Blog Page 2 of 5 - True North Financial Planning
Choosing Among Retirement Plan Contribution Types
Greetings to all, as we move closer to the end of what has been a challenging year. I hope this email finds you well.
An important set of decisions regarding saving for retirement is which type of retirement plan to contribute to, how much to contribute, and whether to contribute with pre-tax or after-tax funds. As with many financial planning decisions, the answer can vary depending on your situation.
The article below points out some important considerations and guidance on this topic. It is important to periodically re-visit whatever decisions you make, usually at least once a year or more often if your situation changes significantly. A good time for many people to do this is later in the year when deciding on other employer or business benefits for the next year, such as health and other insurance coverages (e.g., life, disability).
Note that planning tips and other info are now posted on my website, http://www.
Best wishes for a peaceful and safe holiday season.
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Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, penalty-free withdrawals of up to $100,000 will be allowed in 2020 for qualified individuals affected by COVID-19. Individuals will be able to spread the associated income over three years for income tax purposes and will have up to three years to reinvest withdrawn amounts.
Could a Health Savings Account Help Strengthen Your Retirement Plan?
Greetings and happy holidays to all! It seems hard to believe that a new year, and decade, are almost upon us.
One of the annual rituals this time of year for many is selecting health insurance coverage for the next year, during a period of time referred to as “open enrollment”. As health care costs continue to increase, paying for health care is an increasing concern for many, both before retirement and in retirement. One approach to mitigating high health care costs is to fund a health savings account. HSAs are one of my favorite financial planning tools. As noted in the article below, HSAs offer triple tax benefits that are not available with other savings vehicles, and HSA funds can be used to fund current health expenses, or invested to fund health care costs later in life.
As the article points out, there are some limitations as to who is able to fund an HSA, but if you do qualify, an HSA is well worth considering.
Best wishes to everyone for a holiday season filled with peace and joy, and for an abundant 2020!
Tom
December 08, 2019In a 2019 Gallup poll, 25% of Americans age 50 to 64, and 23% of those age 65 and older, said health-care costs were their top financial concern. Could a Health Savings Account Help Strengthen Your Retirement Plan?By one estimate, a 65-year-old couple who retire in 2019 may need about $300,000 in savings to pay their health-care expenses in retirement. This includes premiums for Medicare Parts B and D, supplemental (Medigap) insurance, and median out-of-pocket prescription drug expenses, but not other health expenses such as long-term care, dental care, and eye care.1 Health expenses are rising faster than inflation, and even insured workers are finding it harder to pay their portion from year to year (premiums, copays, coinsurance, and deductibles), much less plan for the future. The stakes are even higher for early retirees (younger than 65) and self-employed individuals who must purchase their own health insurance and bear the entire cost themselves. A health savings account (HSA) is a tax-advantaged account linked with a high-deductible health plan (HDHP). They work together to help you cover your current health-care costs and also save for your future needs. Tax trifecta HSAs offer several tax benefits to help encourage diligent saving. Pre-tax contributions can often be made through an employer via payroll deduction, or you can make contributions yourself and take a tax deduction whether you itemize or not. Either way, HSA contributions reduce your adjusted gross income and federal income tax for the current year. Any interest or investment earnings compound on a tax-deferred basis inside the HSA. Withdrawals are tax-free if the money is spent on qualified medical expenses. When HSA money is spent on anything other than qualified medical expenses, withdrawals are taxed as ordinary income, and an onerous 20% penalty applies to taxpayers under age 65. Depending on your state, HSA contributions and earnings may or may not be subject to state taxes. Contribution rules The maximum HSA contribution limit in 2020 is $3,550 for individual coverage or $7,100 for family coverage. This annual limit applies to all contributions, including those made by you, your family members, or your employer. You can contribute an additional $1,000 starting the year you turn 55. Once you sign up for Medicare, you can no longer contribute to an HSA. Funds roll over from year to year and are portable, which means they are yours to keep. When HSA balances reach a certain threshold, you can steer the funds into a paired account with investment options similar to those offered in a 401(k). You can make 2019 contributions up to April 15, 2020. Pros and cons HDHPs are designed to help control health costs. HSA owners are forced to pay attention to prices, so they may select lower-cost providers and be more likely to avoid unnecessary spending. On the other hand, some people with HDHPs might be reluctant to seek care when they need it, because they don’t want to