Tax Planning

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Tax Reform Series: Changes to Standard Deduction, Personal Exemption, Misc. Deductions, and the Child Credit

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Contributed by: Matt Trujillo, CFP® Matt Trujillo

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

Key Highlights:

  • Personal exemptions, which were previously used to reduce adjusted gross income, have been eliminated entirely

  • The standard deduction has been increased to $12,000 for single filers (previously $6,350) and $24,000 for joint filers (previously $12,700)

  • Several deductions that used to be available to tax filers that itemized their deductions have been eliminated or reduced such as:

    • The deduction for state and local taxes is now capped at $10,000 as opposed to the unlimited amount that was deductible under previous tax law

    • Lowers the threshold for mortgage interest deductibility; now only the interest on debt up to $750,000 is eligible to be deducted as opposed to $1,000,000 under previous tax law

    • Miscellaneous itemized deductions have been eliminated entirely as a category; these deductions included things like unreimbursed business expenses, tax preparation fees, and investment fees.

  • The child tax credit is expanded to $2,000 per child and is refundable meaning even if you have zero tax liability you can still get a check back from the IRS for this credit

    • This credit was previously $1,400 per child and would begin to phase out for joint filers at $110,000 of adjusted gross income; the credit now doesn’t begin to phase out until you reach $400,000 of adjusted gross income (for joint filers)

If you are curious to know more about how the changes may impact your specific situation please contact our office to discuss!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. 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. 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.

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Tax Reform Series: Changes to Federal Income Tax Brackets

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Contributed by: Robert Ingram Robert Ingram

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The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

The TCJA brings many changes to both corporate and individual tax laws in 2018.  You may be asking yourself, “what do these changes mean for me?” A good place to start may be with the new personal income tax brackets.

How tax brackets work

When calculating our Federal tax liability on regular income, we apply a tax rate schedule to our taxable income. The taxable income is a filer’s income after any adjustments and exclusions (adjusted gross income) and after subtracting applicable deductions and exemptions. Specific rates are then charged on different ranges of income (tax brackets) as determined by tax filing status. Currently, in 2017 there are 7 brackets where the rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax bracket structures and how the taxes would be assessed for two of the most common filings statuses (single and married filing joint returns) are as follows:

Current 2017 Individual & Married Tax Brackets

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Under the current 2017 tax brackets, for example, a married couple filing jointly with taxable income of $150,000 would have the first portion of their income up to $18,650 taxed at 10%.  The amount from $18,651 up to $75,900 would be taxed at 15% and then the remaining amount of their income from $75,901 up to the $150,000 would be taxed at 25%.

What is changing?

While the House of Representatives’ original tax reform proposal would have consolidated the 7 brackets down to 4, the final Tax Cuts and Jobs Act retains 7 brackets but reduces the tax rates on most the brackets by a couple of percentage points and adjusts the income ranges within them.  The examples for those filing as single and for married couples filing jointly are below.

New 2018 Individual & Married Tax Brackets Under the TCJA

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If the bracket rates are generally lower, does that mean my taxes will be lower?

Well, the good news is that the answer is…maybe.

If taxpayers apply the new tax rates in 2018 to the same level of taxable income they would have in 2017, many people would see a lower overall, effective tax rate on that taxable income. (Good news, right?)  However, other changes outlined in the TCJA, such as the new standard deduction amount, the elimination of the personal exemptions, and the cap on the amount of state and local taxes that are deductible could have an impact on your taxable income amount.  As a result, the actual taxes applied may or may not see as much of a reduction. 

Ultimately, how your own tax situation may change in this new tax landscape will depend on a combination of factors and decisions.  It is important to consult with your advisors.  As always, if you have any questions surrounding these changes, please don’t hesitate to reach out to our team!

Robert Ingram is a Financial Planner at Center for Financial Planning, Inc.®

This information and all sources have been deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax matters. Tax matters should be discussed with the appropriate professional.

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2017 Year-End Financial Planning

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Contributed by: Josh Bitel Josh Bitel

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With the fourth quarter upon us, tedious tasks like assessing your financial situation can often fall by the wayside.  With that in mind, this is a good time for us to share some important items to consider before the end of the calendar year. Here are a few things to consider before you take on 2018.

Establish or tighten up your emergency fund.

As we often recommend, keeping three to six months worth of expenses saved in an easily liquidated and accessible account can protect you against any unforeseen perils that may arise. Getting an emergency fund in place before the year wraps up is a great way to jump-start your budget for 2018.

