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Inherited an IRA?

Photo: Tima Miroshnichenko | Pexels

Inheriting an individual retirement account (IRA) can be a significant financial opportunity, but it can also present several financial considerations and potential tax implications. If you’ve recently inherited an IRA, it’s important to understand your options and make informed decisions in line with your overall financial plan and future goals. Take the following steps as soon as possible after inheriting an IRA.

1. Consult with your wealth manager. Inheriting an IRA can have significant financial and tax implications, which is why it’s important to seek professional guidance. Your wealth manager can help you understand how your inherited IRA may impact your financial plan and long-term objectives.

2. Consider your tax obligations. Inheriting an IRA can have significant tax implications. You may be subject to income taxes on any distributions you receive, and the tax treatment of the account can vary depending on the type of IRA, the age of the original owner, and your relationship with the owner. It’s important to work with a qualified tax advisor to understand your potential tax liabilities and develop a tax-efficient strategy for managing your inherited IRA.

3. Understand your distribution options. As the beneficiary of an IRA, your distribution options typically depend on the type of IRA you inherited, your relationship with the account holder, whether the account holder had begun taking required minimum distributions (RMDs) from the account, and when the account holder died. Typically, a beneficiary’s distribution options include the following.

• Lump-sum distribution — If you choose a lump-sum distribution of the entire account balance, you may face significant tax liabilities, as any assets withdrawn from a traditional IRA are subject to ordinary income tax rates during the year in which they are distributed.

• Spousal rollover — If you inherited an IRA from your spouse, you likely have the option to roll over the assets into your own IRA. This move allows you to treat the inherited IRA as your own and defer distributions until you reach age 73 (as of 2023).

• Stretch IRA — If you’re a non-spousal beneficiary and the original account holder passed away before December 31, 2019, you may have the option to “stretch” withdrawals from the account over your life expectancy. This move can allow you to take smaller RMDs over a longer period of time, which can help maximize the tax-deferred growth of assets within the account.

• Five-year rule — If the original account holder passed away before beginning RMDs or if there is no beneficiary named on the account, you may be subject to the five-year rule, which requires you withdraw the entire IRA balance by the end of the fifth year following the account holder’s death.

• Ten-year rule (SECURE Act) — If the IRA account owner died on or after January 1, 2020, the non-spouse beneficiary must withdraw the entire account within 10 years. Currently it’s unclear whether RMDs are required each year under proposed regulations. Your wealth manager will be able to help you determine if and when you need to take withdrawals from your inherited IRA.

4. Update beneficiary designations. It’s important to update the beneficiary designations on your inherited IRA to reflect your own beneficiaries. This helps ensure any remaining IRA assets will be distributed to your designated beneficiaries upon your passing. Regularly review these beneficiary designations to help ensure they continue to align with your overall financial goals and legacy wishes.

5. Review and update your estate plan. Inheriting an IRA may trigger a need to review your own estate plan. If you have your own IRA, you may become aware of changes you wish to make to help ensure your retirement assets are distributed according to your wishes. If you don’t already have an estate plan in place, inheriting an IRA may be a good reminder of the importance of establishing one, as the inheritance process often highlights the need to ensure your assets are distributed according to your wishes while minimizing your heirs’ tax liabilities.

Gene Gard, CFA, CFP, CFT-I, is a Wealth Manager with Creative Planning, formerly Telarray. 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.

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How Location Can Impact Your Retirement Goals

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When planning for retirement, people often focus on how much money they need to save, when they’ll retire, and how to spend their free time. An often-overlooked retirement planning consideration is where to retire — and the decision can have a significant impact on your finances.

Here are some factors to consider when deciding where to retire:

• Income tax implications — Let’s go ahead and start with the elephant in the room. Sadly, even after you finish working, you’ll still owe taxes. Taxes can have a significant impact on your retirement, and different states have different tax rates for retirement income. Some states have more favorable tax policies than others, which can allow retirees to keep more of their retirement income. In addition, some states don’t tax Social Security benefits or other types of retirement income, which can help you further maximize your retirement savings.

• Retirement income
Social Security benefits — While most states don’t tax Social Security benefits, there are a few states that impose some form of taxes on them. Regardless of where in the U.S. you live, up to 85 percent of your Social Security income may be subject to federal income tax.
Retirement plan distributions — Many people hold most of their retirement savings in tax-deferred accounts, such as IRAs and 401(k)s. While these vehicles provide a great way to save in a tax-deferred manner, retirement distributions from these types of accounts are subject to ordinary income tax at the federal level. However, some states don’t tax retirement plan distributions, which can help you maximize your funds available for retirement.

