Many of us are counting on ours, or our spouses’, Social Security Benefits for a significant part of our retirement income. But, if you or your spouse are government workers or teachers, you may be in for a surprise with Social Security WEP and GPO offsets.
Touted as an aid to prevent Americans from outliving their assets, be aware of the downsides of this important pending legislation.
Provided by Angel McCall CFP®
In May 2019, the House of Representatives passed the SECURE act (Setting Every Community Up for Retirement Enhancement Act). Even though the bill contains provisions aimed at increasing access to tax-advantaged retirement accounts, your retirement accounts will be affected in a major way. Opponents point out that it is also a money-grab bill for the government by changing withdrawal rules which may impact retirement and estate planning strategies and a windfall for annuity vendors.
The Senate is expected to pass a version of the bill probably including key elements of their “RESA” (Retirement Enhancement Security Act) which would mitigate some of the “money-grabbing” aspects of the House bill.
While proposed legislation does smooth out some of the problems with retirement savings – like removing the IRA age limitation, expanding the start for RMDs, increasing annuity options and potentially increasing the likelihood of small employers starting retirement plans – there is still a strong argument that these changes, while positive, won’t help the retirement predicament very much. Many of the changes can be viewed as only benefiting wealth IRA owners who don’t need their RMDs yet and clearly benefit the insurance annuity product providers. The annuities provided do not seem to provide any inflation protection or benefits to beneficiaries. The biggest winners for these annuities will be the insurance companies and insurance sales people.
Americans will still be facing major issues not being addressed in Congress:
Social Security funding
Rising health care costs
Skyrocketing drug prices
Strains on Medicare and Medicaid, and
1/3rd of the population are not really saving for retirement
Here are the major provisions of the SECURE Act that may affect you.
1. Increase in the Required Minimum Distribution Ages
The current law requires minimum distributions (RMDs) from retirement accounts to begin once you reach 70.5. The SECURE Act sets the age at 70.5. The RESA Act proposes to change this requirement to age 75. One criticism of this provision is that it mostly benefits those with significant savings allowing the money to grow longer.
2. Removal of Age Limitation on IRA Contributions
Currently, IRA contributions are not allowed after age 70.5. The SECURE Act would remove this limitation for those who continue to work later in life.
3. Penalty-Free Distributions for Birth of Child or Adoption
The rule would allow an aggregate amount of $5,000 to be withdrawn from a retirement plan without the 10% penalty within one year of final adoption or the child’s birth. (Income taxes would be owed.)
4. Increase Small Employer Access to Retirement Plans
Currently, SIMPLE and SEP IRAs are available, but have not been broadly utilized. They could come together to set up and offer 401(k) plans at less cost than exists today.
Many employers offer no retirement savings options at all, leaving retirement savings solely up to the employee.
5. Reduces the number of work hours required before signing up for a 401(k) plan
This will open up plans to part-time workers.
6. Tax Credit for Automatic Enrollment
This credit to employers would help offset the costs of setting up a plan which includes automatic enrollment of all employees.
7. Lifetime Income Disclosure for Define Contribution Plans
Would require that at least once a year the participant would receive a projection showing how much income the balance in the account could generate.
Of course, the methodology for calculating this and the assumptions used would need to be worked out and provided to the participants.
8. Annuity Options Inside Retirement Plans
Included as a “safe harbor” provision, this will be a boon for insurance companies. For a variety of reasons, I almost never recommend that a retirement account be put into an annuity. Even though a 401(k) rolled into an IRA needs to be “managed,” it can provide cost of living increases and can be left to beneficiaries. Even though annuities provide a fixed, lifetime benefit, a person can usually do better without them.
9. The Hidden Money Grab of the SECURE Bill
If you have an IRA or a retirement plan that you were hoping you could leave to your children in a tax-efficient manner after you die, then this provision could cost them dearly.
Non-spouse beneficiaries of IRAs and retirement plans currently can minimize the amount of their Required Minimum Distributions by “stretching” them over their lifetimes. The longer your beneficiaries can postpone or defer them (and taxes on the distributions) the better off they will be.
However, buried in the SECURE act is a small provision kills the “stretch IRA.” (This provision also applies to Roth IRAs - these distributions are not taxable – but once the funds are rolled out of the Roth, their gains become taxable.)
Buried in the language of the SECURE Act, a beneficiary other than your spouse who inherits a traditional IRA or retirement plan must deplete the account within 10 years. This is a huge change from the old rules allowing withdrawals over a beneficiary’s lifetime.