Check your flexible Spending Account

Make sure you don’t end the year with a balance inside your FSA plan. Most of these plans have a ‘use it or lose it’ feature. So if you’re putting off that pesky doctor’s visit or are overdue for a new pair of prescription glasses, use your pre-tax dollars you’ve elected to cover these expenses!

Review your retirement accounts to make sure you’re on track to maximize your contributions

Whether it is an IRA account, either traditional or Roth, or an employer sponsored plan, the end of the year is a great time to assess your contributions and make sure you’re on track to meet your goals. This is important for your tax situation as well, as you may be able to deduct contributions to certain retirement plans. Although IRA accounts can be funded up until April 15th of the following year (up to $5,500 if you’re under age 50), it’s never too early to make sure you’re on track!

Give a tax-deductible charitable contribution

The end of the year is a time when we’re all thinking about giving. If you are charitably inclined, the end of the year is a great time to donate to any causes you are passionate about so you can receive a write off on your taxes for 2017. Don’t forget, donating appreciated securities from a taxable account is often more advantageous for you and the cause you believe in! Make sure you are making this donation for something you really believe in and not just for the potential tax write-off, the holiday season is a great time to asses this.

As always, in regard to your financial life, we are here to assist in anyway we can. These are just a few of the things you should keep in mind as the year wraps up. If you have any questions regarding your personal situation, contact us here at The Center for Financial Planning.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

Is Corporate Tax Reform a Good Thing?

Contributed by: Jaclyn Jackson Jaclyn Jackson

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The probability of tax reform is increasing with the White House proposing to reduce the corporate statutory federal tax rate from 35% to 20%.  Even though most companies don’t actually pay at the 35% tax rate (26% median effective tax rate for the S&P 500), the tax cut is projected to lift S&P earnings by 8%.  While S&P projections sound good, economic benefits are not a sure thing as implications could have varying outcomes based on historical data. 

To illustrate the complexity of implications, I’ve outlined core arguments that prove and disprove the benign effects of lowering the corporate tax rate.

For:

  1. Incentivizes US companies to stay in the US, expand business, and increase employment.

    According to a study done by J.P. Morgan, 60% of the cash held by 602 US multi-national companies is in foreign accounts. They concluded that $663 billion would be invested into business expansion and job growth in the United States, if an income tax cut were offered to companies that repatriate.
     

  2. Higher corporate income taxes lower worker wages, diminish consumption, and increase unemployment.

    Using data from 1970-2007, a Tax Foundation study found that for every $1 increase in state and local corporate tax revenues, hourly wages would drop an estimated $2.50. Theoretically, lower wages decrease one’s ability to buy goods, resulting in lower income for businesses thereby creating a net increase in unemployment.
     

  3. Job growth is inhibited by the current corporate income tax rate which is over the rate that maximizes revenue to corporations and the US government.

    Based on studies of the Laffer curve, the corporate income tax rate that maximizes revenue to both corporations and the US government is 30%.

Against:

  1. Repatriation doesn’t ensure more jobs in the US.

    Congress passed a tax holiday in 2004 that allowed companies to bring back earnings made abroad at a 5% income tax instead of at 35%.  Fifteen of the companies that most benefitted cut more than 20,000 net jobs.
     

  2. Historically, unemployment rates were the lowest in US when federal corporate income tax rates were the highest.

    From 1951 (top marginal corporate income tax rate rose from 42% to 50.75%) to 1969 (rates reached 52.8%), the unemployment rate moved from 3.3% to 3.5%. From 1986 to 2011 (top marginal corporate income tax rate declined from 46% to 35%), the unemployment rate moved from 7% to 8.9%.

    Majority of economists don’t link employment to lower tax rates.  When 53 American economists were polled, 65% attributed employers not hiring to lack of product/service demand.
     

  3. High corporate profits don’t guarantee low unemployment rates.

    In 2011, corporate profits made up 10% of US GDP (highest since 1950), but corporate income tax revenue only brought the US federal government the equivalent of 1.2% of GDP (lowest in recorded history). In 2011, the US unemployment rate was 8.9% compared to the OECD (Organization of Economic Cooperation and Development) average of 8.2%.

*Data summarized from https://corporatetax.procon.org/.

While most would agree lowering corporate tax rates deserves serious consideration, it is not a given that lowering corporate tax rates will improve employment nor consumption.  Today, US corporate profits are high (sitting on nearly $2 trillion in cash), yet wages and job creation hasn’t gone up significantly. There are many other factors to consider with comprehensive tax reform, not to mention the tough tradeoffs involved in this process. Frankly, tax reform is a huge, convoluted undertaking; time will tell whether the current administration is up to the task.

