Qualified Charitable Distributions: Giving Money While Saving Money

Contributed by: Josh Bitel, CFP®

The Qualified Charitable Distribution (QCD) can be a powerful and tax-efficient way to achieve one’s philanthropic goals. This strategy has become much more popular under the new tax laws.

QCD Refresher

The QCD, which applies only if you’re at least 70 ½ years old, essentially allows you to directly donate your entire Required Minimum Distribution (RMD) to a charity. Normally, any distribution from an IRA is considered ordinary income from a tax perspective; however, when the dollars go directly to a charity or 501(c)3 organization, the distribution from the IRA is considered not taxable.

Let’s Look at an Example

Sandy turned 70 ½ in June 2019, and this is the first year she has to take a Required Minimum Distribution (RMD) from her IRA, which happens to be $25,000. A charitably inclined person, Sandy gifts, on average, nearly $30,000 each year to her church. Because she does not really need the proceeds from her RMD, she can have the $25,000 directly transferred to her church, either by check or electronic deposit. She would then avoid paying tax on the distribution. Since Sandy is in the 24% tax bracket, she saves approximately $6,000 in federal taxes!

Rules to Consider

The QCD and similar strategies have rules and nuances you should keep in mind to ensure proper execution:

• Only distributions from IRAs are permitted for the QCD. Simple and SEP IRAs must be “inactive.”

  • Employer plans such as a 401k, 403b, 457 do not allow for the QCD.

  • The QCD is permitted within a Roth IRA but would not make sense from a tax perspective, because Roth IRA withdrawals are tax-free by age 70 ½.*

• You must be 70 ½ at the time the QCD is processed.

• Funds from the QCD must go directly to the charity and cannot go to you first and then out to the charity.

• You can give, at most, $100,000 to charity through the QCD in any year, even if this figure exceeds the actual amount of your RMD.

The amount of money saved from being intentional with how you gift funds to charity can potentially keep more money in your pocket, which ultimately means there’s more to give to the organizations you passionately support.

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Efficient Tax Planning is Year-Round Work

Contributed by: Josh Bitel

While many of us focus this time of year on getting our tax returns done, year-round tax planning excites us number geeks! We really can’t control taxes, right? Well, not exactly. 

Of course, we can’t change the tax rates set by our government, but we can work collaboratively on financial decisions throughout the year that help ensure the greatest possible level of tax efficiency. Let’s look at a few examples:

EXAMPLE #1: FORD STOCK

Say you have a stock position in Ford purchased at $3 a share when “the sky was falling”. Because its worth has greatly increased, your unrealized gain amounts to $20,000. The stock has done so well, you might not want to part with it. You also don’t want to pay tax on that nice $20,000 gain. 

So consider this: If your taxable income falls within the 12% marginal tax bracket, chances are you would pay very little or possibly ZERO tax on the $20,000 gain. You could lock in that nice profit and potentially improve the overall allocation of your portfolio. 

This is a hypothetical example for illustration purpose only and does not represent an actual investment.

EXAMPLE #2: ROTH CONVERSION

Let’s take a look at another real-life example we often see. What if your income this year takes a significant drop, through a job loss, retirement, job change, or other move? Be sure to keep us in the loop, so that we can help you make pro-active tax planning decisions.

In this situation, a Roth IRA conversion could make a lot of sense if your income will fall into a lower tax bracket that you most likely will not see again. You would pay tax at a much lower rate, and moving Traditional IRA dollars into a Roth IRA for potential future, tax-free growth could create a monumental planning opportunity.   

SHARING YOUR TAX RETURNS

These are just two examples of the many factors we examine in your financial plan to make sure your dollars are efficiently taxed. You can help us do this work. Sharing your tax return early gives us a much better chance throughout the year to uncover strategies that may make sense for you and your family. 

Many of our clients have now signed a disclosure form allowing us to directly contact their CPA or tax professional to obtain copies of returns and to discuss tax-planning ideas. This saves you, as the client, the hassle of making copies or e-mailing your return – and we are all about making your life easier! 

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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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. 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. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Protect Your Credit by Checking and Correcting These Reports

Contributed by: Josh Bitel

If you’re like most people, you probably don’t think or worry about your credit score unless you’re getting ready to use it. Your credit report provides detailed information about your credit history and may even make or break your applications for loans, mortgages, or credit cards. Errors or false applications bogging down your score could also prevent you from receiving a better interest rate, for example.

Tips for checking your credit report

1. Visit annualcreditreport.com to request your free credit report from your choice of three agencies: Equifax, Experian, and TransUnion. Use all three. You are entitled to a free report from each every 12 months.

2. Set an annual reminder to pull your report with each agency. Stagger these reminders, so you can check your full report once every four months and keep a closer eye on it.

3. Review all information, including the basics – addresses, phone numbers, employers, etc. – to spot any errors or discrepancies.