• Pension income — Some states differentiate between public and private pensions and may tax only public pensions. Other states tax both, while some states tax neither. Again, the amount of state tax you pay on this retirement income source can have a big impact on your lifestyle.

• Estate taxes — In 2023, the federal government allows individuals to pass on up to $12,920,000 without any federal estate tax ($25,840,000 for married couples filing jointly). However, depending on where you live, you may need to pay state estate taxes. It’s important to understand the estate tax requirements of your current state as you’re planning your legacy, especially since some states’ estate tax limits may be lower than you would expect.

• Capital gains — Long-term capital gains are taxed by the federal government at more favorable rates than ordinary income. However, this is often not the case for states that charge state income tax. Many states don’t differentiate between earned income and capital gains, which means depending on the state in which you live, you may have significant tax liabilities on investment income.

• Cost of living — Cost of living can differ widely between various cities and states, making it essential to choose a retirement location you can afford. Some cities have a much lower cost of living than others, which allows you to do more with your retirement savings. By choosing a location with a lower cost of living, you may be able to afford a larger home, travel more often, or pursue hobbies and interests that may be out of reach if you were paying more for daily living expenses.

• Healthcare costs — When choosing where to retire, it’s important to find a location that offers access to high-quality healthcare facilities. Having convenient access to healthcare can help keep your costs down.

• Housing costs — Housing costs can vary widely between different cities and states, which is why it’s important to choose a retirement location that aligns with your housing budget. It’s also important to consider what property taxes you’ll be responsible for paying, as these too can vary widely.

While we’re not advocating for a mass migration to a retiree-friendly state such as Florida, it’s important to understand how where you live can impact your retirement finances. This knowledge allows you to choose a location that fits within your retirement budget and allows you to live the lifestyle you want.

Gene Gard, CFA, CFP, CFT-I, is a Wealth Manager with Creative Planning, formerly Telarray. 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.

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Health Savings Accounts: The Best “Roth” Ever?

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Health savings accounts (HSAs) were first authorized in 2003 as a tax-friendly way to save money for healthcare expenses. They’re a benefit designed to encourage use of high-deductible health plans (HDHPs), which usually involve a lower monthly premium but higher out-of-pocket costs until deductible and out-of-pocket limits are reached. We’re very fortunate that lawmakers created HSAs. Though they aren’t technically a retirement account, in some ways they’re better than even the venerable Roth IRA itself!

The Benefits of HSAs

HSAs incorporate some of the best features of both traditional and Roth accounts. Here’s why they’re referred to as “triple tax-free.”

Money that goes in an HSA account is excludable from taxable income, similar to contributions to traditional IRAs. But unlike IRAs, you can make deductible contributions to HSAs regardless of how high your income might be. If you directly contribute to an HSA via payroll deductions, a payroll tax of 6.2 percent for Social Security and 1.45 percent for Medicare is avoided. Even 401(k) contributions are subject to payroll taxes! This benefit is easy to overlook but yields an immediate 7.65 percent return on money directed to your HSA.

An HSA account can be invested in the markets just like an investment portfolio, and it grows in a tax-deferred/tax-free manner, similar to most retirement accounts. Unlike flexible spending accounts (FSAs), there is no use-it-or-lose-it stipulation. These funds are yours forever.

When HSA funds are eventually withdrawn and spent on approved healthcare expenses, those withdrawals aren’t taxed either, much like a Roth IRA. Though you got a tax benefit when you funded your HSA, you don’t owe taxes on the back end either — it’s hard to beat that!

Besides the points above, there’s another unusual benefit of HSAs to note. Imagine you’re out of pocket for $5,000 of surgical expenses. Your first instinct might be to run the charge on your HSA card or immediately reimburse yourself, but if you do that, you’re probably leaving something on the table.

Assuming you correctly assemble the documentation, there is no deadline to reimburse yourself for medical expenses. For example, you could wait five years to take your $5,000 tax-exempt medical expense reimbursement from the HSA. By waiting, your $5,000 still comes back to you, but it would have had five years to grow in your HSA tax-free, and any earnings on that money left behind continue to compound and grow within the HSA.

