Author: Gene Gard

Build Your Wealth

Post author By Gene Gard
Post date February 14, 2024

With inflation on the rise, interest rates at recent historical highs, and income stagnation in many industries, it may seem impossible to create an investment portfolio and become a millionaire in today’s economy. Here we highlight five myths about millionaires to help you separate fact from fiction.

Myth #1 – Millionaires inherit their wealth.
Many people view all millionaires as trust fund babies born into a life of luxury. However, a recent survey found that 79 percent of millionaires didn’t receive any type of inheritance. In fact, the only characteristics shared by most millionaires are determination and work ethic.
Truth – Most millionaires come from families with average or below-average income and built their wealth independently.

Myth #2 – It’s easy to spot a millionaire.
If your mind produces an image of millionaires living in big houses, driving fancy cars, and vacationing in exotic locations, you may be surprised to learn that most millionaires live relatively modest lifestyles. Consider the following data points:

The most popular car brands among millionaires are Toyota, Honda, and Ford, with nearly 61 percent of millionaires driving one of the three.
The average American millionaire spends $117 per month on clothes, while the average American (across all income levels) spends $161 per month on clothes.
The average American millionaire spends less than $200 per month at restaurants, while the average American spends $303.25 per month eating out.
93 percent of millionaires use coupons some of the time when shopping.

The fact is that most millionaires don’t look wealthy. Millionaires tend to live comfortably within their means and avoid taking on unnecessary debt. They tend to purchase homes they can afford then work to pay them off early.
Truth – Most millionaires accumulate their wealth through a combination of hard work and smart financial decisions, and their relatively frugal lifestyles can make them difficult to spot.

Myth #3 – You need a high salary to become a millionaire.
When asked, many Americans guess that most millionaires are doctors, senior corporate executives, or business owners because these careers typically offer the highest salaries. In reality, the top five careers held by millionaires include:

Engineer
Teacher
Accountant (CPA)
Manager
Attorney

Are you surprised to see teachers on the list, given that they’re notoriously underpaid? Their inclusion shows a high salary doesn’t necessarily equate to financial success. In fact, 69 percent of millionaires averaged less than $100,000 in household income per year, and 33 percent of millionaires never reached a six-figure income throughout their entire careers.
Truth – Millionaires don’t always have high salaries. Even those in lower-paying careers can build wealth over time. Ultimately, one of the greatest indicators of whether you can become a millionaire isn’t how much you earn but rather how much you consistently save.

Myth #4 – Millionaires have degrees from prestigious universities.
While it’s true 88 percent of millionaires hold a bachelor’s degree, 62 percent of them obtained their degrees from public state universities — and one out of 10 millionaires never obtained a college degree. Only 8 percent of surveyed millionaires attended Ivy League schools.
Truth – Education is important, but the degree matters more than where it’s from.

Myth #5 – Millionaires are savvy investors who know how to manage their finances.
Most millionaires understand they don’t know what they don’t know. They tend to spend a lot of time reading and learning about how they can reach their financial goals. Very few attempt to save and invest on their own. In fact, 68 percent of millionaires work with a financial advisor, and most began doing so before they achieved millionaire status.
Truth – You don’t need to manage your finances on your own. A qualified fiduciary wealth advisor can help you make smart financial decisions and build your wealth over time.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Tags Finance, invest, millionaire, Wealth, who wants to be a millionaire in THIS economy

News News Feature

Explaining the Tax Relief Act

Post author By Gene Gard
Post date February 7, 2024

The Tax Relif act means there are some changes in store. (Photo: Kelly Sikkema | Unsplash)

The Tax Relief for American Families and Workers Act of 2024 was passed by the House of Representatives on January 31, 2024, by a 357-70 vote. It now heads to the Senate where it faces an uncertain future. Although the bill hasn’t become law yet, it’s important to be aware of the potential changes, outlined below.

Child Tax Credit

The refundable portion of the credit would be increased over a three-year period (2023, 2024, and 2025). For 2023, the maximum refundable portion would be increased from $1,600 per child to $1,800. In 2024, it would increase to $1,900 and then in 2025 it would be $2,000. The calculation of the refundable credit would change in 2023, 2024, and 2025.

Research and Experimental Expenditures

The bill would allow taxpayers to deduct currently (rather than capitalize and amortize) domestic research and experimental costs that are paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026. Foreign costs would continue to be capitalized and amortized over a 15-year period.