Jaclyn Jackson is a Portfolio Administrator and Financial Associate at Center for Financial Planning, Inc.®

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. Past performance is not a guarantee of future results.

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Webinar in Review: Year-End Tax Planning

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Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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On November 14th, Melissa Joy, CFP® and I hosted The Center’s annual Year-End Tax Planning Opportunities and Strategies webinar which continues to be one of our best attended discussions throughout the year.  In 2016, Melissa and I hosted the webinar two days after the presidential election and this year, the presentation was held several days after the latest GOP tax reform proposal.  Needless to say, it’s been a great chance for our team to share timely updates with clients and strategic partners! 

If you weren’t able to attend the webinar live, we’d encourage you to check out the recording below.  Here are a few key points and takeaways from our discussion:

Potential Tax Reform Highlights  

  • Moving from seven tax brackets down to three or four: 12%, 25%, 35% and 39.6%

  • Elimination or caps on popular deductions:  State and local taxes, medical expenses, student loan interest, mortgage deduction cap, property tax cap

  • Larger standard deduction (almost doubling from $12,700 for married filers to $24,000)

  • Repeal of Alternative Minimum Tax (AMT)

  • Corporate tax reduction (moving down to 25%)

  • Estate tax exemption (almost doubling from $5.5M to $11M, with the goal of repealing the estate tax completely within 6 years)

2018 Updates

  • Social Security Cost of Living Adjustment (COLA), Medicare premium adjustments, retirement plan contribution and income limit adjustments, etc.)

Retirement Planning   

  • Evaluate your savings rate moving into the new year and if you’re not maxing out your 401k ($18,500 or $24,500 if over the age of 50), consider increasing your savings percentage by 1% - 2% each year

  • Work with your advisor to determine if the Traditional (pre-tax) or Roth (after-tax) retirement vehicles makes sense for your situation given your current and projected future tax bracket  

Charitable Giving

  • Consider utilizing a Donor Advised Fund to gift appreciated securities from a brokerage account – allows you to take a tax deduction and also avoid paying capital gains tax

  • Consider utilizing the Qualified Charitable Distribution (QCD) if you’re over the age of 70 ½ - allows you to gift funds directly to charity from your IRA

Investment Planning  

  • Review your allocation before year end to see if your mix between stocks and bonds is appropriate for your situation

  • Consider the asset location of your portfolio to potentially improve after-tax returns

  • Consider proactive planning such as tax-loss harvesting

As mentioned during the webinar, don’t forget to check out our Year-End Planning Opportunities guide in the resources portion of our website.  This guide acts as a helpful tool to help organize your financial picture before year and also provides further insight on retirement planning strategies to consider as well as a detailed overview of proposed tax reform.  Please feel free to contact your financial planning team at The Center with any questions or concerns, we’re here to help.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

This information is being provided for educational purposes only and is not intended as specific tax or investment advice. 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.

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2018 Increases Retirement Plan Contribution Limits and Other Adjustments

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Contributed by: Robert Ingram Robert Ingram

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Several weeks ago, the IRS released updated figures for retirement account contribution and income limits for 2018.  Like the recent Social Security cost of living adjustment, the adjustments are minor but certainly worth noting. 

Employer Retirement Plans (401k, 403b, 457, and Thrift Savings Plans)

  • $18,500 annual contribution limit (up from $18,000 compared to 2017 – first increase in 3 years!)

  • $6,000 “catch-up” contribution if over the age of 50 remains the same as 2017

  • Total amount that can be contributed to defined contribution plan including all contribution types (employee deferrals, employer matching and profit sharing) increases to $55,000 (up from $54,000 compared to 2017) or $61,000 if over the age of 50 ($6,000 catch-up)

    • Consider contributing after-tax funds if available and cash flow allows for it.

In addition to the contribution limits increasing for employer-sponsored retirement plans, the IRS adjustments provide some other increases that can help savers in 2018.  A couple of highlights include:

Traditional IRA deductibility income limits:

Contributions to a Traditional IRA may or may not be tax deductible depending on your tax filing status, whether you are covered by a retirement plan through your employer, and your modified adjusted gross income (MAGI).  The amount of your Traditional IRA contribution  that is deductible is reduced (“phased out”) as your MAGI approaches the upper limits of the phase out range.  For example,

  • Single: Covered under a plan

    • Phase out begins at $63,000 up to $73,000 compared to 2017 (phase out: $62,000 to $72,000)

  • Married filing jointly: Spouse contributing to the IRA is covered under plan

    • Phase out begins at $101,000 to $121,000 compared to 2017 (phase out: $99,000 to $119,000)

