Am I Spending Enough Or Saving Too Much?

Contributed by: Kali Hassinger, CFP®, CDFA®

No you didn’t read that title incorrectly.  After decades of consistent and focused saving, how do you change your mentality to feel comfortable spending what you’ve worked so hard to accumulate?  Good savers spend decades developing the discipline to save, plan, and minimize debt, all for the ultimate goal of reaching financial independence and freedom.  However, when it comes time to use those hard-earned funds to support your retirement lifestyle, it can be a difficult transition.

The Center defines financial planning as a coordinated and comprehensive approach to reaching your financial goals.  It necessitates an appropriate balance between spending now and investing for the future.  That is a difficult balance to maintain, and without truly understanding your current resources and future needs, it is easy to miss the mark.  Without professional analysis and review, many either spend too much now and jeopardize future goals or have save too aggressively and end up unnecessarily sacrificing current quality of life. 

In planning, we can quantify what it takes to meet future financial goals, and make sure that we are doing what is needed to help reach those objectives.  In some cases, that knowledge can provide the freedom to actually reduce savings.  Beyond just allowing increased spending, this can also provide the opportunity to pursue passions as opposed to income.

When finally reaching that retirement finish line, however, turning your savings into income can be a daunting task.  Pulling from a balance that you’ve worked years to accumulate and build up can be uncomfortable, especially if you don’t know how much you can safely withdrawal without jeopardizing your long term financial security.  If you’re like many of our clients, it isn’t uncommon to react to this discomfort by under-spending and unintentionally accumulating money throughout retirement. 

Life is all about balance.  In this example, it’s about protecting your financial future while also enjoying life now.  If you’re in the enviable position of having more than you need for retirement, making a meaningful plan for the excess can help to ease the reluctance to spend.  Whether it is gifting, creating a financial legacy, or granting yourself permission to indulge a bit, if it brings you joy, it is worth considering.  Of course we would not recommend spending money frivolously, but, the ultimate goal is to pursue areas of interest because they are meaningful and important to you - unconstrained by financial concerns.  Isn’t that true financial freedom?  

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

---

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss.

American Rescue Plan Act of 2021 – What You Need to Know

Contributed by: Robert Ingram, CFP®

The American Rescue Plan Act of 2021 was signed into law by President Biden last Thursday.  This $1.9 trillion package, intended to provide relief and recovery from the impacts of the Covid-19 pandemic, contains a wide range of provisions.  These span from funding Covid-19 testing, contact tracing, and vaccination efforts, providing grants for school to improve their capabilities to operate amidst the pandemic, funding support to state and local governments to offset lost tax revenues, small business grants, to tax credit and other relief measures for individuals. 

Here are some of the notable provisions that may impact your finances this year and your overall financial plan.

Direct Payments (“Stimulus Checks”)

The American Rescue Plan Act, much like the CARES Act (enacted in March of 2020) and the Consolidated Appropriations Act (enacted last December 2020) before it, provides a refundable tax credit made as a direct payment to individual and families.  These 2021 Recovery Rebate payments have started to go to recipients.

How much could I receive?

• The full credit amount is $1,400 per eligible individual

• Eligible individuals include not only the taxpayers but also the taxpayers’ dependents

This is a key difference from the criteria determining the eligible number of individuals for the 2020 Recovery Rebates in the CARES Act and Consolidated Appropriations Act, which included only the taxpayers and the taxpayers’ children under age 17.

A married couple, for example, filing a joint return with a 21-year-old daughter in college, a 17-year-old son, and an 85-year-old mother living with them whom they claim as a dependent, could receive up to $1,400 x 5 = $7,000 for their 2021 Recovery Rebate.

Who is eligible?

Generally, U.S. citizens or U.S. Resident Aliens with a valid Social Security number, who are not dependents of another taxpayer, and who fall within certain income thresholds are eligible.

Your Adjusted Gross Income (AGI) determines your income eligibility, with the amount of tax credit phasing out to $0 over the following ranges by tax filing status.

• Married Filing Jointly: $150,000 to $160,000

• Head of Household: $112,500 to $120,000

• Single and all other filers: $75,000 to $80,000

For example, if you are married filing jointly and your AGI is an amount up to the initial threshold of $150,000, you would be eligible for the full credit.  If instead, your income falls between $150,000 and $160,000, your eligible credit is reduced proportionally as your income approaches the $160,000 ceiling.  If your income is at the $160,000 level or above, you are no longer eligible.