The bill doesn’t provide any commentary related to claiming the deduction in a tax year for which a return has already been filed. We’re not sure if this will mean amended returns for 2022 will need to be filed or if there will be a way to claim the deduction on a subsequent year’s return.

100 Percent Bonus Depreciation

The bill would extend 100 percent bonus depreciation for property placed in service after December 31, 2022, and before January 1, 2026 (January 1, 2027, for longer production period property and certain aircraft). The 20 percent and 0 percent rates would continue to apply to property placed in service in 2026 and 2027.

Increased Code Sec. 179 Deduction

The bill would increase the amount of the Sec. 179 deduction to $1.29 million in 2024 and increase the beginning phase-out amount to $3.22 million. These amounts would be indexed for inflation for taxable years beginning after 2024.

Business Interest Expense Limitation

The bill would make the limitation on business interest expense deduction less severe. Prior to 2022, when companies computed adjusted taxable income for the purposes of seeing whether their interest expense deduction was limited, they were allowed to add back depreciation, amortization, and depletion expense. This add back was taken away in 2022, making adjusted taxable income smaller and therefore making it more difficult to deduct the full amount of interest expense paid or incurred.

Disaster-Related Tax Relief

The bill would eliminate the requirement that casualty losses must exceed 10 percent of adjusted gross income (AGI) to qualify for the deduction. Each separate casualty would still be subject to a $500 floor. The casualty loss would be able to be taken even if taxpayers don’t itemize their deductions, meaning they would be allowed to claim the casualty loss in addition to the standard deduction. The bill would extend the relief to apply to any federally declared disaster during the period beginning on January 1, 2020, and ending 60 days after the date of the enactment of this bill.

Employee Retention Credit (ERC)

The period for filing ERC claims for both 2020 and 2021 would end as of January 31, 2024. Even if the bill is signed into law after January 31, 2024, the January 31st deadline will likely apply retroactively.

It would also increase the penalty on any “COVID-ERTC promoter” who “knows or has reason to know that an understatement of the tax liability of another person would result from the use of his aid, assistance, or advice.” The penalty would increase from the current $1,000 to “the greater of $200,000 ($10,000 in the case of a natural person) or 75 percent of the gross income of the ERTC promoter derived (or to be derived) from providing aid, assistance, or advice with respect to a return or claim for the credit refund or a document relating to the return or claim.

Tags Finance, Tax Relief for American Families and Workers Act

News News Feature

Is a 401(k) Loan Right for You?

Post author By Gene Gard
Post date January 31, 2024

More retirement plan participants are taking loans from their retirement accounts, and they’re borrowing larger sums of money than in the past. According to data provided by Empower, a retirement plan administrator to 5.3 million accounts, 2.6 percent of participants (approximately 138,000 people) took a loan from their employer-sponsored plan during the third quarter of 2023. This is up from 2.3 percent in the third quarter of 2022 and 1.7 percent in 2020.

Fidelity, the nation’s largest retirement plan administrator, saw a similar increase, with 2.8 percent (641,000 people) requesting loans in the third quarter of 2023, up from 2.4 percent in that quarter of 2022.

The average loan has also increased in recent years. In a survey conducted by Plan Sponsor Council of America, the average 401(k) loan in 2022 was $15,000, up from $10,000 to $11,000 between 2018 and 2021. As of June 2023, the average outstanding loan balance is $8,550.

The popularity of 401(k) loans may be partly due to the fact that 70 percent of retirement plan participants report they don’t have enough in emergency savings to cover six months of expenses. So, it may be that participants are using these loans to pay for unexpected costs.

In the event of a financial crunch, many consider borrowing from their 401(k) because it could be faster and cheaper than other types of credit. However, despite their popularity, 401(k) loans can be highly detrimental to your long-term financial security. Following are five reasons to avoid borrowing from your employer-sponsored retirement account if possible.

1. Long-term savings impact

Perhaps the biggest downside to taking a loan from your 401(k) is that you’ll have less saved for retirement. Taking money from your retirement savings can significantly impact your savings potential over time.

2. Opportunity cost

One of the most significant advantages of contributing to a retirement account is the opportunity for tax-deferred growth and compounding interest. You miss out on this growth opportunity when you remove assets from the account. Even a small loan can significantly impact your long-term savings when accounting for this missed growth opportunity.

