenses may look like. After all, a plan will only be successful if it accounts for the basic minimum needs. Remember that the cost of living will go up over time. And keep in mind that your retirement expenses may change from year to year. For example, paying off a mortgage would decrease your expenses, while healthcare costs as we age will have the opposite effect on your budget.

Understand How Retirement Age Can Change the Calculation

In a nutshell, the earlier you retire, the more money you will need to rely on to support your lifestyle. I recently wrote a blog simplifying this topic: click here to see more.

Account For Your Life Expectancy

Of course, when you stop working is only one piece of the pie to determine how long of a retirement you will experience. The other, harder to estimate, piece is your life expectancy. It is important to understand that the average life expectancy of your peers can play into the equation. Many factors play into this, such as location, race, income level, etc., so getting a handle on your specific situation is key. There are many tables that can be found online to assist with this; however, I always encourage people to err on the side of caution and assume a longer-than-average life expectancy to reduce the possibility of running out of money.

Identify Your Sources of Retirement Income

So you have an idea of how much you spend to support your lifestyle and how long your retirement may last, next is understanding where the money comes from. A good place to start for most Americans is Social Security. Check out http://www.ssa.gov to see your current benefit estimate. Other fixed income sources may include a pension or annuity. Beyond that, we normally rely on investments such as a 401k plan at work or other retirement plans.

Address Any Income Shortfalls

In a perfect world, we have added up our retirement lifestyle and compared it with our sources of retirement income, and found that we have plenty set aside to support a comfortable retirement. However, this is not always the case. If you have gone through this exercise and come to the conclusion of an income shortfall, here are a few ideas to help bridge that gap:

• Consider delaying your retirement for a few years

• Try to cut current expenses so you will have more money to save for retirement

• Work part-time during retirement for extra income

As always, an advisor can help with this calculation and inspire confidence in your path to financial independence. Reach out to us today if you are thinking about that light at the end of the tunnel!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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 the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. 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 of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 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. 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 72.

How Much Does It Actually Take to Retire Early?

Contributed by: Josh Bitel, CFP®

Like most people, you have probably thought of the possibility of an early retirement, enjoying your remaining years doing whatever brings you joy and being financially independent. Whether you have your eyes set on traveling, lowering your golf score, spending more time with your family, or any other hobbies to take up your time, you may wonder… How much money does it actually take to retire at age 55?

If you have thought about retirement, you are likely familiar with the famous “4% rule”. This rule of thumb states that if you withdraw 4% of your investment portfolio or less each year, you will more than likely experience a ‘safe’ retirement, sheltered from the ebbs and flows of the stock market as best you can. However, some may not know that this rule assumes a 30-year retirement, which is typical for most retirees. If we want to stretch that number to 40 years, the withdrawal rate is slightly lower. For this blog, we will assume a 3.5% withdrawal rate; some professionals have argued that 3% is the better number, but I will split the difference.

A key component of a retiree’s paycheck is Social Security. The average working family has a household Social Security benefit of just under $3,000/month. For our calculations, we will assume $35,424/year for a married couple retiring at age 65. For a couple retiring ten years sooner, however, this benefit will be reduced to compensate for the lost wages. The 55-year-old couple will collect $27,420/year starting as soon as they are able to collect (age 62).

For simplicity’s sake, we will assume a retirement ‘need’ of $10,000/month in retirement from all sources. A $120,000/year budget is fairly typical for an affluent family in retirement nowadays, especially for those with the means to retire early. Of course, we get to deduct our Social Security benefit from our budget to determine how much is needed from our portfolio to support our lifestyle in retirement. (Note that we are assuming no additional income sources like pensions or annuities for this example). As the 4% (or 3.5%) safe withdrawal rule already accounts for future inflation, we can apply this rule to determine an approximate retirement fund ‘need.’ See the following table for the results:

As you can see, over $500,000 in additional assets would be needed to retire ten years earlier. These rules can be applied to larger or smaller retirement budgets as well. While this exercise was heavily predicated on a rule of thumb, it is worth noting that no rule is perfect. Your experience could differ considerably from the assumptions listed above.