  • Spouse contributing is not covered by a plan but other spouse is covered under plan

    • Phase out begins at $189,000 to $199,000 compared to 2017 (phase out:  $186,000 to $196,000)

Roth IRA contribution income limits:

Whether or not you can make the maximum contribution to a Roth IRA,  ($5,500 in 2018 plus a $1,000 “catch-up” for individuals age 50 and above) depends on your tax filing status and your MAGI.  The contribution you are allowed to make is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range.  In 2018 for example,

  • Single

    • Phase out begins at $120,000 to $135,000 compared to 2017 (phase out:  $118,000 to $133,000)

  • Married filing jointly

    • Phase out begins at $189,000 to $199,000 compared to 2017 (phase out: $186,000 to $196,000)

If your income is over this limit and you cannot make a regular annual contribution, you might consider a popular planning tool known as the “back-door” Roth conversion.

As we enter 2018, these updated figures will be on the forefront when updating your financial game plan.  However, as always, if you have any questions surrounding these changes, don’t hesitate to reach out to our team!

Robert Ingram is a Financial Planner at Center for Financial Planning, Inc.®

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Bob Ingram, CFP® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. 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. The above hypothetical examples are for illustration purposes only. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

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Guide to the 2017 Benefits Open Enrollment

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Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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As summer winds down and we quickly approach the holiday season, many employees will soon be updating their benefit options at work during open enrollment (click here to check out our webinar from last year on this topic).  It’s extremely easy to procrastinate and set that employer benefit booklet off to the side and put it off until you receive the e-mail from HR reminding you it’s due in a few days.  You scramble to complete the forms and more than likely, not spend as much time as you should on electing the benefits that will impact you for the next 365 days.  We’ve all been there, but it’s important to carve out a few hours several weeks before your benefit elections are due to ensure you put in enough time to thoroughly review your options.

If offered by your employer, below are some benefits that you should have on your radar:

  • 401k Contributions

    • Are you maximizing your account? ($18,000 or $24,000 if you’re over 50 in 2017)

    • Traditional vs. Roth – click here to learn more about which option could make sense for you  

  • Health Insurance

    • HMO vs. PPO - Click here to learn more about how these plans differ from a cost and functionality standpoint  

  • Flex Spending Accounts (FSA)

    • “Use it or lose it” – click here to learn more 

    • Medical FSA maximum annual contribution 2017 is $2,550

    • Dependent care FSA maximum annual contribution for 2017 is $5,000

  • Health Savings Accounts (HSA)

    • Can only be used if covered under a high-deductible health care plan

    • Click here to learn more about the basics of utilizing a HSA 

      • $3,400 maximum annual contribution in 2017 if single ($4,400 if over 50)

      • $6,750 maximum annual contribution in 2017 for a family ($7,750 if over 50)

  • Life and Disability Insurance

    • Most employers will offer a standard level of coverage that does not carry a cost to you as the employee (example – 1X earnings)

    • If you’re in your 20s, 30s and 40s, in most cases, the base level of coverage is not sufficient, therefore, it’s important to consult with your advisor on the on appropriate amount of coverage given your own unique situation  

As with anything related to financial planning, every situation is different.  The benefits you choose for you and your family more than likely will not make the most sense for your lunch buddy co-worker.  We encourage all clients to loop us in when reviewing their benefit options during open enrollment – don’t hesitate to pass along any questions you might have to ensure you’re making the proper elections that align with your own personal financial goals.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete.

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Webinar in Review: A Beginners Guide for Those Just Starting Out

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Contributed by: Emily Lucido

With a little bit of wit and a whole lot of information, Kali Hassinger, CFP® and Josh Bitel, Client Service Associate, recently presented a webinar that provided young folks with a broad guide for how to start their financial lives off on the right foot. As we found out during the presentation, making smart choices early can make life easier in the long run.

Although Millennials have an average debt of 50% in just student loans, they are doing better than most people might think. About 80% have a budget and 72% are saving for retirement. (Source: http://bit.ly/2bBC3vG). If you are a Millennial and are reading and thinking, “I’m not saving for retirement and I don’t have a budget,” that’s okay! Even by taking small steps now, you can make a huge difference rather than waiting. There are a lot of different factors to think about when tackling financials in the “real world.” The first step is to get organized.

Spending vs. Saving

You can spend smarter by following these tips below:

  • Stay Organized - which can include setting up account notifications & alerts

    • These notifications can be set up for when you complete a transaction, or if your balance falls below a specific amount (you can set the minimum balance amount yourself)

    • The notifications can also be good for detecting fraud

  • Applications & Technology

    • There are a ton of free apps out there that can help with any situation, just google your need and you can find something suitable for you

  • Figuring out your Credit Score

    • Credit Karma gives you free access to your credit score and is highly secure

    • What determines your credit score?
      ~ Check out our blog that breaks down your credit score composition!