Determining Eligibility

There are a few different measuring points used to determine your income eligibility for receiving the rebate benefit. 

1. For the direct payments that are already starting to be disbursed now

The IRS uses available information, that is, your most recently filed tax return.  Since we are still within the tax-filing period for 2020, you may or may not have already filed your 2020 return.

If you had already filed your 2020 tax return, the IRS will use your 2020 tax return to determine your Adjusted Gross Income for eligibility.

If you have not filed your 2020 tax return, the IRS will use your 2019 tax return to determine your income eligibility.

Folks that would be eligible for the direct payment based on 2019 income but whose 2020 income might result in a reduced payment (or could make them ineligible) may benefit from not having filed their 2020 returns.

For those whose income was within the phase-out range or was above the eligibility phase-out based on the 2019 tax returns, there are other opportunities to benefit from these rebates (particularly if your income had fallen in 2020 due to the pandemic or other factors).

 2. The “Additional Determination Date”

Taxpayers who have not yet filed their 2020 returns but do file them before an Additional Payment Determination Date will have their rebate payment recalculated based on their 2020 AGI.  If the recalculated rebate payment is higher than the amount determined from the 2019 taxes, the IRS will send out another “stimulus check” to make up the difference.

The Rescue Act sets this Additional Payment Determination Date as the earlier of

• 90 days after the 2020 tax year filing deadline (still April 15th as of this writing) or

• September 1st

Keep in mind that If you anticipate filing an extension for 2020 and the extended filing deadline is October 15, you would still need to file your return much sooner to have your potential rebate recalculated using 2020 income.

3. Filing your 2021 Tax Return

Remember that the Recovery Rebate is a 2021 tax credit, so even if the advanced direct payments of the credit are determined using the 2019/2020 tax returns for income eligibility, filing your tax return for 2021 is the 3rd way to be eligible for this benefit.

If your 2021 AGI is lower than the 2019/2019 AGIs used to determine the advanced payment, and it is low enough to result in an eligible credit or a larger credit than was already paid out, this difference is applied as a tax credit on your 2021 tax return.

Increased Child Tax Credit (CTC) for 2021

The American Rescue Plan Act also makes some temporary enhancements to the normal Child Tax Credit for 2021.

• The Child Tax Credit is raised to $3,000 from $2,000 for children over age 6 and to $3,600 for children under age 6

• Eligible children can be up to 17 years old rather than just under age 17.

• The enhanced CTC is also a fully refundable tax credit this year. (i.e. it can become a tax refund if the credit makes the tax liability negative)

• A provision also has the IRS paying out 50% of the estimated 2021 tax credit over equal installments starting in July 2021, all based on your most recently filed tax return.

*If, however, at the end of 2021 you were eligible for a smaller amount than was paid out to you, that difference is “clawed back” by adding it to your tax liability on your 2021 tax return.

Because tax credits reduce tax liability dollar for dollar, this credit overall can have a significant impact on a family’s tax situation, particularly for a family with young children.  As a hypothetical example, a married couple with 3 kids (ages 3, 5, and 8) filing jointly with $100,000 of income in 2021 (assuming all ordinary income) and taking the standard deduction ($25,100) would have tax liability of $8,590.  After subtracting the CTC for the kids ($3,600 + $3,600 + $3,000 = $10,200), the couple’s tax liability would be negative $1,610 ($8,590 - $10,200) meaning a refund of $1,610!

With these enhanced credits, the credit amounts do begin to phase-out at the following Adjusted Gross Income (AGI) levels:

Married Filing Jointly: $150,000

Head of Household: $112,500

Single and all other filers: $75,000

Being ineligible for the 2021 enhanced child tax credit does not exclude you from using the normal child tax credit of up to $2,000 per child. You can still qualify for that credit up to these higher-income phase-out thresholds:

Married Filing Jointly: $400,000

Single and all other filers: $200,000

Child and Dependent Care Tax Credit Increased for 2021

The Rescue Act also makes changes to the Child and Dependent Care Tax Credit for this year that essentially raises the maximum possible credit from $1,050 to $4,000 for a single qualifying dependent and from $2,100 to $8,000 for two or more dependents.

• First, the maximum amount of eligible expenses (such as daycare) used to calculate the tax credit increases from $3,000 to $8,000 for a single dependent and from $6,000 to $16,000 for multiple dependents.

• There is also a percentage number applied to the taxpayer’s eligible expenses to calculate the actual credit amount (this is known as the ‘Applicable Percentage). For 2021, the Applicable Percentage increases to 50% from the previous maximum of 35%.

