Money Smart Week Participation

 

April 5^th – 12^th marked the Federal Reserve Bank of Chicago’s Money Smart Week. During Money Smart week, a variety of experts in the area of financial planning presented during six days of focused presentations to community groups and educational organizations in an effort to help consumers learn to better manage their personal finances.

This year, The Center’s Melissa Joy and Sandy Adams participated in Money Smart Week as members of the FPA of Michigan. Melissa and Sandy presented Budgeting 101 at community libraries. This is just one example of how we at The Center fulfill our vision of Partnering with a Passion for the Community and our commitment to financial education and literacy.

Why You Can’t Always Take a Tax Deduction on an IRA

On deadline day for filing your taxes, you may be considering making last-minute Traditional IRA contribution.  Most people contribute to an IRA to 1) save for retirement and 2) take a tax deduction on the contribution to hopefully lower one’s overall tax bill.  Many people, however, are not aware that there is a good chance that the IRA contribution they are intending to make or have made in the past, does not allow for a tax deduction. This happens if you are above IRS adjusted gross income (AGI) thresholds.  Eligibility to deduct depends on income and whether or not you are covered under an employer sponsored retirement plan, such as 401k or 403b.

Married Filing Jointly

Both spouses are covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $96,000

Only one spouse is covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $181,000

Neither spouse is covered under an employer sponsored retirement plan at work

• No income limit to be able to fully deduct an IRA contribution

Single

Individual is covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $60,000

Individual is not covered under an employer sponsored retirement plan at work

• No income limit to be able to fully deduct an IRA contribution

There’s a reason the IRS limits the amount that can be deducted by someone who is covered under an employer retirement plan. The IRS tries to prohibit investors who are in higher tax brackets from sheltering “too much” income that won’t be taxed until funds are ultimately withdrawn upon retirement. 

You must also have earned income equal to or greater than the IRA contribution being made during the year in which the contribution will be coded.  For example, for someone to be eligible to make a full IRA contribution, their earned income from work throughout the year must be greater than or equal to $5,500, if under the age of 50, or $6,500 if over the age of 50.  Another important note – Social Security, pension benefits, IRA distributions, dividends, interest, etc. are NOT considered earned income items.  The IRS prevents retirees from contributing to qualified retirement accounts that grow tax-deferred unless they are working. 

In my next blog post, I’ll discuss ins and outs of contributing and withdrawing funds from an IRA where non-deductible contributions were made…this is where things can tricky.  Stay tuned. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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. C14-009199

Elder Care Planning: Preparing an Aging Parent for Financial Capacity Challenges

 Financial capacity is one of the first abilities to decline as cognitive impairment appears, whether due to the slowing down in older age or a more specific dementia diagnosis.  Anyone with an elderly parent should be prepared to face the challenges that can come with diminished financial capacity. The first step in preparation is to understand what you and your mother or father may be facing. Quite literally, financial capacity refers to a person’s ability to manage money and financial assets in ways that meet a person’s needs and which are consistent with his/her values and self-interests.  Financial capacity includes basic skills like identifying and counting money, understanding debt and loans, handling cash transactions, paying bills, and maintaining judgment to act practically and avoid exploitation. Given that, for most of us, the loss of some financial capacity is inevitable, these are some risks and how to prepare your family:

Financial Management Challenges – most often, the ability to handle the day-to-day money management becomes a challenge.  This may mean that things like handling incoming checks and bills or balancing the checkbook become difficult.  In these instances, bouncing checks, not paying bills when they are due, and not filing tax returns are commonplace.  It goes without saying that this can cause a multitude of problems (not to mention, extra cost).

Fraud/Financial Exploitation -- more and more we are hearing about occurrences of financial fraud, with older adults being the most targeted victims. Financial fraud and exploitation can come in many forms, including but not limited to theft of checks (Social Security, pension, etc.), theft or unauthorized use of ATM or credit cards to access funds, and tax fraud.  Many times, a trusted friend, family member or caregiver is the one taking advantage of the older adult.