Is it possible to have “too much” money in your HSA? If you’re the healthiest person in the world and never spend a dime on medical care, you’re still in great shape when it comes to your HSA (apologies for the bad pun). Once you reach age 65 or if you become disabled, you can withdraw from your HSA for any reason, without penalty; however, those withdrawals are taxable as ordinary income. So, in this scenario, your HSA eventually functions much like a traditional IRA.

The Downsides of HSAs

If you take money out for nonmedical expenses before age 65, you’ll pay ordinary income taxes plus a 20 percent penalty. As discussed above, there are many ways to access that money without penalty, but, just like with an IRA, if you need the money early without a plan in place, you’ll pay meaningful tax and penalties on those withdrawals.

Another downside is that HSAs aren’t ideal for estate planning. If you pass away, your spouse will inherit your HSA and it becomes just like it was their HSA all along, no problem. However, if there is no surviving spouse, the beneficiary must take a distribution of the entire balance of the account, which means the entire account’s value is taxable as ordinary income that year.

Therefore, it makes sense to spend down your HSA as you age. That shouldn’t be difficult — for most people, medical expenses increase later in life. You even can use HSAs to pay some or all of your long-term care premiums.

What It Means for You

If you fund an HSA, save appropriate documentation of healthcare expenses and try to avoid swiping that card — you might be surprised at how quickly your HSA could play an important role in helping to secure your financial future.

Gene Gard, CFA, CFP, CFT-I, is a Wealth Manager with Creative Planning, formerly Telarray. 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.

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If Investments Were Cars

Photo: Felix Fuchs | Unsplash

Everyone has an opinion about cars. Luxury or economy, sedan or hatchback, van or pickup truck — preferences stay pretty consistent outside major life changes, like a new baby or a new RV to pull. To some extent, cars help define your personality in America, and car lovers tend to stay loyal to their favorite model or brand.

Investment portfolios help define your future, but hopefully they don’t define your personality. While you might get satisfaction from driving a fancy sports car, we believe “exciting” investments are likely best avoided. Your investments should actually be relatively boring and low cost while historically providing the performance you need in the long run.

There’s one quick and nearly certain way to lose money in cars or investment portfolios — making big changes too frequently for the wrong reasons. Hopping around from one investment to another can even be much more expensive than trading in for a new car every year, which we know is one of the pricier car decisions you can make.

Let’s say you own an Accord, and after five years and 100,000 worry-free miles you need a new water pump. You might feel a bit unlucky, but you would probably sigh and get it replaced. What you probably would not do is start second-guessing your decision to buy the car in the first place. You wouldn’t run across the street and trade in your Accord for a Camry because your friend told you at a cocktail party that Hondas are no good anymore and Toyotas are now the only reliable choice. You probably would have been fine in an Accord or a Camry, but switching back and forth between them because of short-term problems is far worse than picking and sticking with one or the other. Nobody manages their vehicles like that, so why do we think about investments in that way?

There are countless ways to invest in markets, and I believe only some of them are patently “wrong.” An appropriate portfolio for your circumstances will undoubtedly outperform and underperform various benchmarks at various times, and the periods of underperformance don’t mean you’ve bought the wrong portfolio. Financial news focuses on what is outperforming after the outperformance has already occurred, and using that backward-looking news as actionable trading advice can be devastating to your long-term returns.

Even if you can ignore the news, there are still opportunities to be distracted by recent performance. A sound investment portfolio for you might hold 10 different funds. Over any period, one of those funds will perform better than the others and one will perform worse. Performance comes in chunks, and although the instinct to sell the worst recent performer is strong, previous worst performers have a chance of improving and should therefore only be sold if something has materially changed in your initial investment thesis. One important thing to remember is why each element of your portfolio is there (regardless of recent performance) in order to avoid making big, emotional decisions due to the natural dispersion of investment returns.

Driving a new car off the lot usually cuts its value instantly and dramatically, but people don’t always think about the devastating consequences of chasing performance and making large and frequent changes in their investment portfolios. There’s little chance breaking financial news or current events mean you should make changes to an appropriate, low-cost, diversified portfolio. Consider showing the same brand loyalty to your portfolio that you show to your cars — investment loyalty can actually make a positive difference on the path toward a secure financial future.

Gene Gard, CFA, CFP, CFT-I, is a Wealth Manager with Creative Planning, formerly Telarray. 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.

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Should You Help Family Members Pay Off Their Debt?