• The income threshold for reducing that percentage is expanded to an AGI of $125,000 (regardless of tax filing status).

Before this change under the Rescue Act, the 35% applicable percentage reduced down to 20% at a much lower income range.  Starting at $15,000 the percentage decreased 1% point for every $2,000 that your AGI exceeded that threshold down to a minimum floor of 20% (actually reached at an AGI of $45,000).  This meant the credit amount was more limited for most taxpayers.

For 2021 the same reduction applies, but it does not start until an AGI of $125,000.  As a result, when AGI hits $185,000, the applicable percentage is capped at 20%.  The combination of these changes allows more people to be eligible for higher potential tax credits.

• One downside for higher-income earners of $400,000 or more is that the Rescue Act adds a phase-out from the 20% minimum Applicable Percentage.  Starting at a $400,000 AGI, the 20% Applicable Percentage is reduced 1% point for every $2,000 your income exceeds that threshold.  This effectively makes you ineligible for any credit amount once your AGI exceeds $440,000.

Other Provisions of Note:

Federal unemployment support

Certain unemployment compensation benefits have been extended, including

• The federal unemployment insurance (UI) supplement is set at $300 per week through Sept. 6.k.

• The Pandemic Unemployment Assistance program providing benefits to individuals such as those self-employed is extended to September 6th

The Rescue Act also makes the first $10,200 in federal unemployment insurance assistance nontaxable for incomes under $150,000.  This would be $20,400 for two spouses.

*A key point is the $150,000 AGI threshold includes the unemployment benefits received)

Health Insurance Support

• Provides COBRA subsidies in 2021 for individuals that were involuntarily terminated.  Individuals can maintain their coverage at $0 cost from April through September.

• Expands the Premium Assistance Tax Credits for health insurance plans purchased through the state exchanges.

Small Business Support

Additionally, there is $15 billion in new funding for Economic Injury Disaster Loans (EIDL) as grants. The bill designates $7 billion for the Paycheck Protection Program (PPP) to nonprofits and news services. An additional $1 billion funds a grant program for independent live venues, theaters and cultural institutions. EIDL grants are exempt from inclusion in recipients’ gross income for tax purposes.

As you may have noticed, many of these provisions in the new legislation are nuanced and how they apply to your specific situation depends on several factors.  Continue to have conversations with your financial planner, and as always please reach out if you have questions.

Robert Ingram, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

5 Social Security Rules to Know for Maximizing Your Benefits

Contributed by: Robert Ingram, CFP®

Social Security is still a key source of income for most retirees.  At the same time with the program’s many nuanced rules and options, just understanding your available benefits can be confusing enough, let alone figuring out how to make the most of those benefits throughout retirement.  Additionally, there are some strategies not as widely publicized and they can easily fly under the radar.

Here are five Social Security rules to keep in mind as you plan your Social Security filing strategy. 

1. Delaying Social Security Can Increase Your Benefit Amount

Under the Social Security retirement program, you can collect your full retirement benefit at the designated Full Retirement Age (FRA), determined by your birth year.  Individuals born from 1943 to 1954 reached FRA at age 66.  In each year from 1955 to 1959 the FRA increases by 2 months (e.g. 1955 = age 66 and 2 months, 1956 = age 66 and 4 months, and so on). Those born in 1960 or later reach their FRA at age 67.

Think of your full retirement age benefit as your baseline benefit.  You can begin collecting benefits as early as age 62.  However, your benefit amount would be reduced by a small percentage for each month that you collected early.  This can add up to a sizable reduction. For example, if your full retirement age is 67 and you begin collecting as early as possible at 62, you could see your benefit reduced by 30%.

Now, the opposite is also true if you begin collecting your benefits after your full retirement age.  For each month that you delay taking your benefits beyond your full retirement age until age 70, your benefit amount increases by 2/3 of 1%.  (Are you thinking that doesn’t sound like much?)  These delayed retirement credits would yield an 8% increase over 12 months.  For clients that are concerned about longevity in retirement (a.ka. living a long time needing retirement income), this can be an effective way to help protect themselves.

2. Delaying Social Security Can Impact Benefits To A Surviving Spouse

For married couples that are receiving their Social Security retirement benefits, when one spouse passes away, the surviving spouse will receive only one benefit going forward.  It is the larger of his or her benefit or the deceased spouse’s benefit. 