What can you do to prepare to help you and your aging parent avoid these potential risks?

• Make sure to have an update General/Financial Durable Power of Attorney naming a trusted family member or friend in place. 
• Consider having a Revocable Living Trust drafted that names a successor to handle things in the case of financial incapacity; appropriate assets should be titled in the name of the trust.
• Get your aging parent to communicate with his or her current/future Power of Attorney and/or Successor Trustee (and appropriate family members or friends) about money goals and values.  In addition, make sure all of his or her financial information is documented and organized in the case that someone needs to assist with financial matters in the future (consider a tool like our Personal Record Keeping Document and Letter of Last Instruction for this purpose).
• Help facilitate an introduction between your parent’s current/future Power of Attorney and/or Successor Trustee (and appropriate family members or friends) to his or her  financial team (financial planner, CPA and estate planning attorney).  Make sure that each member of the professional team has authorization to talk to (1) other members of your professional team and (2) family members or friends that might assist in the future. 
• Make sure that the chosen financial planner has a written Investment Policy Statement in place for managing your love one’s investment portfolio.  This written document outlines goals, risk tolerance, asset allocation preference and needs related to your parent’s investments. 

By working with a professional and personal team to plan ahead for the possibility of financial incapacity, you give yourself and your loved ones the best chance to avoid the risks to future financial independence.

This is the second in a monthly post (2^nd Thursday of each month) that will address Elder Care planning topics.  If you have a specific question or issue you’d like addressed, please contact me at Sandy.Adams@CenterFinPlan.com.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information in this material does not purport to be a complete description of the issues referred to herein. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. C14-009365

Winning Strategies Borrowed from the Game of Chess

 I learned to play chess when I was 8 years old.  The game always appealed to me because of the complex strategy and tactics involved.  Although I always enjoyed the game I never took it seriously until I was a little older.  After I graduated college and had a little money in my pocket, I decided to start competing in major tournaments and was very proud to win the state of Michigan Chess Championship in 2009 and 2011.  With this strong love and passion for the game of chess, it’s no coincidence that I ended up in finance.  There are several parallels between chess and finance, but here are a few of the most noteworthy.

Coordination of Pieces

In chess utilizing your pieces in a coordinated approach is one of the biggest keys to success.  To the amateur chess player this can be a very daunting task.  How could a knight, queen, bishop, pawn, and rook, which all move differently, be used in a coordinated, synchronized attack?  The exact answer to that could fill a whole book, but suffice to say it can be done. Similarly, in finance, think of all the moving parts to your personal situation and think of all the relevant questions that might stem from the various personal financial decisions.  Am I saving enough for retirement? When can I retire? What are the tax implications of my investments? Do I have enough Life Insurance? Do I have the right type of Insurances? Do I need a will and a trust? Should I have an emergency savings account and how much should be in it?  Am I maximizing my benefits at work?  These are just a few of the hundreds of potential questions that we at The Center answer on a daily basis. In chess terms we would say don’t consider moving one piece without considering what effect it will have on the rest of the army.

Patience and Discipline

Playing competitive chess at a high level you have to be very patient and disciplined.  If you’re too hasty you could easily squander your advantage.  It’s best to slowly improve your position until your army is as efficiently placed as possible.  In finance, especially with retirement investing, you have to be very disciplined to stick to your asset allocation in good times and in bad. 

Controlling Emotions

Let’s face it, money can be a very emotional subject.  However, making emotional decisions when it comes to money is seldom a good idea.  The same is true for chess.  It’s not unusual to find yourself in a difficult position where your opponent is throwing everything but the kitchen sink at you.  The emotional response is to give up and throw in the towel, but the true chess masters are able to control that natural human response and fight on.  I have had many beautiful games where I was dead lost, but I refused to give up, and ultimately was able to pull through. Many investors probably felt the same way in 2008 when it might have seemed the entire stock market was going to implode.  A lot of people couldn’t handle the emotions involved, and unfortunately moved to cash at the worst possible time. Those able to overcome the natural human response to flee to cash were probably in a better position when the market rebounded.