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“My loved one is in debt and asked for my help in paying it off. What should I do?” At Creative Planning, we run into this question often, as family and finances are so frequently interconnected with one another. When it comes to deciding a course of action, oftentimes there’s not one clear and obvious answer. Before making a financial commitment to help a loved one, be sure to consider the following.

What are the alternatives?

Before volunteering your own funds, a positive first step is to understand if there are any other ways to help your loved one clear up their debt. If it’s reached a point where it has destroyed your loved one’s credit rating, it could make sense to have it written off by declaring bankruptcy. Or perhaps you can help find a debt management program or pursue a debt settlement arrangement. Depending on the circumstances, there may be other ways to help your loved one gain financial footing that don’t require a check from you.

How will the money be used?

If alternatives fail to produce a viable solution, before committing your funds it’s best to understand how the current or new debt may be impacting your loved one’s situation. As the potential lender, it’s natural to question the borrower’s previous financial decisions. Practically, you (as the lender) may not view paying off an auto loan as prudent; however, there may be more common ground around paying off an outstanding medical or educational debt. Having clarity regarding how the loan is to be used may help to overcome emotions and objections around providing a loan. Whether the loan helps to free one from their debt burden or enable a new venture, the purpose of the loan should be clearly defined. If servicing existing debt, it may be wise to ensure any money you lend is being used to pay off principal, which will have a greater impact on your loved one’s overall financial health.

What are the specific terms of the loan?

Just as you would with any other borrower, have your loved one agree to the loan’s terms in writing before you issue a check. While this may seem harsh, it’s an important step to help ensure there are no misunderstandings or resentments down the road. Your loan agreement should include the following:

• The amount you’re lending

• The time frame in which the loan will be repaid

• Any agreed-upon interest, if applicable

• The amount and frequency of payments, if applicable

Keep in mind that loans over a certain threshold amount may be viewed by the IRS as taxable gifts if not repaid in full. One way to avoid tax liabilities is to charge interest and require regular payments.

What is the “repayment priority”?

Depending on your loved one’s financial situation, your loan may be just one part of their total “loan portfolio.” Even if you and your loved one agree on a payment plan, your payment schedule may not be as rigidly set as a traditional creditor’s may be. In other words, you may be more willing and able to allow for a payment to be missed while your loved one addresses other obligations. Make sure you’re comfortable knowing that you may be at the bottom of your loved one’s obligation list and that, in the event they’re unable to pay you back, you’re also comfortable with potentially not receiving the loan back in full.

What is your level of comfort with lending?

If a loan to your loved one would put your financial future in jeopardy, it wouldn’t be a prudent decision to make the loan in the first place. If you’re in the position where you’re able to provide the loan without negatively impacting your financial future, then loaning a loved one money is less about your ability to “afford it” and more about your level of comfort in introducing a borrower/lender arrangement into your relationship. There can be many emotions involved in mixing business and family. Regardless of any other considerations, if you’re not comfortable not seeing the money again, it may not be a good idea to loan it in the first place.

Gene Gard, CFA, CFP, CFT-I, is a Managing Director with Creative Planning, formerly Telarray. 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.

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How to Tackle Financial Infidelity

Financial infidelity is not uncommon. (Photo: Afif Ramdhasuma | Unsplash)

You may have heard of Ryan Reynolds’ financial infidelity in his marriage to Blake Lively. Reynolds confessed on Jimmy Kimmel Live that he spent $2.75 million to purchase a Welsh soccer team without first discussing it with his wife.

Unfortunately, acts of financial infidelity such as this are not uncommon. According to a survey by U.S. News & World Report, approximately 30 percent of Americans have dealt with financial infidelity. The most common examples include the following:

  • 4 percent – Keeping purchases secret
  • 7 percent – Hiding debts or accounts
  • 6 percent – Lying about income
  • 4 percent – Draining money from savings
  • 9 percent – Lending without consent

How can you and your spouse recover from financial infidelity? Consider taking the following actions.

Discuss your feelings and the impact the infidelity had on your relationship.

One of the first steps to recover is by talking about it. If you were the victim of infidelity, how did that make you feel? What can your spouse do to help you regain trust in him/her?

If you were the one who committed financial infidelity, what are the reasons behind it? Do you feel that your partner is overly controlling with the finances? Maybe you desire to keep up with the Joneses? Whatever the reason for your indiscretion, work with your spouse to address the underlying cause and move forward together in a positive manner.

Discuss your money values.