By delaying Social Security to increase your benefit amount while you are living, you are also locking in a higher benefit amount that could be available to your surviving spouse.   Conversely, taking benefits early at a reduced amount may leave a smaller benefit available to your surviving spouse.  These different possible scenarios present both unique challenges and planning opportunities for maximizing the value of your benefits over both spouses’ lifetimes.

3. Withdrawal of Social Security Application (The “Do-Over”)

Suppose you have started collecting your benefits and then you changed your mind.  Perhaps you had collected early at a reduced benefit.  Can you go back and reverse the decision to claim benefits?  Well, if you are within the first 12 months of claiming, you can.

You can withdraw your application for benefits and then reapply later.  This resets things as if you had never started benefit.  Keep in mind there are also some important requirements.

• You must repay all of the benefits you and your family received from your original retirement application, including:

  • Benefit amounts your spouse collected based on your earnings record or benefits dependent children received

  • Any amounts withheld for Medicare premiums

  • Voluntary tax withholding

• Anyone who receives benefits based on your application must provide written consent

• You can only withdraw your application once in your lifetime.

4. Voluntary Suspension

Ok, you may be wondering if it has been longer than 12 months since you claimed your benefits and you change your mind, are you completely stuck?  Well, not exactly.  There is another way to increase your benefit amount.

Once you reach full retirement age, you can request a suspension of your benefit payments (regardless of when you started them).  By doing so, the benefit you were receiving earns those delayed retirement credits of 2/3 of 1% for each month that your benefits are suspended.  This results in a higher amount when you resume your benefits, no later than age 70.

This strategy of suspending benefits can be an effective tax planning tool for years in which you anticipate other outside income, like a pension that recently started or a lump sum from the sale of a business.

5. Benefits Based On An Ex-Spouse’s Earnings

If you are divorced, you may be able to collect benefits based on your ex-spouse’s Social Security record.  Similar to the benefits for married couples, you can receive up to one-half of your ex-spouse’s full retirement amount by waiting until your full retirement age to apply.  Collecting earlier than your full retirement age still results in a reduced benefit.

You can collect based on your ex-spouse’s record if you meet the following criteria:

• You were married at least 10 years and you have been divorced for at least 2 years

• You are unmarried

• You are age 62 or older

• The benefit you are entitled to on your Social Security earnings record is less than the benefit you would receive based on your ex-spouse’s record

If the amount you could receive based on your ex-spouse’s record is larger than the amount from your record, you have the opportunity to receive the higher benefit.

Decisions around when and how to collect Social Security benefits can be complicated and depend so heavily on your unique circumstances.  Your health, your retirement spending needs, your income sources, and financial assets are just a few that come to mind.  If you have questions about how Social Security fits within your overall retirement income plan, or if we can be a resource for you, please reach out to us!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

---

This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Prior to making a decision, please consult with your financial advisor about your individual situation.

Helping You Set Your Financial Goals For The New Year!

Contributed by: Kali Hassinger, CFP®, CDFA®

New beginnings provide the opportunity to reflect.  What choices or experiences got you to where you are today, and where do you want to go from here?  Whether you’re motivated by the New Year or adjusting your course due to circumstances outside of your control, goals provide the opportunity to set your intentions and determine an action plan.

Budgeting, saving, retirement, paying off debt, and investing are all common, and often reoccurring, resolutions and goals. Why reoccurring?  Because, as is human nature, it is too easy to set a goal but lose focus along the way.  That is why it’s so important to set sustainable goals and find a way to remain accountable.

Working with an outside party, like a financial planner, can help you define these attainable goals and, most importantly, keep you accountable.  When we make commitments to ourselves and share them with others, we are more likely to follow through.

When goals are written down and incorporated in a holistic financial plan, it becomes easier to track progress and remain committed throughout the year.  The financial planning process, when executed correctly, integrates and coordinates your resources (assets and income) with your goals and objectives. As you go through this process, you will feel more organized, focused, and motivated. Your financial plan should incorporate the following (when applicable):

• Goal identification and clarification (you’re here now!)

• Developing your Net Worth Statement

• Preparing cash flow estimates

• Comprehensive investment management and ongoing monitoring of investments

• Financial independence and retirement income analysis

• Analysis of income tax returns and strategies designed to help decrease tax liability

• Review of risk management areas such as life insurance, disability, long term care, and property & casualty insurance

• College funding goals for children or grandchildren

• Estate and charitable giving strategies

As you reach one goal, new ones can emerge, and working with a financial planner can help you navigate life’s many financial stages. When you’re setting and working toward your objectives, don’t hesitate to reach out and share them with your trusted financial planner!  If you aren’t working with anyone yet, it’s never too late to start!  