Team Game

Chess is a team sport.  Well not really…but I’ve found the biggest improvements I’ve made as a player have come when other professional chess players critique my games.  No matter how good you are, there is always room for improvement and ways to look at the same old positions in a different light.  The same is true in finance.  At The Center, each of our clients has a dedicated team of professionals to service their personal financial situation.  The lead financial planner, the support planner, and the client service associate are always making sure we are working as diligently as possible to help clients improve their overall financial position. 

You should never feel like a pawn when it comes to your financial plan. You are in control and with coordination, patience, control, and helpful advisors you can find a suitable strategy.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. C14-009192

Save the Date: May 4, 2014 Cystinosis Fun Run/Walk

 On May 4^th we will hold the 8^th Annual Cystinosis Fun Run/Walk in honor of Kacy Wyman. In the past we have had over 400 walkers and runners support the event and Kacy. We understand that there are many worthy causes and feel very fortunate that so many have chosen to support Kacy’s cause in the past – and appreciate you considering a financial contribution for our May 4^th event.  All proceeds benefit Cystinosis Research Network. CRN is an all-volunteer, non-profit 501(c)(3) organization. The CRN Federal Tax ID# is 04-3323789.

Thanks to 37 pills a day, eye drops 8-10 times per day and 7 liters of water Kacy’s condition is stable – but we need a cure. Community supporters raised near $30,000 for the Cystinosis Research Network last year. These funds help with continued research projects to improve the quality of life for those dealing with Cystinosis and other rare diseases, and ultimately a cure! Your financial support is making a difference in Kacy’s life and all of the children enduring this rare disease called Cystinosis (Sis-ta-know-sis). Your support drives research and gives us hope that a cure will be found during Kacy’s lifetime. Thank you again for considering.

Checks should be made payable to:
Cystinosis Research Network

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A14-005959

5 Steps to Being Cautious While Still Taking Life’s Chances

In the arena of finance, risk is inherent.  Think about the risks you take everyday. When it comes to investment expectations there is always the risk that the outcome will be different than anticipated. When it comes to the income your family depends upon, there is always the risk of job loss. When it comes to budgeting, there is always the risk of inflation, which could leave you without enough to keep up with the rising cost of things around you. When it comes to your family, there is always the risk that someone could face a health challenge or a long-term illness.

Learning About Risk

After 25 years working with people, I have seen families lose children and grandchildren to tragedy.  I have witnessed divorce and marriage and have seen first-hand financial windfall and destruction. Helping clients through all this has helped me gain a better understanding of risk tolerance and realize that risk preferences vary greatly.  Most people want to avoid risk as much as possible, but many have to learn that the hard way.  Remember your first loss? The big one? How did it affect you? If it was truly the big one, then it made you sit up and take notice.  It left an impression on you and your decisions.  And it may have given you a deeper understanding of what risk really means.

5 Steps to Managing Risk

Despite the fact that we all must learn to live with risk, there are steps we can take to help mitigate the downside when it comes to financial planning:

1. Diversification, asset allocation and rebalancing: While this won’t make you rich quick, it should help reduce overall portfolio volatility.

2. Insurance: For a relatively small cost you can provide for the safety of a young and growing family for many years and provide protection in case of premature death or disability.

3. Emergency Funds: Always maintain the appropriate emergency balance for your situation.  A simple rule of thumb is 3-6 months of expenses. Then you may want to consider choosing investments that are marketable and liquid for your taxable portfolios.

4. Long-term Care Insurance: To avoid a catastrophic financial blow if a spouse develops a long-term illness and needs expensive health assistance, consider long-term care insurance when you’re in your late 50s.

5. Estate Planning:  By taking just a few minutes to write out a plan, there’s a better chance of things happening as you wish. Write a holographic will (handwritten and signed) or go to your state website and pull off the appropriate documents (like wills, powers of attorney, patient advocate designations, etc.). Complete them or set up a meeting with an estate planning attorney to help you with this process. 