4. Make sure you recognize all accounts, loans, credit cards, etc. listed on your report.

Fixing or disputing errors

When you notice a problem, first directly contact the credit reporting companies and let them know what information you believe is not correct. You may be asked to provide supporting documentation to dispute a claim as fraud. In some instances, that may be hard, if not impossible, to do. It can be difficult to produce proof that you never opened a credit card, for example. Still, putting forth your best effort is well worth your time.

Second, contact the fraud/security department at the company that reported the fraudulent information. They will send dispute paperwork for you to submit with supporting documentation. Inform them, in writing, that the account was opened or charged without your knowledge, explain why you dispute the information and are asking that it be removed or corrected. Keep a paper trail for yourself.

Also, verify whether the debt has been sold to a collections agency. If it has, make sure they will notify the collections agency that the debt is in dispute. And brace yourself! It could take 90 days (or more!) before you see a resolution. Set a reminder to follow up if you have not heard anything within the time promised. Once you have received confirmation that the fraudulent claim has been discharged, make sure they have also closed the account in your name.

Haggling with credit reporting agencies can be a pain, but the work is a necessary evil. Misreported information could lead to your credit score suffering by as much as 100 points, and unless you review and monitor your reports on a consistent basis, you’ll never know.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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Repurposed from July 23, 2015 - Previous blog

High-deductible medical insurance plan? Try an HSA!

Contributed by: Josh Bitel

With the first year of the new Tax Cuts and Job Act behind us, tax-efficient saving seems to be top of mind for many Americans. In a world of uncertainty, why not utilize a savings vehicle you can control to help with medical costs?

USING AN HSA

A Health Savings Account, or HSA, is available to anyone enrolled in a high-deductible health care plan. Many confuse an HSA with a Flex Spending Account or FSA – don’t make that mistake! A Health Savings Account is typically much more flexible and allows you to roll any unused funds over year to year, while a Flex Spending Account is a “use it or lose it” plan. 

WHAT AN HSA CAN COVER

Many employers who offer high-deductible plans will often contribute a certain amount to the employee’s HSA each year as an added benefit, somewhat like a 401k match. Dollars contributed to the account are pre-tax, and tax-deferred earnings accumulate. Funds withdrawn, if used for qualified medical expenses (including earnings), are tax-free.

The list of qualified medical expenses can be found at irs.gov; however, just to give you an idea, they include expenses to cover your deductible (not premiums), co-payments, prescription drugs, and various dental and vision care expenses.

As always, consult with your financial advisor, tax advisor, and health savings account institution to verify what expenses qualify. If you make a“non-qualified” withdrawal, you will pay taxes and a 20% penalty on the withdrawal amount. 

HERE ARE THE DETAILS FOR 2019:

Individuals

• Must have a plan with a minimum deductible of $1,350

• $3,500 contribution limit ($1,000 catch-up contribution for those 55 or older)

• Maximum out-of-pocket expenses cannot exceed $6,750

Family

• Must have a plan with a minimum deductible of $2,700

• $7,000 contribution limit ($1,000 catch-up contribution for those 55 or older)

• Maximum out-of-pocket expenses cannot exceed $13,500

WITHDRAWING FROM AN HSA

Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA. However, funds can be withdrawn for any purpose, medical or not, and you will no longer be subject to the 20% penalty. The withdrawal will be included in taxable income, as with an IRA or 401k distribution. This can present a great planning opportunity for clients who may want to defer additional money, but have already maximized their 401k plans or IRAs for the year.

Although you have to wait longer to avoid the penalty than with a traditional retirement plan (age 59 ½), this investment vehicle could reduce taxable income in the year contributions were made, while earnings have the opportunity to grow tax-deferred and tax-free.  

As you can see, a Health Savings Account can be a great addition to an overall financial plan and should be considered if you are covered under a high-deductible health plan. No one likes medical expenses, but this vehicle can potentially soften their impact.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

IRS Announces Increases to Retirement Plan Contributions for 2019

Contributed by: Josh Bitel

Several weeks ago, the IRS released updated figures for 2019 retirement account contribution and income limits. 

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

• $19,000 annual contribution limit, up from $18,500 in 2018.

• $6,000 “catch-up” contribution for those over age 50 remains the same for 2019.

• An increase in the total amount that can be contributed to a defined contribution plan, including all contribution types (employee deferrals, employer matching and profit sharing), from $55,000 to $56,000, or $62,000 for those over age 50 with the $6,000 “catch-up” contribution.

In addition to increased contribution limits for employer-sponsored retirement plans, the IRS adjustments provide some other increases that can help savers in 2019. A couple of highlights include:

Traditional IRA and ROTH IRA Limits

• $6,000 annual contribution limit, up from $5,500 in 2018 – the first raise since 2013!