spend the money in their account. A high deductible can make it difficult to pay for a costly medical procedure, especially if there hasn’t been much time to build up an HSA balance. To be eligible to establish or contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan — an HDHP with a deductible of at least $1,400 for individuals, $2,800 for families in 2020. Workers who are offered HDHPs (as a choice or their only option) or purchase their own insurance often face much higher deductibles. In 2019, the average deductible for employer-provided HDHPs was $2,486 for individual coverage and $4,779 for family coverage.2 Qualifying HDHPs also have out-of-pocket maximums, above which the insurer pays all costs. In 2020, the upper limit is $6,900 for individual coverage or $13,800 for family coverage, but plans may have lower caps. This feature could help you budget accordingly for a worst-case scenario. Premiums are typically lower for HDHPs than traditional health plans. Until the deductible is satisfied, members usually pay more up-front for services such as physician visits, surgery, and prescriptions, but typically receive the insurer’s negotiated discounts. Some preventive care, such as routine physicals and cancer screenings, may be covered without being subject to the deductible. Under new IRS guidance issued in July 2019, the list of preventive care benefits that HDHPs may provide was expanded to include certain medications and treatments for chronic illnesses such as asthma, diabetes, depression, heart disease, and kidney disease. Providing this coverage encourages patients to seek care before problems become more serious and costly. Retirement strategy Another HSA benefit is that account funds not needed for health expenses are available for any other purpose after you reach age 65. Although HSA funds cannot be used to pay regular health plan premiums, they can be used for Medicare premiums and qualified long-term care insurance premiums and services that you may need later in life. If you can afford to fund your HSA generously while working, some of those dollars could be left untouched to accumulate for many years. You could even pay current medical expenses out of pocket and preserve your HSA assets for use during retirement. But save your receipts in case you have an unexpected cash crunch. You can reimburse yourself for eligible expenses at any time. Compare carefully Open enrollment is the time of year when employers typically introduce changes to their benefit offerings. If you purchase your own health insurance, you might also be presented with new options for 2020. The bottom line is that choosing and using your health plan carefully could help you save money. If you choose an HDHP, make sure to contribute the premium dollars you are saving to your HSA, and more if you can. Before you sign up for a specific plan, read the policy information and look closely for any coverage gaps or policy exclusions, consider the extent to which your prescription drugs are covered, estimate your potential out-of-pocket costs based on last year’s usage, and check to see whether your doctors are in the insurer’s network. 1) Employee Benefit Research Institute, 2019 2) Kaiser Family Foundation, 2019 |
Data Breaches: Tips for Protecting Your Identity and Your Money
A data breach is an incident in which private, personal information is exposed, viewed without authorization, or stolen.
Data Breaches: Tips for Protecting Your Identity and Your Money
Large-scale data breaches are in the news again, but that’s hardly surprising. Breaches have become more frequent — a byproduct of living in an increasingly digital world. During the first six months of 2019, the Identity Theft Resource Center (ITRC), a nonprofit organization whose mission includes broadening public awareness of data breaches and identity theft, had already tracked 713 data breaches, with more than 39 million records exposed.1 Once a breach has occurred, the “aftershocks” can last for years as cyberthieves exploit stolen information. Here are some ways to help protect yourself.
Get the facts
Most states have enacted legislation requiring notification of data breaches involving personal information. However, requirements vary. If you are notified that your personal information has been compromised as the result of a data breach, read through the notification carefully. Make sure you understand what information was exposed or stolen. Basic information like your name or address being exposed is troubling enough, but extremely sensitive data such as financial account numbers and Social Security numbers is significantly more concerning. Also, understand what the company is doing to deal with the issue and how you can take advantage of any assistance being offered (for example, free credit monitoring).
Even if you don’t receive a notification that your data has been compromised, take precautions.
Be vigilant
Although you can’t stop wide-scale data breaches, you can take steps to protect yourself. If there’s even a chance that some of your personal information may have been exposed, make these precautions a priority.
• Change and strengthen passwords. Create strong passwords, at least 8 characters long, using a combination of lower- and upper-case letters, numbers, and symbols, and don’t use the same password for multiple accounts.
• Consider using two-step authentication when available. Two-step authentication, which may involve using a text or email code in addition to your password, provides an extra layer of protection.