Financial infidelity often occurs among couples who have different values when it comes to saving, spending, and investing. Perhaps one partner values image and is willing to go into debt to purchase a fancy car, big house, and nice clothing. In contrast, the other partner may value security and prioritize saving in an emergency fund while living a lifestyle that’s well within the couple’s financial means.

It’s important to share your own money values and gain an understanding of your spouse’s if you’re going to move forward as a team. Try to find common ground and agree on a financial strategy that meets both your needs. A good wealth manager can help facilitate a productive conversation and help you move forward with confidence.

Set common financial goals.

Without shared financial goals, it can be difficult for two people with different financial priorities to reconcile their saving and spending habits. Work together to establish financial goals that you both feel good about. Maybe you share the dream of retiring to a warm climate or hope to someday travel the world together. Remaining focused on shared financial goals can help both partners resist the urge to hide their financial transgressions.

Establish a budget.

It’s not anyone’s favorite task, but establishing a budget (and sticking to it!) can go a long way toward getting on the same financial page. Take a hard look at your savings, spending, and priorities, and establish a reasonable budget that you’re both comfortable living with.

Give each other an “allowance.”

This can be a way to allow room for each other’s different spending habits. Consider establishing separate checking accounts in each spouse’s name. Then, decide together on a monthly amount or “allowance” that will be deposited every month into each account. Give each other the freedom to spend that money as you wish. Providing each other the opportunity to spend on small purchases without judgment can help you both stick to a budget while also maintaining a sense of financial freedom.

Gene Gard, CFA, CFP, CFT-I, is a Managing Director with Creative Planning, formerly Telarray. 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. Visit CreativePlanning.com for more information or to request a free, no-obligation consultation.

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Behavioral Finance

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In personal finance, the numbers almost always suggest a single correct answer. Economics used to focus on “Economic Person,” a hypothetical being who would make the best financial choice based on numbers only. The field of behavioral economics has risen to prominence because we’ve learned we’re mostly nothing like an Economic Person, and regular people frequently make choices that are far from financially optimal.

Imagine you receive a windfall, which isn’t allocated to your financial life in any way. Then imagine you have one loan outstanding, with a payoff amount equal to the windfall. We’ll say for simplicity that it was a $6,000 check and your loan is at 5 percent interest with $500 payments and a year remaining on the loan, but feel free to scale these numbers up or down to a value meaningful for you. The question is, should you pay off that loan or not?

One school of thought would suggest immediately paying it off. The money is unexpected, and you could reduce your monthly outlays by $500 instantly. This would create more monthly net cash flow and reduce risk in case of a job loss or other unexpected event. And you would avoid the interest for the remaining life of the loan. Paying off debt is probably never incorrect, if for no other reason than peace of mind. There’s an old saying that it’s impossible to be bankrupt without debt, and there is a huge emotional dividend from being debt-free that can be a goal in itself. For example, we can show in our modeling that it almost never is likely to make long-term sense financially to pay off a mortgage early, but we will encourage you to do so if the peace of mind you experience exceeds the slight financial benefit of making the absolute optimal choice.

Economic Person might look at the long-term performance of investment portfolios and the expected returns based on current circumstances and say it is foolish to pay off the loan today. They would invest the windfall in their financial portfolio, pay the loan off on schedule as planned, and expect to be financially better off. Economic Person would even understand that the market might be flat or fall over the next year, yet be confident they made the best choice given the information and never have a second thought if they did not quite achieve the 5 percent break-even return. That is what I would do, but only because I have been hardened from years of watching the markets and truly believe in time in the market vs. timing the market in the long run.

We’ve talked about Economic Person, but what would happen to a typical “Regular Person” in this scenario? If Regular Person did not pay off the loan immediately, they would probably put the funds aside. They may splurge on something with some of the “found money.” They would think about investing the windfall, but probably decide it’s not the best time to put money in the market and that they should wait for ever-elusive certainty to get invested. Without realizing, they’ll probably spend the money with not much to show for it. Maybe it’s okay to splurge with it, but we believe it is far better to make financial decisions intentionally.

It would be great if you like the Economic Person approach to the windfall, but if you are likely to behave like Regular Person, perhaps you should pay off your debt immediately instead.

If you identify too closely with Regular Person, you might go full circle and be better off not paying down your debt at all! For example, if you have a credit card nearly maxed out that you will likely max out again, you perhaps should leave it maxed out and consider the interest a tax on your mindset until you can truly shift your perspective. If you would see the extra monthly cash flow from paying off your car and get the itch to buy a brand-new car, then maybe keep the payment and focus on investing in your managed portfolio (and leaving it there!).