This exercise was your author’s best attempt to simplify an otherwise exceptionally complex life transition. This is merely scratching the surface on what it takes to retire comfortably. To increase your financial plan’s success rate, many other factors must be considered, such as tax treatment of distributions, asset allocation of your investments, life expectancy, etc. If you are interested in fine-tuning your own plan to try to retire earlier, it is best to consult an expert.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. 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. Examples used are for illustrative purposes only.

New Guidelines May Help Retirees Retain More Savings

Contributed by: Josh Bitel, CFP®

In late 2022, the treasury department quietly updated life expectancy tables, reflecting that Americans are living longer and should have a longer time horizon for full distribution of retirement accounts.

When retirement accounts came into law via the Employee Retirement Income Security Act of 1974, required minimum distributions (RMDs) were established. This is an amount mandated by the IRS that individuals must take out of their retirement account each year (for those aged 72 and above) to avoid paying a stiff penalty. Two components make up the size of the RMD – the account holder's age and the account value. Generally speaking, the older an account holder is, the larger their distribution must be in relation to their account size (for example – assuming a $1,000,000 account, someone 72 years of age must distribute $36,496 by year-end, while an 85-year-old must distribute $62,500). These figures are gathered by taking your account balance and dividing it by your life expectancy factor, as dictated by the IRS (table shown at the end of this blog).

New RMD tables now reflect longer life expectancies, which means a reduction in yearly required distributions. So if you're someone who only takes out the minimum distribution every year, in theory, you can retain more of your savings in tax-advantaged accounts.

Of course, satisfying annual RMDs doesn't always mean taking your distributions and putting them into your bank account for spending. There are strategies available to reinvest these funds, avoid taxes by sending them to charities, and fund college savings plans, among other things to help you achieve your financial goals.

RMDs are truly in place so that account owners aren't able to defer their taxes indefinitely. Like anything else in the world of finance, it's best to fully understand the rules before making decisions. For this reason, you may be best suited to consult with a financial advisor to avoid any pitfalls.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Josh Bitel, CFP® and not necessarily those of Raymond James. 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. Examples used are for illustrative purposes only.

Focusing on What You Can Control

Contributed by: Josh Bitel, CFP®

May is Mental Health Awareness Month, and as we all know, managing stress can go a long way in improving mental health. Personally, I have always been a bit of a “worry wart” and often have to remind myself not to sweat the small stuff and focus on what I can control. And of course, as a financial planner, I find this very easy to relate to investing and saving for retirement! Below is a graphic from J.P. Morgan that I have shared many times with clients. Just as we try to do in our personal lives, managing what we can control and not worrying about other factors can go a long way in relieving some of the stress that comes with saving for retirement.  

The major area that we as investors often become fixated on (and rightfully so!) is market returns. Ironically, as the chart shows, this is an area we have no control over. The same goes for policies surrounding taxation, savings, and benefits. As you can see, employment and longevity are things we do have some control over by investing in our own human capital and our health. In my opinion, the areas that we have total control over—saving vs. spending and asset allocation and location—are what we need to focus on. We try to have clients focus on consistent and prudent saving, living within (or ideally, below) their means, and maintaining a proper mix of stocks and bonds within their portfolio. Over the course of 35+ years of helping clients achieve their financial goals, The Center has realized that those two areas are the largest contributors to a successful financial plan. 

With so many uncertainties in the world we live in that can impact the market, it is always a timely reminder to focus on the areas we have control over and make sure we get those right. If we do, the other things that we might be stressing over will potentially fall into place. If you need help focusing on the areas of your financial well-being that you CAN control, give us a call! We are always happy to help.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Josh Bitel, CFP® and not necessarily those of Raymond James.