• Monitor your accounts. Notify your financial institution immediately if you see any suspicious activity. Early notification not only can stop a potential thief but may help limit any financial liability.
• Check your credit reports periodically. You’re entitled to a free copy of your credit report from each of the three national credit reporting agencies every 12 months. You can get additional information and request your credit reports at annualcreditreport.com.
• Consider signing up for a credit monitoring service. It’s not uncommon for a company that has suffered a data breach to provide free access to a credit monitoring service. As the name implies, this service tracks your credit files and alerts you to changes in activity, such as new accounts being opened or an address change.
• Minimize information sharing. Beware of any requests for information, whether received in an email, a letter, or a phone call. Criminals may try to leverage stolen information to trick you into providing even more valuable data. Never provide your Social Security number without being absolutely certain who you are dealing with and why the information is needed.
Fraud alerts and credit freezes
If you suspect that you’re a victim of identity theft or fraud, consider a fraud alert or credit freeze.
A fraud alert requires creditors to take extra steps to verify your identity before extending any existing credit or issuing new credit in your name. To request a fraud alert, you have to contact one of the three major credit reporting bureaus. Once you have placed a fraud alert on your credit report with one of the bureaus, your fraud alert request will be passed along to the two remaining bureaus.
A credit freeze prevents new credit and accounts from being opened in your name. Once you obtain a credit freeze, creditors won’t be allowed to access your credit report and therefore cannot offer new credit. This helps prevent identity thieves from applying for credit or opening fraudulent accounts in your name.
To place a credit freeze on your credit report, you must contact each credit reporting bureau separately. Keep in mind that a credit freeze is permanent and stays on your credit report until you unfreeze it. If you want to apply for credit with a new financial institution in the future, open a new bank account, apply for a job, or rent an apartment, you’ll need to “unlock” or “thaw” the credit freeze with all three credit reporting bureaus. Each credit bureau has its own authentication process for unlocking the freeze.
Recovery plans
The Federal Trade Commission has an online tool that enables you to report identity theft and to actually generate a personal recovery plan. Once your personal recovery plan is prepared, you’ll be able to implement the plan using forms and letters that are created just for you. You’ll also be able to track your progress. For more information, visit identitytheft.gov.
1 Identity Theft Resource Center, Data Breach Reports, June 30, 2019
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IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Advisor Solutions Copyright 2019.
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Five Questions about Long-Term Care
Greetings to all, and happy summer!
As the baby boom generation ages – about 10,000 people per day in the U.S. turn 65 – long-term care considerations are receiving more attention in the media, and with good reason. Many people do not adequately consider long-term care as part of their planning. Too often long-term care needs are not addressed until there is a long-term care event, when decisions must be made quickly and under pressure. It is important for everyone, together with family members, to develop a personalized long-term care plan well in advance of retirement age. This is one area of planning in particular where some advance planning can avoid, or mitigate, difficult (and often costly) situations later.
See below for some helpful guidance to help get you started with long-term care planning.
It may also be helpful to reference my August 2018 blog post on picking a financial caretaker.
Long-term care is not just provided in nursing homes–in fact, the most common type of long-term care is home-based care.
Understandably, many people put off planning for long-term care. But although it’s hard to face the fact that health problems may someday result in a loss of independence, if you begin planning now, you’ll have more options open to you in the future.
Five Questions about Long-Term Care
- What is long-term care?
Long-term care refers to the ongoing services and support needed by people who have chronic health conditions or disabilities. There are three levels of long-term care:
• Skilled care: Generally round-the-clock care that’s given by professional health care providers such as nurses, therapists, or aides under a doctor’s supervision.
• Intermediate care: Also provided by professional health care providers but on a less frequent basis than skilled care.
• Custodial care: Personal care that’s often given by family caregivers, nurses’ aides, or home health workers who provide assistance with what are called “activities of daily living” such as bathing, eating, and dressing.
Long-term care is not just provided in nursing homes–in fact, the most common type of long-term care is home-based care. Long-term care services may also be provided in a variety of other settings, such as assisted living facilities and adult day care centers. - Why is it important to plan for long-term care?