In today’s world, we have all the information we could possibly need to make good financial choices, be healthy, and accomplish anything we can imagine, but we have an execution problem. Regular Person is not maxing out their retirement contributions, eating kale, and learning to be a concert pianist on YouTube. Regular person is sitting on the couch, watching Netflix, and probably not making the best financial decisions (or making very many deliberate decisions at all).

It is okay to not be perfect. We all have a little bit of Economic Person and Regular Person within us. What is important when it comes to your financial future is that you understand yourself and where you fall on the spectrum and work to make the best choices — not in an absolute sense, but the best choices for you.

Gene Gard, CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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New Spending Ideas for the New Year

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A new year is upon us, and that means many are setting (and forgetting) new year’s resolutions. New beginnings are a common time to think about spending, saving, and budgeting. In this space, we’ll talk through a few concepts that might be useful as you consider your relationship with your money in the coming year.

One of the trickiest things to define when mapping out a plan is what kind of spending to actually worry about. Spontaneous purchases on Amazon or a fancy bottle of wine at a restaurant is more of a luxury than a necessity if you’re looking to cut costs. But what about grocery spending? Doctor visits? School tuition? Your mortgage?

Probably the best way to look at it is to consider only things you want to change. If you’re happy in your house and committed to staying, then there is not much to do about your property taxes. They are of course an item that must be considered as part of cash flow planning, but there is not much reason to spend mental energy on them.

There is a potential big blind spot, however, which is the savings that can be had even in “non-negotiable” categories. For example, many people believe you should spend as much as possible on tires, since they are an important safety component when it comes to driving. Even if you consider safety non-negotiable, you might find through research that certain less expensive tires are just as safe as the top tier. Even if you remain committed to the most reputable and well-known tire brands, you likely will find that you can achieve substantial savings by shopping around. The knee-jerk reaction to spend as much as you can on safety-adjacent stuff might be just as influenced by marketing as any actual incremental security.

Another source of unnecessary spending is the desire to be spontaneous. While spontaneity has a role for all of us, there is no place for it financially if you’re aggressively trying to work your spending down. Things like dining out, buying clothes, and weekend getaways are easy to stumble into, and the costs can add up quickly. Planning just one nice restaurant meal each week could not only help control the budget but also give you something to look forward to in advance — and that anticipation can greatly increase the enjoyment per dollar spent.

In the end, the most important spending principle is to be honest with yourself. Every dollar we spend is because in the moment we have convinced ourselves it’s a good idea, but that justification can be ephemeral. If you use a transaction aggregator like Mint, it can be instructive to go back over your transactions weeks or months later and see what you value after the fact and what you don’t. Even better is to look at your Amazon purchase history, which is never purged. Which items you’ve bought do you still use? Which did you never use? Which items make you wish you could go back in time and unorder them? An honest relationship with your past spending is one of the best ways to develop better decision-making about the future.

If you are happy with your spending, you have nothing to worry about, but most of us have some work to do in this realm. Like we always say, we cannot control markets, but we can control spending, and your spending habits likely have the most outsized impact of anything on the path to your secure financial future. Hopefully, these tips can help you develop a mindset that serves you as you make decisions about your money.

Gene Gard, CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Retirement Changes in SECURE 2.0

Pexels | Nataliya Vaitkevich

In late 2022, a bill called SECURE 2.0 was signed into law. There’s nothing revolutionary in the law; it’s more of a kitchen sink of various adjustments and tweaks to retirement plan and IRA rules. There are dozens of parts to the law, but some changes are important and relevant for typical investors and we’ll highlight some meaningful ones here.

Delayed Age for Required Minimum Distributions (RMDs): SECURE 2.0 increases the required minimum distribution age to 73 starting on January 1, 2023, and increases the age further to 75 starting on January 1, 2033. This is meaningful because it allows the option to defer taxes to later in life.

No More RMDs for Roth 401(k)s: Previously, all 401(k) plans required RMDs (including Roth). This change is a fix to an oversight — typically Roth accounts don’t have RMDs.

Leniency for RMD Mistakes: RMD mistakes are extremely costly, and now only slightly less so. This law reduces the penalty for a missed RMD from 50 percent to 25 percent. If a mistake is corrected quickly and proactively, then the penalty might be only 10 percent.