If you are thinking, “It can’t be all that bad,” then check out this chart demonstrating the difference between you leaving $1 million IRA to your child under the existing law, and the result under the SECURE Act.
A $1M Traditional IRA is inherited by a 45 year-old child and the minimum distributions he is required to take are invested in a brokerage account.
Assumptions used for Graph:
1. $1 Million Traditional IRA inherited by 45-Year Old Married Beneficiary
2. 7% rate of return on all assets
3. Beneficiary’s salary $100,000
4. Beneficiary’s annual expenses $90,000
5. Beneficiary’s Social Security Income at age 67 $40,000
The only difference between these two is when the child pays taxes!
The solid line represents a child who can defer (or “stretch”) the taxes over his lifetime under the current rules. At age 86, that beneficiary still has $2,000,000.
The dashed line represents the same child if he is required to take withdrawals under the SECURE Act. Your child could be financially secure or broke at age 86!
The Senate is working on a proposal that allows a $400,000 exclusion per beneficiary, but distribution would need to be over five years instead of ten years like the House version. The Senate version would allow more estate planning opportunities and tax savings, but this provision seems to be tied to Section 529 proposed revisions that the House voted down.
The SECURE act will impose massive taxes on families of IRA and retirement plan owners – even those with far less than $1M. Even though the Senate version has a five-year acceleration instead of a ten-year, this version could be better for most because of the value of the exclusion – especially if you have multiple beneficiaries.
Citations1 - financial-planning.com/articles/house-votes-to-ease-rules-for-rias-correct-trump-tax-law [5/23/19]
2 - irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 [6/18/19]
3 - congress.gov/bill/116th-congress/house-bill/1994 [6/17/19]
4 - shrm.org/resourcesandtools/hr-topics/benefits/pages/house-passes-secure-act-to-ease-401k-compliance-and-promote-savings.aspx
5 - law.com/newyorklawjournal/2019/04/05/what-to-know-about-the-2-big-retirement-bills-in-congress/ [4/5/19]
6 – forbes.com/sites/jlange/2019/06/11/the-hidden-money-grab-in-the-secure-act/#66b95993bbd7
We all would love to have a little extra cash on hand for emergencies. Saving up that cash can be a challenge – but with a little effort, that challenge can be met.
Getting rich quick can be liberating, but it can also be frustrating. Sudden wealth can help you address retirement saving or college funding anxieties, and it may also give you the opportunity to live and work on your terms. On the other hand, you’ll pay more taxes, attract more attention, and maybe even contend with jealousy or envy. You may also deal with grief or stress, as a lump sum may be linked to a death, a divorce, or a pension payout decision.
In this month’s recap: major stock benchmarks descend as trade issues remain front and center in the Wall Street conversation; consumer confidence remains high, while the housing market cools.
If too large a percentage of your portfolio is held in stocks or stock funds, you may shoulder more investment risk than you want. To address that risk, your portfolio holdings can be realigned to respect the original (target) asset allocations.
As an investor and retirement saver, how much will this turmoil matter to you in the long run? Not as much as you may expect. There are many good reasons to remain in the market rather than attempting to intuit or guess when and where big shifts in fortune may arrive.
Taking every step possible to keep your personal information safe will help you lower your risk of identify theft. Here are some items you should not regularly carry with you.
Are you worried about being audited? The fear may be overblown, as only 0.6% of taxpayers had their federal returns examined in 2017 (the most recent information available). Still, no one likes extra stress courtesy of the I.R.S. Let’s look at some red flags that might get you extra I.R.S. scrutiny.
In a recent articlewritten by Warren Buffet, there is wisdom to be shared as he compares our financial plans with a forest.
Your financial plan is comprised of many parts. This would equate to what Buffett calls the “economic trees.” In other words, let’s not get to caught up on any one investment.
“A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty,” Buffett writes.
He won’t get every investment right. Neither will we. Berkshire holds a substantial position in Kraft Heinz (KHC), whose shares recently tumbled after the company delivered poor results and slashed its dividend.
But, if we review the portfolio as we’d view the forest, we find a diversity of trees, wildlife, and plants. It’s a work of beauty. Your portfolio is built from the bottom up. Like the forest it’s very diversified, and it is created with your financial goals in mind.
As Buffett opines (and we agree), “I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”
That said, how did the 19.8% drop in the S&P 500 Index (September peak to Dec 24th trough) sit with you? With your input, we do our best to gauge your tolerance for risk. If you found yourself fretting over the volatility, let’s talk.