No one expects to need long-term care, but it’s important to plan for it nonetheless. Here are two important reasons why:
The odds of needing long-term care are high:
• Approximately 52% of people will need long-term care at some point during their lifetimes after reaching age 65*
• Approximately 8% of people between ages 40 and 50 will have a disability that may require long-term care services*
U.S. Department of Health and Human Services, November 14, 2017 The cost of long-term care can be expensive: For many, the cost of long-term care can be expensive, absorbing income and depleting savings. Some of the average costs in the United States for long-term care include:
• $6,844 per month, or $82,128 per year for a semi-private room in a nursing home
• $7,698 per month, or $92,376 per year for a private room in a nursing home
• $3,628 per month for a one-bedroom unit in an assisted living facility
• $68 per day for services in an adult day health-care center
*U.S. Department of Health and Human Services, October10, 2017 - Doesn’t Medicare pay for long-term care?
Many people mistakenly believe that Medicare, the federal health insurance program for older Americans, will pay for long-term care. But Medicare provides only limited coverage for long-term care services such as skilled nursing care or physical therapy. And although Medicare provides some home health care benefits, it doesn’t cover custodial care, the type of care older individuals most often need.
Medicaid, which is often confused with Medicare, is the joint federal-state program that two-thirds of nursing home residents currently rely on to pay some of their long-term care expenses. But to qualify for Medicaid, you must have limited income and assets, and although Medicaid generally covers nursing home care, it provides only limited coverage for home health care in certain states. - Can’t I pay for care out of pocket?
The major advantage to using income, savings, investments, and assets (such as your home) to pay for long-term care is that you have the most control over where and how you receive care. But because the cost of long-term care is high, you may have trouble affording extended care if you need it. - Should I buy long-term care insurance?
Like other types of insurance, long-term care insurance protects you against a specific financial risk–in this case, the chance that long-term care will cost more than you can afford. In exchange for your premium payments, the insurance company promises to cover part of your future long-term care costs. Long-term care insurance can help you preserve your assets and guarantee that you’ll have access to a range of care options. However, it can be expensive, so before you purchase a policy, make sure you can afford the premiums both now and in the future.
The cost of a long-term care policy depends primarily on your age (in general, the younger you are when you purchase a policy, the lower your premium will be), but it also depends on the benefits you choose. If you decide to purchase long-term care insurance, here are some of the key features to consider:
• Benefit amount: The daily benefit amount is the maximum your policy will pay for your care each day, and generally ranges from $50 to $350 or more.
• Benefit period: The length of time your policy will pay benefits (e.g., 2 years, 4 years, lifetime).
• Elimination period: The number of days you must pay for your own care before the policy begins paying benefits (e.g., 20 days, 90 days).
• Types of facilities included: Many policies cover care in a variety of settings including your own home, assisted living facilities, adult day care centers, and nursing homes.
• Inflation protection: With inflation protection, your benefit will increase by a certain percentage each year. It’s an optional feature available at additional cost, but having it will enable your coverage to keep pace with rising prices.
Your insurance agent or a financial professional can help you compare long-term care insurance policies and answer any questions you may have.
Deductions for Long-Term Care Insurance Premiums: 2018 & 2019
________________________________________Age 2018 Limit 2019 Limit
40 or under $420 $420
41-50 $780 $790
51-60 $1,560 $1,580
61-70 $4,160 $4,220
70+ $5,200 $5,270
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IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.
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Buying a Home: How Much Can You Afford?
Spring and summer are prime home buying seasons, and buying a home is the largest purchase most people will ever make. Before making this large investment, it is important to understand how much you can afford. The answer is different for everyone, and depends on a variety of factors. See below for some helpful guidance to help you decide how much home you can afford.
This is also a good opportunity to look at your overall spending, and adjusting spending as needed in order to meet your housing goal, as well as other goals.