3. Double taxation

Contributions to employer-sponsored retirement plans are typically made with pre-tax dollars. You’re then taxed on your assets when you withdraw them in retirement. However, 401(k) loan repayments are made with after-tax money, meaning you need to earn more than you borrowed to repay your loan. In addition, your repayment amount will still be treated as a pre-tax source of income when you withdraw funds in retirement. That means you are paying taxes twice on any loan amount you repay to the plan.

For example, suppose you fall into the 24 percent tax bracket and take a loan from your pre-tax retirement plan. Every dollar you earn to repay your loan is taxed at 24 percent, meaning each dollar is worth only $0.76 after taxes. In order to make your retirement account whole again, you’ll end up paying 24 percent more than what you borrowed (not including interest).

In addition, you don’t get credit for having paid taxes on the loan repayment amount. When you withdraw the funds in retirement, they’re taxed again as ordinary income. If you remain in the 24 percent tax bracket, each dollar you withdraw from the loan repayment is again worth only $0.76. That’s a hefty tax consequence!

4. Missed contributions

Some retirement plans prohibit participants from making regular deferrals while they have an outstanding loan balance. Not only does this restrict the amount you can set aside in retirement savings, but it may also make you ineligible for employer matching contributions. That’s a double hit to your long-term savings.

5. Repayment requirements

If you leave your job for any reason, you’ll have 60 days or until the date you file your next tax return to pay off your outstanding loan balance. If you fail to do so, your outstanding loan balance becomes a taxable distribution subject to ordinary income taxes as well as a potential 10 percent early withdrawal penalty if you haven’t yet reached age 59½. This is another reason to avoid 401(k) loans because if something unexpected occurs you could face these significant taxes and penalties.

Tags 401(k), 401(k) loan, Finance, loan

News News Feature

Business Budgeting 101

Post author By Gene Gard
Post date January 24, 2024

Does your business use a budget? Having a budget may seem like a no-brainer, but you’d be surprised how many businesses don’t use one. Without a budget, it’s difficult to have a clear understanding of your financials and overall performance. If your business has struggled with budgeting and isn’t sure where to begin, you’re not alone. Make today the start of your budgeting journey with these simple steps.

Decide Your Budgeting Tool

To start a budget, all you really need to do is get it on paper, literally. Drafting a budget on a piece of paper is a great start if that’s what’s comfortable to you. Most beginners opt for a tool such as Excel to house their budget. Excel is a solid tool with templates and formulas that make it relatively easy to track and update expenses.

As you get more experienced with your budget, you may want to consider more robust budgeting tools, like Jirav, that offer a deeper analysis of your financial metrics and advanced reporting capabilities. The same applies if your business has rapidly grown or has plans for expanding — you may find that a simple spreadsheet is no longer sufficient and could be holding your business back.

Align Your Budget With Your Goals

Budget numbers shouldn’t be pulled out of thin air. They should always be a reflection of your business’s upcoming goals and priorities for a set time frame, such as quarterly or yearly. Whether you’re aiming to upgrade certain systems or want to add head count to a few teams, your budget should account for the top areas you want to invest in.

It’s also crucial to get other departments involved, depending on the size of your business. Each team will most likely have their own budget to follow, so it’s important to make sure everyone’s plans align with the overall vision and direction of the company.

Don’t Let Your Budget Become Stale

A great way to start your initial budget is by reporting on your financials from the previous year and using that as the basis. Be cautious though: Many businesses fall into a rut of using their previous year’s financials as the baseline of their budget each year without looking for ways to improve it. Once you’ve gotten more comfortable with budgeting, it’s recommended to further analyze the trends you see in your budget and explore new reporting metrics to optimize its impact on your business.

There are countless insights in a budget for businesses to tap into to shape their strategy. If an area is severely overspending, that may signify deeper performance issues or inefficiencies that need to be addressed. The reverse may be true for areas that underspend. Eventually, you may choose to set up your budget to track revenue by a team or employee and use that data to determine how to allocate future funds. No matter where you decide to focus your attention within your budget, it should be reviewed and adjusted every year to meet the changing needs of your business.

One of the most challenging aspects of budgeting is simply getting started. Whether you opt to use a basic program like Excel, a robust software option, or even the back of a napkin, a budget is only useful if you put effort into it.