After-Tax 401(k) – An Often Forgotten Strategy

Contributed by: Josh Bitel, CFP®

Roughly half of 401(k) plans today allow participants to make after-tax contributions. These accounts can be a vehicle for both setting aside more assets that have the ability to grow on a tax-deferred basis and as a way to accumulate assets that may be more tax-advantaged when distributed in retirement.

As you discuss after-tax contributions with your financial advisor, you might consider the idea of setting aside a portion of your salary over and above your pre-tax contributions ($19,500 for people under age 50 and $26,000 for those over 50). By making after-tax contributions to your 401(k) plan now, you could build a source of assets for a potentially tax-efficient Roth conversion.

What to consider:

Does your plan allow for after-tax contributions?

Not all plans do. If an after-tax contribution option is available, details of the option should be included in the summary plan description (SPD) for your plan. If you don’t have a copy of your plan’s SPD, ask your human resources department for a copy or find it on your company’s benefits website. You can also talk to your financial advisor about other ways to obtain plan information, such as by requesting a copy of the complete plan document.

What does “after-tax” mean?

After-tax means you instruct your employer to take a portion of your pay — without lowering your taxable wages for federal income tax purposes — and deposit the amount to a separate after-tax account within your 401(k) plan. The money then has the ability to grow tax-deferred. This process differs from your pre-tax option in which your employer takes a portion of your pay and reduces your reported federal taxable wages by the number of your salary deferrals and deposits the funds to your pre-tax deferral account within the plan.

Are there restrictions?

Even if your plan has an after-tax contribution option, there are limits to the amount of your salary that you can set aside on an after-tax basis. Your after-tax contributions combined with your employee salary deferrals and employer contributions for the year 2021, in total, cannot exceed $58,000 (or $64,500 if you are age 50 or over and making catch-up contributions). Your after-tax contributions could be further limited by the plan document and/or meet certain nondiscrimination testing requirements.

Okay, but how does this help me build Roth assets?

When you are eligible to withdraw your 401(k) after-tax account — which could even be while you are still employed — you can rollover or “convert” it to a Roth IRA or a qualified Roth account in your plan, if available. The contributions you made after-tax may be able to be rolled into a Roth IRA each year, even while you are still employed!

If your plan allows for after-tax contributions and you think they may be right for you, it may be time to chat with your financial advisor.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Benefits Of Working With An ‘Ensemble Practice’

Contributed by: Josh Bitel, CFP®

Financial planning practices come in all shapes and sizes, but perhaps the two most common arrangements are solo practices and ensemble practices. Solo practices are normally led by a single advisor who calls the shots, while ensemble practices are team-oriented firms, all working toward a common goal. The Center identifies with the latter.

An ensemble practice is structured with multiple advisors under the same roof. This allows for constant sharing of ideas, best practices, strategies, and even sharing of resources. The Center has a 2 hour meeting every Monday for just this purpose. Our planners at The Center, all with unique expertise, get together to eat lunch and share client cases, tough questions, interesting reading pieces, and maybe a few jokes here and there. This is all possible because we are all working collaboratively toward a shared vision, as outlined in the Vision 2030 document our entire team had a hand in creating.

The Center, as with many ensemble practices, leverages the power of teams. We have team members who are specialists in such areas as insurance, divorce planning, tax planning, retirement planning, and many more. So if an advisor is met with a tough client case involving long-term care, for example, he or she can seek out help from a team member with expertise in this area instantly.

An often overlooked advantage for clients choosing to work with an ensemble practice such as The Center is the foundation for internal succession planning. It is often said that as an advisor ages, so do their clients. This begs the questions who will take care of me when my advisor retires? And from the advisors end, who will take care of my legacy once I’ve moved on? With a practice like ours, there is an internal succession plan in place for many years before a planner decides to retire. Often, clients are transitioned to an advisor who has been working under the tutelage of the retiring advisor.

As with anything, you must weigh the pros and cons of working with an advisor under their practice’s arrangement. In the end, it is all about finding the right person to help you reach your goals and feel comfortable along the way. At The Center, we have found that working in a team-based environment toward a shared vision helps us serve our clients the best way we can.