| How Much Can You Afford? Introduction An old rule of thumb said that you could afford to buy a house that cost between one and a half and two and a half times your annual salary. In reality, there’s a lot more to take into consideration. You’ll want to know not only how much of a mortgage you qualify for, but also how much you can afford to spend on a home. In order to know how much you can truly afford, you need to take an honest look at your lifestyle and your standard of living, as well as your income and what you choose to spend it on. Getting to the bottom line If you have unlimited resources, you can afford to buy whatever home your heart desires. For most of us, though, that’s not the case. Unless you can afford to buy a house outright, you’ll probably need to get a mortgage to help you pay for it. So, determining how much house you can afford is often a case of determining how much of a mortgage you can afford. Start with some simple math: Take your monthly income and subtract all of your non-housing-related expenses. What you’re left with is the amount per month that you have available to allocate toward housing. Other housing expenses to factor in In determining what you can afford to spend on a home, you should also take into account other housing-related expenses. The total amount of expenses may depend in part on what type of home you buy and where it’s located. Such expenses include: Maintenance costs–everything from weekly rubbish removal to a new roof Utility costs–electricity, heating and/or air-conditioning, gas, water and/or sewer Homeowner association fees or condominium assessment fees Deduct the monthly portion of these expenses from what you estimated your monthly housing allowance to be, and you’re getting close to determining how much of a monthly mortgage payment you can afford. Of course, mortgage lenders have a slightly more sophisticated way of determining how much they think you can afford. Mortgage prequalification and preapproval Consider shopping for your mortgage before you start shopping for your house. Compare the mortgage rates and terms offered by various lenders, and then get preapproved or prequalified with the lender of your choice. That way, you’ll know how much you can spend on a house before you fall in love with one that’s just out of your reach. Make sure you understand the difference between prequalification and preapproval. Prequalification is simply the process of estimating how much money you’ll be able to borrow based on the qualifying ratios appropriate for the type of mortgage you’re considering. Preapproval, on the other hand, means the lender has gone through the underwriting process and verified among other things your income and credit. Once you’re preapproved, you’ll get a letter stating that the lender will give you a mortgage up to a certain amount, provided that certain conditions are met (e.g., the property is appraised for an amount sufficient to cover the mortgage). Preapproval lets you know exactly how large a mortgage you can get. It also gives you more credibility as a buyer, since the preapproval letter lets the seller know that you’ll qualify, financially, for a mortgage if your purchase offer is accepted. Make sure you really can afford it Remember that mortgage lenders can only tell you how much of a mortgage you qualify for, not how much you can afford. If homeowners insurance and property taxes are escrowed with your lender, these expenses will increase your monthly mortgage payment. The payment amount will be even more if you’re required to carry specialty policies such as flood or earthquake insurance in addition to homeowners insurance. And if property taxes are especially high, you may find that you’re unable to afford the home. Tip: Keep in mind that your actual mortgage payment will also depend on your interest rate and the term of the loan. Generally speaking, lower rates of interest and longer terms equal lower monthly mortgage payments. Now might be the time to think about revising your budget. Perhaps you can think of ways to reduce your non-housing-related expenses; doing so will free up money that you can apply toward your housing costs. Also keep in mind any future plans that may affect your budget. Perhaps you’ll need to buy a new car in a few years. If you haven’t already done so, perhaps you’ll be starting a family soon. If you have children, as soon as they’re in kindergarten you’ll need to think about saving for their college expenses. No matter how much of a mortgage a lender tells you that you qualify for, you must always be sure your mortgage payment is not beyond your means. After all, it’s the roof over your head. |
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IMPORTANT
DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. To opt-out of future emails, please click here. |
Test Your Knowledge of Financial Basics
Congress has designated April as National Financial Literacy Month in order to raise awareness about the importance of financial literacy education in the United States. National Financial Literacy Month is the perfect time to focus on your saving, investing, and financial planning goals. It is also a good time to test your knowledge of financial basics. I am including a brief 10 question quiz to help you gauge your knowledge of a few basics. The answers are at the bottom (but I know no one will cheat J). Have fun with this and good luck!