Tags budget, Finance

News News Feature

New Year, New Financial Goals

Post author By Gene Gard
Post date January 17, 2024

Are you starting the year off with fresh financial goals? Great! Recommitting to your finances by focusing on your goals is a great way to enter the new year. We believe one of the best ways to ensure progress toward your goals is by considering how they impact each part of your financial plan and making updates to accommodate them.

Account for life events.

One of the most important reasons to continually update your financial plan is to ensure it continues to meet your needs as your life evolves over time. Any time you experience a major life change, such as a marriage, divorce, new baby, death of a loved one, new job, etc., make sure that change is accounted for across all aspects of your financial plan.

Update your goals.

Your goals may not be the same today as they were a year ago. Maybe you successfully saved for a down payment on a home and made a purchase. Perhaps your son graduated college and you no longer need to plan for that expense. Maybe you injured yourself skiing and decided that purchasing a ski condo is no longer something you wish to pursue. Whatever changes may have occurred in your goals over the last year, be sure to incorporate them into your financial plan.

Minimize your taxes.

Proactive tax planning can lead to significant savings over time, which is why it’s important to regularly check in on your tax planning strategies and ensure you’re taking advantage of all tax planning strategies available to you.

Check in on your investments.

When you established your portfolio’s asset allocation, you carefully chose a mix of investments you believed would give you the best possible chance of achieving your financial goals. If you aren’t regularly reviewing your investments, your allocation can begin to drift away from your targets as some sectors outperform others over time. It’s important to periodically rebalance your portfolio back to your original (or an updated) asset allocation. Rebalancing is the process of selling off outperforming investments and reinvesting in lower-performing assets in order to get back to your target allocation. While this may seem counterintuitive, it prevents your allocation from drifting too far from your target investment ranges. This is an important risk management strategy because it prevents one asset type from dominating your portfolio and exposing you to too much risk.

Plan for retirement.

Planning for retirement is an important goal to focus on at any age. In fact, the younger you start, the better off you’ll be when you’re ready to retire. As you review your financial plan, don’t forget to review progress toward your retirement goals. If your financial situation allows, consider increasing or even maximizing your 401k and/or IRA contributions.

Prepare for emergencies.

If you don’t already have an emergency fund, consider starting one as soon as possible. Generally, you should have at least three to six months’ worth of expenses set aside in a liquid account for emergency use. If you have an emergency fund in place but have recently dipped into it, be sure to focus on building it back up to your ideal level.

Protect your loved ones.

Insurance and estate planning are vital components of any comprehensive financial plan. After all, it’s not enough to simply build your wealth — you must also protect it. Work with your wealth manager to ensure your insurance policies continue to meet your ever-changing financial goals. In addition to standard policies, such as medical, homeowner’s, and auto insurance, your recent life changes may require additional coverage, such as:

• Liability insurance

• Umbrella insurance

• Disability insurance

• Life insurance

Just like your overall financial plan, your estate plan should also be reviewed on a regular basis to ensure it continues to meet your needs as your life and situation evolve over time.

Tags Finance, Memphis

News News Feature

You Can’t Time the Market

Post author By Gene Gard
Post date January 10, 2024

We’re reprinting this column from October 2021 because it’s always time to resist temptation.

We get a lot of questions about how to buy and sell to take advantage of short-term volatility in the stock market.

These questions usually come up when …

• There has been a sustained period of good performance. (It can’t last, right?)

• There has been a sustained period of bad performance. (Is this going to get worse?)

• The markets have moved up and down a lot. (Don’t choppy markets signal danger?)

Some people are always convinced that a big downturn is just around the corner.

There’s an old joke about gold miners who have an accident and are waiting outside St. Peter’s gate in a long line. An impatient miner in the back shouts, “Gold struck in hell!” and all the miners eagerly run away. Then the impatient miner starts to follow them, much to St. Peter’s surprise. The miner explains, “Well, I guess I’ll go with the gang — there might be some truth to that rumor.”

In the same way, completely rational people — even investment professionals — will try to time markets even though they know better. It’s just too tempting.

I have many conversations like this:

Them: “Will you call me when the market looks like it’s about to go down, so I can sell first?”

Me: “That’s not something we can do. Nobody in the world has ever demonstrated a sustained ability to sell at the top and buy at the bottom. There’s always bad news out there, but markets climb a wall of worry. If you do call a top, it’s even harder to buy back just at the right time because the market bottom will be at the moment of maximum pessimism and you won’t want to get back in.