• $1,000 “catch-up” contribution for those over age 50 remains the same for 2019.

Social Security Increase Announced

• As my colleague Kali Hassinger, CFP® touched on, the Social Security Administration announced a cost of living adjustment, to the tune of 2.8%, starting January 2019.

• Kali also mentioned some slight increases to Medicare Part B premiums to keep in mind as we inch closer to 2019. 

As we enter 2019, keep these updated figures on the forefront when updating your financial game plan. As always, if you have any questions surrounding these changes, don’t hesitate to reach out to our team!

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

Webinar in Review: Year-End Tax and Planning Strategies

Contributed by: Josh Bitel

In November of 2017, the Tax Cuts and Job Act of 2018 passed with numerous changes to our tax code. This year we provided a refresher on some of those changes as well as some planning opportunities to think about as 2018 wraps up.

If you weren’t able to attend the webinar live, we encourage you to check out the recording below. 

Check out the time stamps below to listen to the topics you’re most interested in:

• (04:20): New 2018 Marginal Tax Brackets

• (06:30): Highlights of the 2018 Tax Cuts and Jobs Act (TCJA) – comparing 2017 with 2018

• (14:24): Planning charitable gifts under the new tax law

• (19:15): Healthcare coverage overview – Health Savings Accounts (HSAs) and Medicare

• (25:30): Roth IRA conversions as an attractive planning opportunity

• (33:20): How to utilize your employer retirement plan most effectively

• (36:30): How we help mitigate taxes & tax efficient investing

• (41:30): Updates to gifting and intra-family gifting for 2018

Student Loan Interest Rates Increase for the 2018/2019 School Year

Contributed by: Josh Bitel

Stop me if you’ve heard this before, college is expensive. For the second year in a row, rates on federal student loans for students attending college in the fall of 2018 are rising by 0.60%. This is a result of the rise in 10-year Treasury note rates. This rate increase wont effect loans made on or before June 30, 2018. Of course, this only applies to federal loans.

For current students, new loan payments will be slightly higher – to the tune of about two or three dollars per month. However, the bigger hit comes for students enrolling for the first time in the fall. With the combination of rising interest rates and the cost of college sky rocketing every year, repayment of these loans can feel daunting. We are likely to see consistent rate hikes for the foreseeable future which will serve to be a bigger burden down the road.  

These rate hikes stress the importance of reducing your need for loans, if possible. Saving as early as you can is an easy way to do this. Simply put, the more you have saved, the less you will need to borrow for education. Filling out the Free Application for Federal Student Aid (FAFSA) and applying for as many scholarships and grants as you qualify for is a great starting point.

Before applying for loans, you should always know how much you need to borrow, there are numerous student loan affordability calculators available online that can give you a sense of what you need and what you can afford. Bear in mind that you may qualify for more than you need, so fighting the temptation of a little extra spending money (at 6.60% interest) is key.

At any rate it is important to understand key information when signing into a loan. Education costs are steadily rising, and interest rates seem to be headed in the same direction. With a responsible payoff strategy and a little bit of hard work, you can start chipping away at that debt in no time. 

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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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 and not necessarily those of Raymond James.

What Should I Do With My Old 401k Plan?

Contributed by: Josh Bitel

If you have recently retired or changed jobs, you may be wondering what will happen to the 401k you’ve been diligently contributing to over the years.  As with almost every financial decision, there is no “one size fits all” answer, it truly will depend on your own unique goals and desire to receive professional guidance on the account.  In most cases, however, there are three options that you will want to consider:

Leaving your 401k where it is

• Limited investment options

  • Especially in bonds/fixed income

  • 401k plans can be great for accumulating but when one is in distribution mode, in many cases, having access to a wider array of investment options is preferred

• Creditor protection

  • 401k plans can offer additional protection compared to IRAs in certain circumstances

• Self-directed in most cases aka you’re responsible for managing the account

  • In many cases, your 401k is your largest financial asset that will be used to support your retirement lifestyle; you should evaluate if you have the time and knowledge to adequately manage the account

*If you are changing jobs, some 401k plans offer you the ability to roll an old plan into your new one for consolidation.

• Some additional flexibility on distributions

  • As long as you are over age 55 and no longer working, or over 59 ½ regardless of employment status, you can avoid the additional penalty on this distribution.