Test Your Knowledge of Financial BasicsHow well do you understand personal finance? The following brief quiz can help you gauge your knowledge of a few basics. In the answer section, you’ll find details to help you learn more. Questions 1) How much should you set aside in liquid, low-risk savings in case of emergencies? a. One to three months worth of expenses b. Three to six months worth of expenses c. Six to 12 months worth of expenses d. It depends 2) Diversification can eliminate risk from your portfolio. a. True b. False 3) Which of the following is a key benefit of a 401(k) plan? a. You can withdraw money at any time for needs such as the purchase of a new car. b. The plan allows you to avoid paying taxes on a portion of your compensation. c. You may be eligible for an employer match, which is essentially getting free money. d. None of the above 4) Some, but not all, of the money in a bank or credit union account is protected. a. True b. False 5) Which of the following is typically the best way to pursue your long-term goals? a. Investing as conservatively as possible to minimize the chance of loss b. Investing equal amounts in stocks, bonds, and cash investments c. Investing 100% of your money in stocks d. Not enough information to decide 6) In debt speak, what does APR stand for? a. Actual percentage rate b. Annual personal rate c. Annual percentage rate d. Actual personal return 7) Mutual funds are the safest types of investments. a. True b. False 8) I have plenty of time to save for retirement. I don’t have to concern myself with that right now. a. True b. False 9) What is/are the benefit(s) of a Roth IRA? a. A Roth IRA can provide tax-free income in retirement. b. Investors can take a tax deduction for their Roth IRA contributions. c. Investors can make tax-free withdrawals after a five-year holding period for any reason. d. All of the above 10) What is considered a good credit score? a. 85 or above b. 500 or above c. B or above d. 700 or above Answers 1) d. Although it’s conventional wisdom to set aside three to six months worth of living expenses in a liquid savings vehicle, such as a bank savings account or money market account, the answer really depends on your own situation. If your (and your spouse’s) job is fairly secure and you have other assets, you may need as little as three months worth of expenses in emergency savings. On the other hand, if you’re a business owner in a volatile industry, you may need as much as a year’s worth or more to carry you through uncertain times. 2) b — False. Diversification is a sound investment strategy that helps you manage risk by spreading your investment dollars among different types of securities and asset classes, but it cannot eliminate risk entirely, and it cannot guarantee a profit. You still run the risk of losing money. 3) c. Many employer-sponsored 401(k) plans offer a matching program, which is akin to receiving free money to invest. If your plan offers a match, you should try to contribute at least enough to take full advantage of it. Some matching programs impose a vesting schedule, which means you will earn the right to the matching contributions and any earnings on those dollars over a period of time. If you selected b as your answer, you’ll note this is a bit of a trick question. Although income taxes are deferred on contributions to traditional 401(k)s, they are not eliminated entirely. You will have to pay taxes on those contributions, and any earnings on them, when you take a distribution from the plan. In addition, distributions taken prior to age 59½ may be subject to a 10% penalty tax. Some exceptions apply. 4) a — True. Deposits in federally insured banks and credit unions are insured by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Share Insurance Fund (NCUSIF), respectively, up to $250,000 per depositor, per ownership category (e.g., single account, joint account, retirement account, trust account), per institution. Neither the FDIC nor the NCUSIF protects against losses in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, nor do they insure items held in safe-deposit boxes or investments in Treasury bills. 5) d. To adequately pursue your long-term goals, you might consult with a financial professional before choosing a strategy. He or she will take into consideration your goals, risk tolerance, and time horizon, among other factors, to put together a strategy that’s appropriate for your needs. 6) c. APR stands for annual percentage rate. This is the rate that credit card, mortgage, and other loan issuers use to show borrowers approximately how much they are paying each year to borrow funds, taking into account all fees and costs. The APR differs from a loan’s stated interest rate, which is typcially lower than the APR because it does not take into account fees and other costs. Borrowers can compare the APRs on different loans to help make smart financial decisions. However, when it comes to mortgages, borrowers should use caution when comparing the APRs of fixed-rate loans and adjustable-rate loans, because APRs do not represent the maximum interest rate the loan may charge. 7) b — False. Mutual funds combine the money of many different investors in a portfolio of securities that’s invested in pursuit of a stated objective. Because of this “diversification,” mutual funds are typically a good way to help manage risk. However, the level of risk inherent in any mutual fund depends on the types of securities it holds. You should always choose a mutual fund carefully to make sure its objective aligns with your own investment goals. Read the fund’s prospectus carefully, as it contains important information about risks, fees, and expenses, as well as details about specific holdings. 8) b — False. Although retirement may be decades away, investing for retirement now is a smart move. That’s because even small amounts–say just $50 per month–can add up through the power of compounding, which is what happens when your returns eventually earn returns themselves. This means your money goes to work for you! 9) a. The primary benefit of a Roth IRA is that it provides tax-free income in retirement. Contributions are subject to income limits and are never tax deductible. Withdrawals may be made after a holding period of five years, provided they are “qualified.” A qualified withdrawal is one made after the account holder dies, becomes disabled, or reaches age 59½, or one in which the account holder withdraws up to $10,000 (lifetime limit) for a first-time home purchase. 10) d. Because different organizations calculate credit scores based on varying factors, there is no single agreed-upon definition of what constitutes a “good” score. Generally, though, a score of 700 or above would likely reflect favorably on someone applying for credit. IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. To opt-out of future emails, please click here. |
The Benefits of Tax-Advantaged Savings Vehicles
Happy spring to everyone! It is nice to finally have some more frequent sunshine and somewhat warmer temperatures.