On the other hand, if you slept soundly, it would suggest your investment mix in relation to risk is on target. “The whole is greater– considerably greater–than the sum of the parts.” We feel the same way about your financial plan.
Let’s say that you had had theforesight to see the oncoming explosion in the federal deficit, one that is up 40,000% over the last 77 years.
“To ‘protect’ yourself,” Buffett said, “You might have eschewed stocks and opted instead to buy three ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200.” Compare that to the performance of the S&P 500!
What is this nation’s secret sauce? The answer is complex and difficult; yet, the overarching theme lies in front of us.
The experiment called the United States has birthed and attracted the best and the brightest. Freedom and opportunity are its calling cards. Today, we are the wealthiest nation on Earth, and we continue to ride the wave of innovation and enjoy the benefits.
But, is that wave about to crash on the shore?
A recent piece by Morgan Stanley entitled, Millennials, Gen Z and the Coming ‘Youth Boom’ Economy, complements Buffett’s optimistic viewpoint. The population of the Millennials will overtake the Baby Boomers this year, and “Gen Z, born between 1997 and 2012, will overtake the Millennials as the country's largest cohort by 2034,” it said. For the U.S. economy, “The demographic tailwinds created by these high-population cohorts could be significant, delivering the kind of ‘youth jolt’ that the Baby Boomers were famous for.”
Sure, we can’t know when the next recession will ensue or some of the challenges we’ll face as a nation in the coming years. Yet, as Buffett sums up his annual letter, “Over the next 77 years, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky–gloriously lucky–to have that force at our back.”
Bright start to the new year
First, let’s go back to December. A headline in the Street.com summed it up well: "Dow Gains on Last Day of Worst December Since the Depression." Even a 7% bounce in the final week of the year didn’t prevent a performance that was compared to the early 1930s.
When the S&P 500 Index touched its bottom on December 24, the broad-based index of 500 large U.S. companies had shed 19.8% from its September 20 peak. We were barely 0.2 percentage points from officially entering a bear market.
Market turmoil in the fall and December’s action were especially ugly. Steep market corrections are not something we look forward to; they are impossible to consistently predict, but they come with the territory.
As I’ve repeatedly said, your investment plan incorporates the unexpected detours. The disciplined investor, who divorces the emotional component from the investment plan, chooses the best path to meet his or her long-term financial goals.
That said, 2019 has been much better:
A flexible Federal Reserve has taken its finger off the rate-hike button,
The economy continues to expand, albeit the pace has slowed, and
We’ve been treated to headlines saying t he U.S. and China are making progress toward a trade agreement
There are no guarantees a deal will be inked, but a March 4 headline in the Wall Street Journal summed up recent sentiment:
"U.S., China Close In on Trade Deal"
Both countries could lift some tariffs imposed last year, and Beijing would agree to ease restrictions on American products.
A trade deal that pries open Chinese markets to U.S. products and services, protects U.S. intellectual property rights, and ends forced technology transfers (and one with strong enforcement provisions) would not only benefit the U.S. economy, but a deal between the world’s largest economies would sweep away one cloud of uncertainty that has plagued investors.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisory resource.
On March 9, 2009, the Dow Jones Industrial Average closed at 6,547. It marked the bottom of the last bear market. Even with the December 2019 down-turn, on February 28, 2019 the Dow finished the day at 25,916, less than 1,000 points from its prior peak.
The bull market turns ten years old this month. How much life is left in the bull? We are in the latter stages of the cycle, but much will depend on the economic fundamentals going forward. With the Fed on hold, inflation contained, and the economy moving forward, the fundamentals are currently sound. But never discount volatility. Stocks seem to take the stairs up and the elevator down. In the spirit of the celebrating the last ten years, let’s look at a partial list of the worries that temporarily sidelined the bull, but didn’t sideline those with a long-term view:
The European debt crisis...Greece...global growth worries... U.S. growth is slowing... China is slowing... the dollar is too strong...Japan earthquake/tsunami/nuclear disaster... U.S. debt downgrade... fiscal cliff... Obama will be re-elected...Trump will get elected... Hillary will get elected... the Fed will end bond buys... Fed will start hiking interest rates...falling oil prices... Ebola scare... Russia invades Ukraine...North Korea... ISIS... Syria... Brexit... trade tensions... acrimony in D.C.... and stocks have risen too quickly.
Shorter-term risks never completely abate. But Warren Buffett’s message has been consistent. Don’t bet against America.
Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call.