Rolling your 401k to an IRA

• Access to a wider range of investment options

  • In many cases will allow you to better diversify your account and potentially reduce the overall risk level of your portfolio

• Professional management

  • Investing funds within an IRA will allow a financial advisor to actively manage and provide advice on your account

  • Our processes at The Center allow us to review your individual investments and accounts every single day to see if changes are warranted

  • Good option for those who would prefer to delegate the financial matters in their life

• Taxes

  • When rolling funds from a 401k to an IRA, it is typically recommended that you process the transfer as a direct rollover – this will make sure the transfer will not be a taxable event

Lump-sum distribution

• Taxable event

  • Simply put, this is a full liquidation of the account which will result in a taxable event

    • Could pay upwards of 40% in tax between federal and state and possibly a 10% penalty if funds are withdrawn before age 55

  • In most cases will push you into a higher bracket

• Bottom line, typically not recommended

  • In most cases, due to the severity of the tax implications, we would not recommend a total lump-sum distribution of funds

    • As always, be sure to consult your tax adviser when making decisions on large retirement plan distributions

Determining what to do with your old 401k plan is an important financial decision you won’t want to take lightly.  I can’t tell you how many times we have seen new clients come to us who left their employer years ago and the overall investment allocation of the 401k plan they still have is nowhere close to where it should be given their stage in life and other financial goals.  Please let us know how we can be a resource for you or those you care about when faced with the question, “what should I do with my old 401k plan?”

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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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 opinions are those of Josh Bitel and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.  For additional information and what is suitable for your particular situation, please consult us.

Finding Your Social Security Information and Social Security Widow Benefits

Contributed by: Josh Bitel

There are many ins and outs of Social Security and I want to help you stay on top of them (without boring you with a pile of information). Here are easy explanations of two topics that can help you make the most of your benefits:

Where’s my Social Security statement?  

Remember when you used to get a statement each year a few months before your birthday from the Social Security Administration (SSA)?  Well if you haven’t seen it in a while that’s because the SSA stopped mailing to most folks back in 2011 (at a savings of $70M). 

The SSA will begin mailing benefit statements every 5 years to those who haven’t signed up for online statements (those already receiving benefits get an annual statement).  Paper statements are also mailed to workers age 60 and older three months before their birthday if they don’t receive Social Security benefits and don’t yet have a ‘My Social Security’ account.  If you haven’t checked out the SSA website, I suggest doing so: www.ssa.gov.  You may receive your statement, project future benefit amounts, as well as learn more about one of the nation’s largest expenditures.

Widowed? Research suggests that you might not be getting your fair share.

According to a recent report from the Social Security Administration Office of the Inspector General, as many as one-third of spouses age 70 and older are not getting the maximum social security benefit. The issue arises when a spouse initially receives “widow” benefits as early as age 60 (benefits based on your spouse’s earnings) and then later is eligible based on their own earnings record for a higher amount. As an example, Jan’s husband Paul passed away and Jan decided to begin receiving a widow’s benefit at age 60.  At age 62-70, Jan may want to switch to benefits based on her earnings record if they are higher.  Jan will need to be proactive as the SSA will not inform Jan if she is eligible for a higher amount.  When in doubt – call the SSA and give them your social security number and the social security number of your spouse to learn about all of your options. That way, you can be sure you are receiving the maximum amount allowed.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor the listed website or its respective sponsor.Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

2017 Year-End Financial Planning

Contributed by: Josh Bitel

With the fourth quarter upon us, tedious tasks like assessing your financial situation can often fall by the wayside.  With that in mind, this is a good time for us to share some important items to consider before the end of the calendar year. Here are a few things to consider before you take on 2018.

Establish or tighten up your emergency fund.

As we often recommend, keeping three to six months worth of expenses saved in an easily liquidated and accessible account can protect you against any unforeseen perils that may arise. Getting an emergency fund in place before the year wraps up is a great way to jump-start your budget for 2018.

Check your flexible Spending Account

Make sure you don’t end the year with a balance inside your FSA plan. Most of these plans have a ‘use it or lose it’ feature. So if you’re putting off that pesky doctor’s visit or are overdue for a new pair of prescription glasses, use your pre-tax dollars you’ve elected to cover these expenses!

Review your retirement accounts to make sure you’re on track to maximize your contributions

Whether it is an IRA account, either traditional or Roth, or an employer sponsored plan, the end of the year is a great time to assess your contributions and make sure you’re on track to meet your goals. This is important for your tax situation as well, as you may be able to deduct contributions to certain retirement plans. Although IRA accounts can be funded up until April 15th of the following year (up to $5,500 if you’re under age 50), it’s never too early to make sure you’re on track!

Give a tax-deductible charitable contribution

The end of the year is a time when we’re all thinking about giving. If you are charitably inclined, the end of the year is a great time to donate to any causes you are passionate about so you can receive a write off on your taxes for 2017. Don’t forget, donating appreciated securities from a taxable account is often more advantageous for you and the cause you believe in! Make sure you are making this donation for something you really believe in and not just for the potential tax write-off, the holiday season is a great time to asses this.

As always, in regard to your financial life, we are here to assist in anyway we can. These are just a few of the things you should keep in mind as the year wraps up. If you have any questions regarding your personal situation, contact us here at The Center for Financial Planning.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.