529 to Roth IRA Transfer: Effective in 2024, if you have an unused balance in a 529 plan, you can transfer those funds to your child’s Roth IRA tax-free. The most you can transfer is $35,000 over a lifetime. These transfers reduce the amount of your child’s regular contributions, and they must be eligible to make contributions to a Roth IRA (i.e. have earned income, etc.). The 529 plan must have been maintained for at least 15 years, and the funds eligible for transfer must have been in the 529 plan for five-plus years.

New Future Limit for Qualified Charitable Distributions (QCDs): For years, the maximum annual QCD amount was limited to $100,000. Beginning in 2024, the limit will be linked to inflation.

Mandatory 401(k) Enrollment: Requires new 401(k) and 403(b) plans started after 2024 to automatically enroll participants in the plan with at least 3 percent but not more than 10 percent contribution, with automatic increases of 1 percent until contributions reach 10 percent but not more than 15 percent of income.

New Catch-Up Contribution: Increases the catch-up contribution to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62, and 63. The increased amounts are indexed for inflation after 2025. New limits are effective for taxable years beginning in 2025.

Matching Student Loan Payments: Allows employees to receive matching contributions by reason of repaying their student loans rather than contributing to retirement plans. This is effective for contributions made for plan years beginning after December 31, 2023.

Retirement Savings Lost and Found: Creates a national online searchable lost-and-found database for retirement plans at the Department of Labor (DOL), allowing participants to search for the contact information of their plan administrator. Directs the creation of the database no later than two years after the date of enactment of SECURE 2.0.

Catch-Up Contributions Must Be Roth: The cost of SECURE 2.0 will be offset by requiring that catch-up contributions be designated as Roth contributions. This provision will apply to eligible participants whose wages for the preceding calendar year exceed $145,000 and is effective for taxable years beginning after December 31, 2023.

SECURE 2.0 was broadly bipartisan and is largely main-street investor friendly, which is refreshing news coming from Washington. It’s definitely worth you or your advisor thinking through how these changes might help you. Retirement always creeps up more quickly than new retirees ever imagined possible, and every little bit helps on the path to your secure financial future.

Gene Gard, CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Sorting Out Distributions

A distribution is just an investment paying out cash for various reasons. (Photo: Shane | Unsplash)

This time of year, many investors have questions about distributions in their accounts. In short, a distribution is just an investment paying out cash for various reasons. To help explain what these payments mean, here are a few simple definitions.

One of the most common types of distributions you’ll see throughout the year are dividend payments. Generally, these payments arise from the investments in the funds in your portfolio either earning interest (as in bonds) or paying a dividend (as in stocks). These distributions are simply a way of making the cash that’s created by the underlying investments in your funds come to you directly as the owner of the fund. These distributions are typically considered income and therefore taxed at income tax rates.

A capital gain generally occurs when you sell something for more than you paid for it. For example, if you bought a $100 investment and sell it later for $110, you incurred a capital gain of $10 which may be subject to taxes. The nice thing about capital gains is that they are only based on the gain ($10, not $110 here), and long-term gains (for positions held more than one year) might have a more favorable tax rate than rates used for short-term gains or ordinary income.

Mutual funds are creating capital gains and losses frequently as they buy and sell securities within the fund. From time to time, they must distribute the net capital gains to shareholders (usually in December). One reason for these distributions is that unless they were distributed, nobody would pay taxes on those gains, perhaps indefinitely. Mutual funds distribute these capital gains to you, so you likely have to pay the tax on these gains but also receive some cash to use for the tax.

Fund pricing around a distribution can be confusing because big drops in share price can occur, but there is nothing to worry about. Imagine a fund priced at $10 per share that is about to do a $2 capital gain distribution. Just before this distribution, the fund must hold $8 in actual securities and $2 in cash ready to distribute, which adds up to the $10 net asset value (NAV) of the fund. Just after the distribution, you hold the $2 and the fund now holds only $8 in securities, so its NAV went from $10 to $8. The fund didn’t really lose 20 percent of its value; it just gave it back to shareholders. That’s why it’s important to consider total return (including all distributions) rather than just the change in the fund’s price over time.

When you receive your next statement, you will see these dividends and capital gains transactions have hit your accounts, which is welcome. Dividends in particular are a huge contributor to long-term total return in investment markets. These distributions are a normal part of the process of owning mutual funds, and are just one more way your investments contribute to your secure financial future.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.