Our new tax law means annual inflation adjustments for more than 60 tax provisions and changes affecting virtually all tax-paying adults in the country—plus the ongoing debate and additional fixes along the way. With tax reform still in the headlines, here is what you need to know about various tax brackets, thresholds, limitations, and exemptions for 2019.
The 2019 Key Financial Data is here. This handy guide will outline tax information for this tax year.
Do you know how the Internal Revenue Service contacts taxpayers to resolve a problem? The first step is almost always to send a letter through the U.S. Postal Service to the taxpayer.
It is very rare for the I.R.S. to make the first contact through a call or a personal visit. This happens in two circumstances: when taxes are notably delinquent or overdue or when the agency feels an audit or criminal investigation is necessary. Furthermore, the I.R.S. does not send initial requests for taxpayer information via email or social media.
Year after year, criminals try to scam certain taxpayers. Year after year, certain taxpayers resort to schemes in an effort to put one over on the Internal Revenue Service (I.R.S.). These cons occur year-round, not just during tax season. In response to their frequency, the I.R.S. has listed the 12 biggest offenses – scams that you should recognize, schemes that warrant penalties and/or punishment.
When rich families squabble over the family legacy, it becomes headline news. Witness the recent battle over the ownership of the Wall Street Journal between members of the Bancroft family. When approached by media titan Rupert Murdoch, various family members fought over whether to preserve the family legacy at the legendary daily business paper or take the money and run. Money eventually won.
For most average Americans, such stories are an illustration not only of how money doesn’t buy happiness, but how it breeds dissention and distance between people who could be enjoying their wealth and moving in concert. With all that money, how can people be so unhappy and contentious?
Families with substantial assets – or the promise of substantial assets as a business grows – might consider creating a family mission statement. While the end product should produce a document built from discussion, argument and consensus, it’s not so much about the piece of paper as the process. When a family sits down to discuss what is really important to them, it’s an opportunity to take the machine apart and see how it works. Many families start the process as a way to build consensus about long-term financial, business, estate and philanthropic goals, but to their surprise, money can take a back seat. Families discover particular strengths, weaknesses and unexpected courses of action within their ranks. The process might identify future leaders of the family.
Trained financial advisors, such as Certified Financial Planner ™ professionals, can explain and guide the process. Some planners may be trained to facilitate such discussion based on the size and goals of the family involved.
The general creation of a family financial mission statement should have four key touchpoints: estate issues, philanthropy, business direction and family dynamics.
Here are some questions that should be asked of everyone in preparing the family’s financial mission statement. They should focus on relationship issues first, and then move into business and money matters.
• What’s most important about our family?
• What do you think our goals should be?
• When do you feel most connected to the rest of us?
• How should we relate to one another?
• What are our strengths as a family?
• Where do you think we’ll be as individuals in 5, 10 and 15 years?
• In order, what are the five things you value most in life?
• How should we behave toward each other?
• How should we resolve our disputes?
• How important is the family business to you?
• What should we be doing differently with our family money as well as our assets inside the business?
• What’s the best way for us to be building our wealth?
• What do you think the role of our family should be in helping the community?
• What should we be doing individually and as a family with regard to philanthropy?
Structurally, the written mission statement can be whatever you agree it should be – a few paragraphs or a page or two. And it needn’t be set in stone – a family should have a meeting every year or two to revise or approve its mission. The family mission statement helps your family establish its identity and the variety of voices within. It can help set goals and diffuse tensions later. It can also be used to moderate discussions that inevitably happen after major changes within the family – death, divorce or happily, an increase in the number of heirs and participants.
As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. It’s actually a good idea to bring young members into a customized version of the process for youngsters so they can comfortably adjust to working as adults with the older members of the family.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Angel McCall, CFP, a local member of FPA.
Your parents might have mentioned at least a couple of times while you were growing up how wonderful and expensive you were. The bottom line? Bringing a child up is a tremendous financial responsibility, and it’s better to plan in advance than deal with a surprise down the line.
A lot is being written about how much money Americans can withdraw from their investments to fund their retirement years. Now, a new research institute launched by Fidelity Investments has outlined the order in which money should be withdrawn from various tax-deferred and taxable investment accounts. Described as the ‘withdrawal hierarchy,’ the Fidelity Research Institute suggests the order, with modifications made courtesy of other financial planning experts.
Measuring and comparing investment performance is not an easy task. Consider, for instance, something as simple as the daily comings and going of the stock market. One month the Dow Jones industrial average (DJIA) is up and the next month it’s down. But do those changes really tell the whole story?
Risk tolerance is an important part of investing – everyone knows that. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will inform every decision you make about it in the future.