This month’s edition of Financial Planning Tips focuses on the benefits of tax advantaged savings vehicles. Understanding the tax considerations of different investment vehicles and applying to your situation can make a huge difference in your long-term savings and investment results.
Read on for key information on different types of tax advantaged investment vehicles. It is important to understand which vehicle(s) are the most appropriate for you.
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Investing Basics
I hope the new year is off to a good start for everyone.
This month’s edition of Financial Planning Tips focuses on investing basics. With the recent volatility in the financial markets, many people have become fearful about their investment portfolios and what the future may hold. Here are a few key investing considerations, and below is some additional information and guidance on two important pillars of investing: saving and investing wisely and asset allocation.
Key Considerations
- SPEND LESS THAN YOU EARN and invest the difference!
- Then reinvest until you achieve your goals
- Make this a must in your life; don’t give yourself a choice
- Find the right asset allocation for you, and stick to it!
- Asset allocation matters much more than selection of specific investments
- Keep it simple, and avoid investments with high fees
- Rebalance your portfolio at least once a year
- Resist the temptation to react emotionally to market swings. Research shows that people who allow their investing decisions to be driven by emotion (especially fear) end up with subpar investment returns, as the temptation is to sell when the market is declining, then buy when things turnaround. Often this results in “selling low” and “buying high”, and thus locking in losses. Often a better strategy is to ride out market volatility, and stick to your plan!
See below for additional information/guidance on saving and investing and asset allocation.
Note that planning tips and other info. are now posted on my website, https://truenorthfinancialplanning.com/, under Resources/Blog. Feel free check it out.
Best wishes to all for an abundant new year!
Saving and Investing Wisely
Saving builds a foundation
The first step in investing is to secure a strong financial foundation. Start with these four basic steps:
- Create a “rainy day” reserve: Set aside enough cash to get you through an unexpected period of illness or unemployment–three to six months’ worth of living expenses is generally recommended. Because you may need to use these funds unexpectedly, you’ll generally want to put the cash in a low-risk, liquid investment.
- Pay off your debts: It may make more sense to pay off high-interest-rate debt (for example, credit card debt) before making investments that may have a lower or more uncertain return.
- Get insured: There is no better way to put your extra cash to work for you than by having adequate insurance. It’s your best protection against financial loss, so review your home, auto, health, disability, life, and other policies, and increase your coverage, if needed.
- Max out any tax-deferred retirement plans, such as 401(k)s and IRAs: Putting money in these accounts defers income taxes, which means you’ll have more money to save. Take full advantage if they are available to you.
The impact of 3% yearly inflation on the purchasing power of $200,000
Why invest?
To try to fight inflation
When people say, “I’m not an investor,” it’s often because they worry about the potential for market losses. It’s true that investing involves risk as well as reward, and investing is no guarantee that you’ll beat inflation or even come out ahead. However, there’s also another type of loss to be aware of: the loss of purchasing power over time. During periods of inflation, each dollar you’ve saved will buy less and less as time goes on.
To take advantage of compound interest
Anyone who has a savings account understands the basics of compounding: The funds in your savings account earn interest, and that interest is added to your account balance. The next time interest is calculated, it’s based on the increased value of your account. In effect, you earn interest on your interest. Many people, however, don’t fully appreciate the impact that compounded earnings can have, especially over a long period of time.
Compounding interest
Let’s say you invest $5,000 a year for 30 years (see illustration). After 30 years you will have invested a total of $150,000. Yet, assuming your funds grow at exactly 6% each year, after 30 years you will have over $395,000, because of compounding.
Note: This is a hypothetical example and is not intended to reflect the actual performance of any specific investment. Taxes and investment fees and expenses are not reflected. If they were, the results would be lower. Actual results will vary. Rates of return will vary over time, particularly for long-term investments.
Compounding has a “snowball” effect. The more money that is added to the account, the greater its benefit. Also, the more frequently interest is compounded–for example, monthly instead of annually–the more quickly your savings build. The sooner you start saving or investing, the more time and potential your investments have for growth. In effect, compounding helps you provide for your financial future by doing some of the work for you.