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

9 Actionable Steps For The New Year To Help Your Finances

Contributed by: Josh Bitel, CFP®

Yes, it’s time to turn the page on 2020 and start anew!  There’s nothing like a fresh calendar to begin making plans for your envisioned future.  We previously provided you with some tips for year-end tax planning in our annual year-end tax letter. Here, we provide you with some very specific and actionable steps you can take now. Ultimately, while no strategy can guarantee your goals will be met, these steps are a great start on improving your financial health in the New Year:

1. Take score: review your net worth as compared to one year ago.

2. Review your cash flow: how much came in last year and how much went out (hint: it is better to have less go out than came in).

3. Be intentional with your 2021 spending: also known as the dreaded budget – so think “spending plan” instead.

4. Review and update beneficiaries on IRA’s, 401k’s and life insurance: raise your hand if you want your ex-spouse to receive your 401k.

5. Review the titling of your non retirement accounts: consider a “transfer on death” designation, living trust, or joint ownership to avoid probate.

6. Revisit your portfolio’s asset allocation:

7. Review your Social Security Statement: if not yet retired you will need to go online – everyone’s trying to save a buck on printing and mailing costs

8. Check to see if your retirement plan is on track: plan your income need in retirement, review your expected sources of income, and plan for any shortfall.

9. Set up a regular review schedule with your advisor: an objective third party is best – but at a minimum set aside time on your own, with your spouse, or trusted friend to plan on improving your financial health.

So, after you promise to exercise more and eat less, get started on tackling your financial checklist!

We wish you a wonderful New Year!

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

Gifting Considerations During The Holiday Season

Contributed by: Nick Defenthaler, CFP®, RICP®

Giving is top of mind for many now that we are officially in the thick of the holiday season. Whether you’re shopping online or fighting crowds at the mall, there are other forms of gifting to consider – ones that would arguably have a much larger impact on your loved one's life.

Gift Tax Exclusion Refresher

The annual gift tax exclusion for 2020 is $15,000. This means you can give anyone a gift for up to $15,000 and avoid the hassle of filing a gift tax return. The gift, if made to a person and not a charitable organization, is not tax-deductible to the donor nor is it considered taxable income to the recipient of the gift. If you are single and wish to gift funds to your daughter and son-in-law, you can give up to $30,000, assuming the check issued is made out to both of them. Remember, the $15,000 limit is per person, not per household. For higher net worth clients looking to reduce their estate during their lifetime given estate tax rules, annual gifting to charity, friends, and family members can be a fantastic strategy. So what are some ways can this $15,000/person gift function? Does it have to be a gift of cash to a loved one’s checking or savings account? Absolutely not! Let’s look at the many options you have and should consider: 

1. Roth IRA funding 

If a loved one has enough earned income for the year, he or she could be eligible to fund a Roth IRA. What better gift to give someone than the gift of tax-free growth?! We help dozens of clients each year with gifting funds from their investment accounts to a child or grandchild’s Roth IRA up to the maximum contribution level of $6,000 ($7,000 if over the age of 50). Learn more about the power of a Roth IRA and why it could be such a beneficial retirement tool for younger folks. 

2. 529 Plan funding 

529 plans, also known as “education IRAs” are typically used to fund higher education costs. These accounts grow tax-deferred and if funds are used for qualified expenses, distributions are completely tax-free. Many states (including Michigan) offer a state tax deduction for funds contributed to the plan, however, there is no federal tax deduction on 529 contributions. Learn more about education planning and 529 accounts.

3. Gifting securities (individual stock, mutual funds, exchange-traded funds, etc.)

Gifting shares of a stock to a loved one is another popular gifting strategy. In some cases, a client may gift a position to a child who is in a lower tax bracket than them. If the child turns around and sells the stock, he or she could avoid paying capital gains tax altogether. As always, be sure to discuss creative strategies like this with your tax professional to ensure this is a good move for both you and the recipient of the gift.  

4. Direct payment for tuition or health care expenses

Direct payments for certain medical and educational expenses are exempt from the $15,000 gift tax exclusion amount. For example, if a grandmother wishes to pay for her granddaughter’s college tuition bill of $10,000 but also wants to gift her $15,000 as a graduation gift to be used for the down payment of a home, she can pay the $10,000 tuition bill directly to the school and still preserve the $15,000 gift exclusion amount. This same rule applies to many medical costs. 