If you need help getting started with any of these steps or making a personal plan to help you prepare for life’s inherent risks, contact me at matthew.chope@centerfinplan.com.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute investment advice. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Diversification and asset allocation do not ensure a profit or protection against loss. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Investing involves risk and you may incur a profit or loss regardless of strategy selected. C14-005525

Center Wins Governor’s Healthy Workplace Award

 Financial health isn’t the only health our Center team focuses on every day.  One of our core values is living a balanced life which means keeping all areas of our lives healthy and balanced.  Part of that balance includes dipping into some physical activity and good nutrition.  We find it keeps our energy up, our minds focused and our creativity flowing allowing us to better serve our clients, our family, each other and our community.  That’s why we are so excited to announce winning the Healthy Workplace Award in the small business category presented by the Michigan Fitness Foundation and the Governor’s Council on Physical Fitness, Health and Sports. 

You may see some of our posts from time to time talking about what we’re doing in the health and wellness area.  Don’t be surprised if you see us on the ball (balanced ball that is) at our computer or eating a healthy snack.  We share in the Governor’s passion for promote fitness and health. So next time you stop in to see us at The Center, feel free to share some of the things you’re doing to lead a healthier, more balanced life. We’re always looking for great new ideas!

To see other companies on the list, click here.

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A14-006732

The High Cost of Dying

 Death is the inevitable end of life and most of us do not spend much time thinking about it or the cost. According to the National Funeral Directors Association the average funeral can exceed $10,000 when you include cemetery costs. How we memorialize our loved ones is dictated by religious, cultural and societal practices, which may increase the cost dramatically.

Three Options for Funeral Planning

Most funeral practices are regulated at the state level with recent efforts to standardize practices through the national association. There are several ways to prepare for funeral costs.

• Final Expense Insurance is a low-cost whole life insurance with face values in the amounts of $5—25,000. An advantage of these policies is the ease at which they can be obtained. The disadvantage is the proceeds do not necessarily have to be used for funeral expenses.
• Pre-need Funeral Contracts are basically insurance policies. The money is placed into a trust, as regulated by most states. Clients should receive information on the policies over the years.
• Funeral Trusts allow individuals to pre-pay funeral services so the money will be available when needed. Again, most states require the money to be put into a master trust, appropriately invested with clients knowing the name of the institution where it is held and receiving periodic reports.

Funeral Rule Legislation Protects Relatives

One of the most significant pieces of consumer protection legislation is the Funeral Rule, enforced by the Federal Trade Commission. This rule makes it possible for consumers to purchase only those goods and services they want, rather than an entire package of goods and services offered by the funeral home. Funeral homes must provide a general price list that includes all items and services the home offers and the cost of each one. Generally, this rule provides:

1. A person has the right to choose the funeral goods and services they want
2. The funeral provider must give a person a general price list that states what is wanted in writing
3. If state or local law requires individuals to buy any particular good or service, it must be stated with references to the law
4. The funeral director cannot refuse to handle a casket or urn purchased somewhere else
5. Funeral directors that provide cremations must make alternative containers available to consumers
6. Individuals cannot be charged for embalming if not authorized

This legislation was passed to counteract many abusive practices that existed within the industry.

In addition to the cost of funerals, the biggest assistance living individuals can give to their loved ones is to leave their wishes on what services they would like for themselves. These wishes should be stated in writing and placed where they will be found. It is recommended it not be in the will, which may not be discovered until after the funeral. It is a great gift to the family to know they are providing the type of service their loved one desired.

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Any information is not a complete summary or statement of all available data necessary for making an investment decision. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. C14-007746

Investment Performance - 1st Quarter 2014

Source: Morningstar

US Bonds represented by Barclay's US Aggregate Bond Index a market-weighted index of US bonds. US stocks per S&P 500 Index a market-cap weighted index of large company stocks. Barclay’s Capital Global Bond index is a market-cap weighted index of global bonds. US Small Companies per Russell 2000 Index a market-cap weighted index of smaller company stocks. International stocks measured by MSCI EAFE is a stock market index designed to measure the equity market performance of developed markets outside of the US and Canada. Commodities per Morgan Stanley Commodity Index a broadly diversified index designed to track commodity futures contracts on physical commodities. Barclays Capital US Corporate High Yield Index is an unmanaged index that covers the universe of fixed-rate, noninvestment-grade debt. Barclays Capital US Corporate High Yield Index is an unmanaged indexthat covers the universe of fixed-rate, noninvestment-grade debt.