“You should focus on investing your money consistently over time, believe in the rebalancing process, and not worry about the small perturbations (or even large perturbations) in the markets. You’re in it for the long run. You’ll miss the big upside if you’re in cash waiting for the next big downside.”

Them: “That all completely makes sense and I understand. I’m on board with the plan. But seriously, can you just please call me if the market looks like it’s about to go down?”

Selling at the top is hard, but there is a way to buy lower consistently, and that’s through the magic of a bond allocation and a rebalancing process. The purpose of bonds is not just to produce income. They tend to perform well when stocks stumble (or at least they don’t fall as quickly), so they can provide a source of cash to buy stocks when they’re on sale.

Let’s look at a hypothetical example.

Say you have $100,000 with 80 percent in stocks and 20 percent in bonds. Your stocks decline 10 percent and the bond market is unchanged. Now your portfolio is $72,000 in stocks and $20,000 in bonds, or about 78 percent stocks and 22 percent bonds. If you rebalance back to target, you will sell about $1,600 of your bonds and use the proceeds to buy stocks.

This small transaction might not seem like much, but it adds up in the long term. It’s a real way to buy stocks low(er) without having to worry about timing things perfectly.

Market timing is exhausting and simply doesn’t work, in our experience. Rather than looking for a better market signal, committed market timers probably should look for more bonds to dampen the downside of a market correction and take advantage of that opportunity to buy lower. Even in a world of low expected bond returns, they perform a very important function for risk-averse investors. The time to sell high is in retirement, after a lifetime of compounding through good markets and bad!

Gene Gard, CFA, CFP®, CFT-I™, is a Private Wealth Manager and Partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Tags Finance, Stock Market

News News Feature

The Corporate Transparency Act

Post author By Gene Gard
Post date December 27, 2023

More work for business owners (Photo: Towfiqu barbhuiya| Unsplash)

Because business owners don’t have enough on their plates already, the Corporate Transparency Act (CTA) will add another reporting requirement to keep you all busy. The CTA, which goes into effect on January 1, 2024, will require a wide range of businesses to file a report providing information on their beneficial owners. The requirement is intended to improve transparency in entities and combat money laundering, tax fraud, and other illicit activities.

Who must file?

CTA applies to a wide range of businesses, including:

• Corporations

• Limited liability companies (LLCs)

• Limited partnerships (LPs)

• Limited liability partnerships (LLPs)

• Business trusts

• Certain foreign entities that do business in the United States

What’s reported?

Information regarding each beneficial owner of the business is required to be filed with the Financial Crimes Enforcement Network (FinCEN). A beneficial owner is an individual who, directly or indirectly, either exercises “substantial control” over a business or owns or controls at least 25 percent of the ownership interests of a business. An individual exercises “substantial control” if they satisfy any of the following conditions:

• They serve as a senior officer of the business.

• They have authority over the senior officers or a majority of the board of directors of the business.

• They have the ability to direct the business’ financial transactions.

• They have the ability to exercise veto power over important business decisions.

For each beneficial owner, the following information will be required:

• Full name

• Date of birth

• Current address

• Unique ID number, such as a driver’s license or passport ID, as well as a photo of that document

When is the report due?

If the business is established before the CTA goes into effect in 2024, the first report will be due within a year. If a business is formed once the act is in place, the first report will be required within 30 days.

After the initial report, there’s no annual reporting requirement. However, any changes to the beneficial ownership of a business will require the filing of an updated report with FinCEN within 30 days. That includes a change of address of any owner.

If no report is filed, the CTA establishes criminal and civil penalties. The failure to file penalty is currently set at $500 a day (up to $10,000). These costly penalties make this an item not to ignore!

The CTA will have an impact on many businesses. Being aware of the required reporting will help your business comply with the law while avoiding costly penalties. You also still have time before the end of the year to clean up and close any existing unused LLCs that may have been formed for a potential business endeavor, thereby removing any filing requirement and preventing an unexpected penalty.

Tags Business, Corporate Transparency Act, Finance

News News Feature

Retiring Earlier than Expected

Post author By Gene Gard
Post date December 20, 2023

Preparing for retirement takes deliberate, consistent planning and attention to detail. One important detail is retirement timing, or the age at which you plan to retire. Having an anticipated retirement date allows you to align your savings and investing goals with the year you’ll need to begin withdrawing money. However, many workers discover they must retire earlier than expected. In fact, according to a retirement confidence survey from the Employee Benefit Research Institute, the median American’s retirement age is 62 years old, while workers’ median expected retirement age is 65.