For those who are charitably inclined, gifting highly appreciated stock or securities directly to a 501(c)(3) or Donor Advised Fund is a great strategy to fulfill philanthropy goals in a very tax-efficient manner. For those over 70 ½, gifting funds through a Qualified Charitable Distribution (QCD) could also be a great fit. Gifting funds directly from one’s IRA can reduce taxable income flowing through to your return which will not only reduce your current year’s tax bill but could also lower help lower your Medicare Part B & D premiums, which are determined by your income each year.  

As you can see, there are numerous ways to gift funds to individuals and charitable organizations. There is no “one size fits all” strategy when it comes to giving – the proposed solution will have everything to do with your goals and the need of the person or organization receiving the gift. On behalf of the entire Center family, we wish you a very happy holiday season, please reach out to us if we can be of help in crafting your gifting plan for 2020!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of earnings are permitted. Earnings withdrawn prior to 59 1/2 would be subject to income taxes and penalties. Contribution amounts are always distributed tax free and penalty free. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover educational costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.

How to Finish Financially Strong in 2020

No one could have predicted what 2020 had to offer. The stock market saw wild swings that hadn’t occurred since the 2008 recession. Concerns over Iranian tensions and an oil war quickly took a backseat as Covid 19 spread across the world. Many other notable things happened this year, but let’s discuss how you can end the year financially strong.

Here are the top 8 tips from our financial advisors.

1. Consider rebalancing your portfolio.

The stock market’s major recovery since March may have left your portfolio overweight in some areas or underweight in others. Be sure that you’re taking on the correct amount of risk by rebalancing your long-term asset allocation.

2. Assess your financial goals.

Starting now, assess where you are with the financial goals you’ve set for yourself. Take the necessary steps to help meet your goals before year-end so that you can begin 2021 with a clean slate.

3. Know the estate tax rules.

For those with estates over $5M, be sure to review your potential estate tax exposure under both a Republican and Democrat administration.

4. Review your employer benefits package and retirement plan.

Open enrollment runs from Nov. 1 through Dec. 15. Review your open enrollment benefit package and your employer retirement plan. Don’t gloss over areas such as Group Life and Disability Elections as most Americans are vastly underinsured. Many 401k plans now offer an “auto increase” feature which can increase your contribution 1% each year until the contribution level hits 15%, for example.  

5. Take advantage of tax planning opportunities.

Such as tax-loss harvesting in after-tax investment accounts or Roth IRA conversions. Many folks have a lower income in 2020 which could present an opportunity to move some money from a traditional IRA to a Roth IRA while in a slightly lower tax bracket.

6. Boost your cash reserves.

It’s so important to have cash savings to cover unexpected expenses or income loss. Having a solid emergency fund can prevent you from having to sell investments in a down market or from taking on high-interest debt. Ideally, families with two working spouses should have enough cash to cover at least 3 months of expenses. While single income households should have cash to cover six months. Take the opportunity to review your budget and challenge yourself to find additional savings each week through year-end.

7. Contribute more to your retirement plan.

Increase your retirement account contributions for long-term savings, great tax benefits, and free money (aka an employer match).

Contributions you make to an employer pre-tax 401k or 403b are excluded from your taxable income and can grow tax-deferred. Roth account contributions are made after-tax but can grow tax-free.

If your employer plan and financial situation allow for it, you can accelerate your savings from now until the end of the year by setting your contribution level to a high percentage of your income.  Many employers allow you to contribute up to 100% of your pay.

8. Give to charity.

Is there a charity you would like to support? Make a charitable donation! Salvation Army and Toys for Tots are popular around this time.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

What Are The Hidden Costs Of Buying A Home?

Contributed by: Robert Ingram, CFP®

Today’s historically low-interest rates can mean a more affordable mortgage payment. However, when buying a home within your budget, it’s important to consider the costs beyond the mortgage.

Let’s begin with the costs to purchase a home.

Even while carrying a mortgage, you will need to make a down payment. While there are low down payment loans, try to put down at least 20% of the purchase price. Otherwise, your loan may have a higher interest rate and you could face additional monthly costs such as mortgage insurance.

You will have closing costs, which can include things such as loan origination fees for processing and underwriting the mortgage, appraisal costs, inspection fee, title insurance, pre-paid property taxes, and first year’s homeowner’s insurance. Generally, you should expect to pay between 3-5% of the mortgage amount.