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

Retirement Strategies: Which Account Should You Tap?

 Receiving a pay check when you are in your working years is pretty straightforward.  You work hard each week, typically have a certain amount of federal and state taxes withheld, and you get paid.  Pretty simple, right?  Fast forward to the golden years of retirement, when you are no longer working for the income you receive, you are generally getting paid from the money from the portfolio you invested in over those hard-working years.  At this stage, the tax treatment of your “pay check” becomes a little more complicated.  With several different types of accounts and income sources, such as pension and Social Security, which account should you consider drawing the income from? Let’s take a look: 

Enjoying Life in the Go-Go Years

Take the example of a 63-year-old couple, just retired, and planning to enjoy a few years of extensive travel, golf and entertainment.  Spending is typically a little higher in these initial years of retirement. At The Center, we refer to them as the “go-go” years.  Both are receiving nice pension benefits ($100,000 total) and have collected Social Security ($40,000 total) at 62. The couple has their home paid off, live a healthy lifestyle and have very little itemized deductions and therefore take the standard deduction ($12,200) when they do their taxes.  They have both accumulated sizable IRAs ($750,000 total) and a joint taxable brokerage account of $250,000.  The clients would like to draw $60,000 from their portfolio for 6 years and begin to cut back once they are in their late sixties.  So what account(s) do we take the $60,000 from?  First off, let’s clarify the tax treatment between the IRA and joint account. 

The IRA: Any funds withdrawn from the IRAs will be treated as ordinary income and included in taxable income at the end of the year.  This is because the clients received a tax-deduction when they initially made contributions. 

The Joint Account: Withdrawals from the joint account on the other hand, will not be treated as ordinary income – the funds contributed to this account never received a tax deduction.  Unlike the IRA, however, the joint account does not grow tax-deferred and the clients will receive a 1099 each year showing capital gains or losses and any dividends or interest paid in the account. 

The Answer: If we take the full $60,000 from the IRA, the additional income will push them from the 25% tax bracket into the 28% bracket and a portion of the distribution would be taxed at 28%.  If the funds were taken from the joint account, the clients would not pay ordinary income tax on the distribution, thus keeping them in the 25% bracket and reducing their overall tax bill.

Everything in Moderation

Now let’s look at a different 63-year-old married couple living a much more modest lifestyle.  They do not have a pension and usually only live off the $40,000 they receive in Social Security benefits.  They also have a total of $750,000 between both of their IRAs and a $250,000 joint taxable brokerage account.  Their Social Security benefits are not taxable in this case because their AGI is under the IRS threshold. They still have a mortgage on their home and give money to several charities throughout the year which allows them to itemize their deductions ($25,000 total).  This year is an exception to their normal frugal lifestyle; they’d like to take $10,000 from their portfolio to go on a 10 day vacation to Hawaii. What account(s) should they take the funds from?  (Hint: Think of the difference between the tax treatment for the IRA and joint account from our previous example) 

The Answer: Assuming modest interest, capital gains and dividends from the joint account, they would feasibly be able to withdraw the $10,000 from the IRA and not pay any federal tax after factoring in their itemized deductions and personal exemptions, even though the IRA distribution was included in their ordinary income. 

As you can see from these examples, there is never a “one-size fits all” answer.  As financial planners, our team does just that, PLAN!  We take a close look at each client’s current and projected tax situation and coordinate with other professionals to make sure we are being as efficient as possible while getting you the funds you need to live the life you choose. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The examples provided are hypothetical. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or withdraw decision. Please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should discuss any tax matters with the appropriate professional. C14-007122