Whether you’re forced to retire early due to health concerns, a job loss, caregiving responsibilities, or just the desire to leave the workforce, leaving your career sooner than expected can impact your retirement plan. Below are seven tips to help you navigate an early retirement.

1. Understand your financial situation.

The first step in retiring earlier than expected is to check in on your financial situation. Evaluate your current savings, investments, and assets. Assess your monthly expenses and budget to gain a clear understanding of your current financial obligations. Determine how much you can reasonably spend each month while still preserving your retirement savings. Your wealth manager can help you assess and understand your current financial situation and any potential challenges you should be aware of.

2. Set clear retirement goals.

The next step is to define your goals. What do you hope your retirement will look like? How will you spend your time? Whom do you wish to support? What will bring you fulfillment? Having a clear vision of your desired retirement lifestyle can help guide your decision-making and allow you to prioritize your spending. Return to these goals often as you navigate the various aspects of your finances.

3. Develop a savings strategy.

Because you’re retiring early, your savings will need to stretch over a longer period of time. If you’re still in the workforce, maximize your savings potential by cutting unnecessary expenses and increasing your contributions to your employer-sponsored retirement account. Depending on your modified adjusted gross income for the year, you may also consider contributing to IRAs or Roth IRAs. Make a goal to save as aggressively as possible during your final years in the workforce. Your wealth manager can help you identify the best account vehicles for your additional savings.

4. Plan for healthcare expenses.

Healthcare costs are often one of the biggest expenses faced by retirees. If you need to retire earlier than expected, it’s important to have a plan in place for paying for healthcare. Explore your options for health insurance coverage, including COBRA, Affordable Care Act (ACA) plans, or private insurance.

5. Evaluate alternative income sources.

Retiring early doesn’t necessarily mean you need to give up all sources of income. Explore opportunities to generate income in retirement, such as freelancing, consulting, part-time work, or starting a side business. Also consider more passive income sources, such as investing in real estate, if the circumstances are right.

6. Adjust your retirement lifestyle.

Retiring earlier than expected may require you to make some adjustments to your lifestyle and spending habits. Carefully review your expenses to identify areas where you can cut back without compromising your mental and physical well-being. Consider downsizing your home or reducing your travel and entertainment expenses.

Before making any major changes, revisit your retirement priorities (see #2 above) to ensure your decisions align with your goals. By making conscious choices, you may be able to better stretch your savings without significantly impacting your long-term goals.

7. Continuously monitor and adjust accordingly.

Once you retire, it’s important to remain financially vigilant. Regularly review your overall financial situation, including your investments, budget, and progress toward your goals. Make adjustments as necessary based on market conditions and your ever-evolving financial life. Stay informed and engaged with your finances to help ensure your continued financial security.

Tags Finance, Memphis, retirement

News News Feature

Managing Taxes on Social Security

Post author By Gene Gard
Post date December 13, 2023

Did you know that you may be required to pay taxes on a portion of your Social Security benefits? In fact, up to 85 percent of your Social Security income may be taxable. Fortunately, the following strategies can help you lower your tax exposure and maximize your Social Security benefits.

1. Be aware of the Social Security income thresholds.

Social Security taxes are determined based on your annual “combined income,” which is determined using the following formula: adjusted gross income (AGI) + nontaxable interest + half of Social Security benefit = combined income.

Your AGI includes income from all taxable sources, such as wages, withdrawals from tax-deferred retirement accounts (such as traditional IRAs and 401ks), and taxable investment income (such as stock dividends and interest from taxable accounts). Nontaxable interest includes income from municipal bonds. Although free from federal and possibly state income taxes, municipal bond income is counted when calculating the taxable amount of Social Security.

2. Delay your benefits.

If you have additional sources of retirement savings, consider drawing on those during the first few years of retirement and delaying taking Social Security. By drawing down other taxable assets, you may be able to lower your combined income in order to reduce the amount of Social Security subject to taxes. Another benefit of delaying Social Security is that you’ll likely receive a higher monthly benefit amount once you begin receiving payments. Your benefit increases by up to 8 percent each year you postpone beyond your full retirement age (up to age 70), and your cost-of-living increases will also be greater.