Now, you will have ongoing costs to live in your home.

Annual property taxes average about 1% of the home value nationwide, but the tax rates can vary widely depending on the city or town. Keep property taxes top of mind when you are looking at different communities.

Homeowner’s insurance is another annual cost that not only depends on the value of the home and the contents within it you are covering, but also on the state and local community. This cost generally ranges between $500-1,500 per year, sometimes more.

If your home is a condominium or a single family home, you should expect annual or monthly homeowner’s association fees that cover the care of common areas, the grounds, clubhouses, or pools. Depending on the number of amenities and of course the location, average fees range from $200-400 per month.

While you may be used to paying some utilities as a renter, the size of your new home could significantly increase your utility rates. Going from an 800 square-foot apartment to a 2,500 square-foot house could double or triple the costs to heat it, cool it, and to keep the lights on. Add your local area water and sewer fees and your utilities could easily reach $500 per month or more.

Going from renting to homeownership also means having to maintain the new home (both inside and out). Things can be regular ongoing maintenance like lawn care and landscaping, or larger projects like painting, roof repair, furnace, and appliance replacement. Consider the tools and equipment you would need to buy or the services you would hire to do the work.

Finally, there is another hidden cost that can put a dent in your budget, filling up the house.  A home with more rooms can mean more spaces that “need” furniture and other decorative touches. The costs of furnishings can be several thousands of dollars to tens of thousands of dollars. Without proper planning, it can be all too easy to rack up those credit card bills and have a mountain of debt as you move into your new home.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Bob Ingram, and not necessarily those of Raymond James. Raymond James Financial Services, Inc. does not provide advice on mortgages. Raymond James and its financial advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified professional for your residential mortgage lending needs.

2 Reasons Why Your Investment Portfolio Needs Adjusting

Contributed by: Abigail Fischer

It’s historically proven, the age-old advice urging you to stick with your investment plan through thick and thin. The Center preaches this, especially during market volatility. But maybe your financial advisor has recently suggested making a change in your investment plan. How could this be? Well, there are two possible reasons: either your circumstances changed or new information emerged about the market.

1. Your circumstances changed

• Retiring in 2020 or the near future? Wow, what a way to end your career, and congratulations! There may be a case to make your portfolio more conservative so that when volatility hits, you see less downturn than you might in a more aggressive model. Read this if you’re concerned about your 401k balance fluctuation. 

• Big purchase ahead? Sticking with your investment plan is a long-term view. When you’ve set your sights on a making a big purchase soon, consider taking a portion of your portfolio to cash or a short-term fixed income fund.

• Your paycheck comes from your portfolio? Consider taking the next six months of expenses in cash or a short-term fixed-income fund so that when you hear market news, you can sleep soundly knowing your next portfolio paycheck will not be affected.

None of these apply but you’re unsure about your portfolio allocation? Read this.

2. New information about the market

• As interest rates fell in March, we saw a short-term opportunity to tactically overweight the Strategic Income portion of the Fixed Income category in some portfolio models. Generally, Strategic Income funds invest in high-yield bonds, emerging market debt, international bonds, asset, and mortgage-backed securities. This short term strategy was sought out by our Investment Committee as we aim to add value to our clients’ portfolios during market volatility. We closely tracked the Bank of America US High Yield Index Option-Adjusted Spread and set a point where we would tactically switch the allocation back to short and long term fixed income funds. Here’s one of the charts we watched:

Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2, August 28, 2020.

• The Investment Committee saw an opportunity in the gold market. Gold is primarily seen as a hedge against inflation risk within the US Market. As the Federal Reserve printed cash at a rapid pace in April 2020, the value of the US Dollar slipped and many investors flocked to gold as a hedging measure. Gold can also be seen as a consistent store of value during a choppy period of high unemployment and low business activity; its long-term value has steadily increased.

The fiduciary standard of seeking return while managing risk is our priority. A strong investment portfolio compliments a clear financial plan. As your circumstances change and the market gives us more information, we are committed to your personal financial goals within the financial planning process. As always, please contact your Center Financial Planner for advice on your specific situation.

Abigail Fischer is an Investment Research Associate and Investment Representative at Center for Financial Planning, Inc.® She gained invaluable knowledge as a Client Service Associate, giving her an edge as she transitions into her new role in the Investment Department.

---

This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

Can I Afford To Buy A Second Home In Retirement?