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Year-End Financial Planning
The end of the year presents a unique opportunity to look at your overall personal financial situation. With factors like tax reform, life changes or just working towards your goals, now is an especially important time to review things. Taking what we now know about the new tax law and weaving together all of the other areas of your personal finances is a great way to way to start a review. Below are some helpful things to consider and take action on, as appropriate, before the year ends.
Best wishes to everyone for a holiday season filled with peace and joy.
Income Tax Planning –Ensure you are implementing tax reduction strategies like maximizing your retirement plan contributions, tax loss harvesting in portfolios and making charitable contributions can all help reduce current and future tax bills. It is also good to review your current year tax projection based on your income and deductions year to date and how that may be different from before.
Estate Planning – Examine a flowchart of your current estate plan to visualize what would happen to each of your assets and how the current estate tax law will impact you. Be sure that your estate planning documents are up to date – not just your will, but also your power of attorney, health care documents, and any trust agreements – and that the beneficiary designations are in line with your desires. If you have recently been through a significant life event such as marriage, divorce or the death of a spouse, this is especially important right now.
Investment Strategy– Recently, we’ve seen increased market volatility and it may feel uncomfortable. Market declines are a natural part of investing, and understanding the importance of maintaining discipline during these times is imperative. Regular portfolio rebalancing will allow you to maintain the appropriate amount of risk in your portfolio. And, if you are retired and living off your portfolio, you also want to maintain an appropriate cash reserve to cover living expenses for a certain period of time so that you do not have to sell equities in a down market.
Charitable Giving – There are many ways to be tax efficient when making charitable gifts. For example, donating appreciated stock could make sense in order to avoid paying capital gains taxes. Further, you may want to consider bunching charitable deductions by deferring donations to next year or making your planned 2019 donations ahead of time. If the numbers are large enough, you might even consider a private foundation or donor advised fund for your charitable giving.
Retirement Planning –Think about your future when working becomes optional. Whether you expect a typical full retirement or a career change to something different, determining an appropriate balance between spending and saving, both now and in the future is important. There are many options available for saving for retirement, and we can help you understand which option is best for you.
Cash Flow Planning – Review your 2018 spending and plan ahead for next year. Understanding your cash flow needs is an important aspect of determining if you have sufficient assets to meet your goals. If you are retired, it is particularly important to maintain a tax efficient withdrawal strategy to cover your spending needs. If you have not yet reached age 70.5, it is prudent to ensure you are making tax-efficient withdrawal decisions. If you are over age 70.5 make sure you are taking your required minimum distributions because the penalties are significant if you don’t.
Risk Management – It is always a good idea to periodically review your insurance coverages in various areas. Recent catastrophic events like hurricanes serve as a powerful reminder to make sure your property insurance coverage is right for your needs. If you are in a Federal disaster area, there are additional steps necessary to recover what you can and explore the tax treatment of casualty losses. Other areas of risk management that may need to be revisited include life and disability insurance.
Education Funding – Funding education costs for children or grandchildren is important to many people. While the increase in college costs have slowed some lately, this is still a major expense for most families. It is important to know the many different ways you can save for education to determine the optimal strategy. Often, funding a 529 plan comes with tax benefits, so making contributions before the end of the year is key. With the added flexibility of funding k-12 years (set at a $10,000 limit), 529 accounts become even more advantageous.
Elder Planning – There are many financial planning elements to consider as you age, and it is important to consider these things before it’s too late. Having a plan in place for who will handle your financial affairs should you suffer cognitive decline is critical. Making sure your spouse and/or family understands your plans will help reduce future family conflicts and ensure your wishes are considered.
The decisions you make each year with your personal finances will have a lasting impact. I hope these suggestions have begun to generate some insight to areas of your personal finances that need attention. Please contact me if you would like to discuss your year-end planning, or any other aspects of your financial planning.
The information presented here is not specific to any individual’s personal circumstances, and does not constitute investment, tax, legal, or retirement advice or recommendations.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
The Benefits of Donating Appreciated Investments
I am honored to be featured in the latest issue of the University of Vermont quarterly alumni magazine, Vermont Quarterly, in a piece about the benefits of donating appreciated stock and other investments. See link below to the piece.
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