3. Consider a Roth conversion.

Withdrawals from tax-deferred accounts (such as traditional IRAs and 401ks) count toward your AGI because those assets have never been taxed. However, withdrawals from Roth sources are tax-exempt because contributions to those accounts are made with after-tax funds.

In the years leading up to retirement, it may make sense to convert a portion of your tax-deferred assets to a Roth IRA. In order to complete a Roth conversion, you must pay taxes in the current year on any amount you withdraw from a traditional IRA to fund the Roth IRA. This is a significant tax event that can have unintended consequences if not carefully executed. That’s why it’s important to work with a qualified wealth manager who can advise you on the best timing and approach based on your specific financial situation. The benefit of this strategy is that, once converted to a Roth IRA, funds continue growing for your retirement and can be withdrawn as retirement income without increasing combined income and, consequently, your Social Security tax exposure.

4. Make qualified charitable distributions (QCDs).

If your retirement goals include supporting charitable causes, you may want to consider making a direct donation from your IRA to a charity. This strategy is referred to as a QCD, and it can help lower your taxable retirement income, which can also lower your Social Security taxes.

At age 73, you must begin taking required minimum distributions (RMDs) from your tax-deferred retirement accounts. Instead of receiving the distribution in your name, which would count toward your combined income for Social Security purposes, you can elect to have the distribution issued directly to your chosen charitable organization. Using this approach, not only can you lower your taxable income, but you can also maximize your charitable impact by contributing pre-tax funds. That’s a win-win for both you and your charity!

Tags Finance, Social Security

News News Feature

Five Tax Opportunities in Retirement

Post author By Gene Gard
Post date December 6, 2023

Preparing for your ideal retirement begins during your working years with saving, some discipline, and taking advantage of the many planning efficiencies available to help you retire the way you want. When you officially make the jump to retirement, the planning doesn’t stop — it just changes. One way to help yourself while in retirement is to understand and take advantage of tax-saving opportunities.

Here are some options you may want to consider:

1. Qualified dividends versus capital gains

Depending on your income and whether you file a joint or individual return, federal short-term capital gains tax rates range from 10 percent to 37 percent, while long-term rates range from 0 percent to 20 percent in 2023. Qualified dividends are also taxed between 0 and 20 percent in 2023. Work closely with your advisor to develop an income and tax planning strategy that’s tax-efficient — don’t needlessly get stuck with higher rates.

2. Gifting strategies

There are many non-financial reasons to donate to causes you believe in; however, being smart about how you donate is what I’m talking about here. Consider donating appreciated stock from your taxable account as opposed to liquidating a position and donating the proceeds. You can deduct the full amount of the appreciated stock so long as it doesn’t exceed 30 percent of your adjusted gross income, and you’ll pay no tax on the gains.

If you need to take a required minimum distribution (RMD) from your IRA but don’t need the funds, consider directly transferring those funds from your IRA to a qualified charity instead, and you won’t need to consider that RMD amount as income that year.

3. Retirement-friendly states

If you’ve ever considered moving, check out states that either have no state income tax or offer a deduction on your retirement income. Tax-friendly states besides Tennessee include Alaska, Florida, Georgia, Mississippi, Nevada, South Dakota, and Wyoming.

4. Wise withdrawals

Once you’ve gone through the process of determining your specific income needs, you’ll need to decide which of your investment account(s) to pull funds from. Keep in mind that funds taken from a traditional IRA will be taxable income in the year they’re taken out, funds sold from a taxable account may have gains/losses that could affect your taxes, and funds taken from your Roth IRA have no tax consequences. One size does not fit all, but I normally recommend you take your retirement income as needed — first from cash sources, then from taxable investment accounts, then from traditional IRAs, and finally from Roth IRAs. Take advantage of the Roth rules by letting those funds work (with no RMD or tax liability) for as long as you’re able to.

5. Roth conversions

Now that you’re retired, you’re likely earning less income than when you were working, which will likely put you in a lower tax bracket. To take advantage of this shift, now may be the time to move funds from your traditional IRA into your Roth IRA. Yes, the funds taken out will be taxed, but likely at much lower rates than while you were working. We recommend you work closely with your advisor and CPA to efficiently manage your tax brackets.

Tags Finance, money money money, retirement, tax-saving opportunities