Contributed by: Robert Ingram, CFP®

It’s a dream for many Americans as they envision retirement, having a second home as a vacation getaway, a seasonal escape, or a primary residence someday.  Even with the relatively mild winter we’ve just experienced in Michigan, it’s easy to appreciate the idea of living away during the cold months or enjoying a summer home up North.  But before you can live the dream, do your due diligence and crunch the numbers.

Retirement income expenses include the daily cost of living and the things you want to enjoy.  Making a large purchase, such as buying a second home, will take a significant chunk of your savings.  If you’ve underestimated the cost, it will wreak havoc on your retirement income.  

So, how realistic is your second home retirement plan? Factor in our suggestions below.

Purchasing costs

If you plan to buy the home using a mortgage, you will of course have a monthly payment.  While the continued low interest rates may help with the home’s affordability, this payment does add to the expenses that your retirement income sources will support.  Calculate your withdrawal rate (the percentage of savings needed to be withdrawn each year) and determine if it’s sustainable over your retirement years.

Now, if you’re able to purchase the property without a mortgage, yes, you would avoid paying interest and you would have no monthly payment.  On the other hand, using a portion of your retirement savings to purchase the home could mean that you have fewer assets reserved for other retirement spending needs.  Consider the impact it may have on the sustainability of your retirement income and whether purchasing or financing the property is more advantageous.

Don’t forget about property taxes. They’re ongoing expenses that you must factor into your budget. They vary widely depending on the state and local community.  Consider any difference in tax rates; non-homestead property is taxed higher than homestead property.

Additional costs

Unfortunately, we know that the cost of owning a home doesn’t end with the purchase. This is certainly true with a second home as well.  Depending on the property type, location, and climate/environment there may be additional costs that you aren’t used to with your current home.  It’s vital that your plan supports these costs as well.  Some examples include:

• Insurance: You’ll pay annual premiums for homeowner’s insurance on two properties.  Plus, homes with higher risk (e.g. hurricane prone southern states) often require additional flood or wind damage insurance.  In some cases, this nearly doubles the cost of the new policy.

• Condo/Association Fees:  Buying a condominium or a standalone house in a community with a neighborhood association will likely mean additional monthly fees.  Homeowners associations may also impose special assessments during the time you own the property for maintenance projects, community amenities, etc.  Understanding the previous history of assessments and the need for future projects can help you better prepare for those potential costs.

• Maintenance on two properties:  Now you have two homes to maintain.  If your second property is far away or you won’t visit often, you may need to hire people locally to provide the maintenance services for you.

• Home security:  Especially for a home that is unoccupied for long periods of time, you want to protect it from vandalism, trespassing, and burglary.  That could mean investing in security systems or working with local service providers to routinely check-in on the property.   

• Heating and cooling year-round: Unlike cottages or houses up North that you can close down and winterize, vacation homes in warm climates may require you to run the air conditioning when you’re not there.  Issues like mold and mildew can be a problem when temperatures and humidity are too high, which is another reason you may need to hire local services to make sure everything is working properly.

• Insect/pest control:  Your second home may be in a region with insects or other critters that require more regular/aggressive pest control.  Add this to your list of monthly or annual maintenance expenses.

What if I plan to rent out my second home?

• Renting out your second home could be an excellent way to generate additional income to offset the costs of ownership.  However, you could face lifestyle compromises. Here are some considerations:

•  Local rules on renting:  It’s critical to understand any local government ordinances or homeowners association restrictions on using your property as a rental.  In some cases, short-term rentals are not allowed or there are limits on the total number of rentals.

• Property management:  The farther the distance between your rental and primary properties, the greater chance you’ll need to hire a property manager to provide on-site service for your vacation guests or long-term tenants.  Property managers can advertise, book renters, and manage financial transactions.  The cost to outsource these services is typically between 10-35% of the rental cost.

•  Additional insurance coverage:  Tenants may not be covered by your insurance.  Homeowners insurance often covers incidents only when the property is owner-occupied.  You may need to add a form of landlord insurance, depending on factors such as the frequency and amount of days you will have the property rented.  Review your policy to be sure.

• Extra maintenance and repair:  You may face repairs and/or need to replace furniture.  Studies suggest that the cost to maintain a vacation rental is 1.5-2% of the property value each year.

The decision to buy a second home involves a combination of both lifestyle and financial considerations. Build a sound plan by balancing your priorities.  Consult with your financial planner as you work through these important life goals, and if we can be a resource for you, please reach out to us! 

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.