    • When building credit and using credit cards, you want to make sure to use only around or below 30% of your available credit

    • Watch for annual fees on credit cards; see if opening the card is worth the annual fee you will end up paying

    • Set up auto pay on all your bills with your credit card to benefit with cash back and rewards

    • To avoid ATM fees, go to the store and buy something small (like a pack of gum) and then get cash back on that purchase

  • Student Loans

    • Student loans are something you want to start paying down right away – and if you can make more than just the minimum payment, try to do that

    • Make sure your payments are being allocated toward your highest interest loan

    • A good resource to show you every student loan you have, whether federal or private is, Annualcreditreport.com

Saving is so important, and to start sooner can make such a big difference in the long run. These tip s help with how to smartly save money:

  • Cash Savings

    • In case of emergency it’s good to have six months of living expenses in a savings account

  • Investing Early

    • The graph below demonstrations how investing your savings early can really benefit you in the long run

    • In the example below Chloe started investing from age 25 and almost reaches $2 million dollars by the age of 65, while we see Noah saves from age 25 (the same amount of money) and just let it sit in cash and only obtained about $653,000 by the age of 65.

  • Retirement Savings

    • Although retirement might seem far away, it is important to be forward thinking and plan ahead

    • Employer plans are a great opportunity to save money if your company offers one - always remember to contribute at least the match if you can

  • If your employer doesn’t offer a retirement plan you can still invest through a Roth IRA or Traditional IRA. Depending on your situation a Roth or an IRA could work for you.

  • Taxes – some quick tips

    • The more money you make, the more you pay in taxes!

    • You can write off student loan interest of up to $2,500 per year

    • TurboTax® is a great online resource for doing your taxes with a 100% accurate calculation guarantee

  • Insurance

    • Insurance is something that is so important – but something that can be overlooked when we are young

    • Staying on your parents health coverage until age of 26 is great – but don’t just assume it’s the best option because you aren’t paying anything

    • Remember to get renters insurance when living in an apartment – you never know when you might need it!

The last thing to remember is the 28/36 Rule. Your housing expenses should not exceed 28% of your gross monthly income while your total debt payments should not exceed 36%. Remember, the earlier you start saving the better – and any place you start at is good.

Take 30 minutes to view the webinar below and get the full details of Kali and Josh’s discussion. If you have any questions, please reach out to us -- we’re here to help!

Emily Lucido is a Client Service Associate at Center for Financial Planning, Inc.®

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Emily Lucido and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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Retirement Planning: Roth 401k vs Traditional 401k

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Contributed by: Kali Hassinger, CFP® Kali Hassinger

With our country’s ever-changing tax policies, we are left to hypothesize what taxation will look like in the coming years. Striking the right balance between taxation now and taxation during retirement is complicated, but a recent study has shown that it may not significantly affect our overall savings behaviors. Since 2006, employers have had the option to offer Roth 401ks to employees, and approximately 49% of employers now include this option as part of their incentive package. 

Roth 401ks effectively remove a large portion of the taxation mystery because all employee contributions are made on an after-tax basis. That means that you pay the tax today at the current and stated rate, but, assuming you wait until 59 ½ and have held the account for five years, all withdrawals are tax-free. All employer matches and contributions, however, are still made on a before-tax basis, so there will still be a tax liability for those future withdrawals.

The Harvard Business School study compared the current and previous savings rates of employees who were given the option to contribute to a Roth 401k and a traditional before-tax 401k. Somewhat surprisingly, there were no significant changes or differences between the before-tax 401k and Roth 401k savings rates. It would be easy to assume that Roth 401ks would have a lower contribution rate because current taxes would eat away at the employee’s ability to save. However, it instead appears that employees continued to use the same savings rates as before-tax 401ks, effectively reducing their current cash flow. Although the participant will pay more tax today, they will have greater purchasing power during retirement. 

The study also touched on the significant participation rate differences between 401k plans that automatically enrolled employees and those that didn’t. With an automatic enrollment plan, unless they choose otherwise, the employee will contribute at least the plan’s default deferral percentage. The lowest participation rate in the studied auto-enroll plans was 90%, while the highest participation rate for a non-enrollment plan (meaning the employees had to manually choose to participate) was 64%.

The study itself didn’t address the question of which type of 401k contribution is more beneficial from a tax or long-term standpoint, but a Roth 401k would inarguably have more purchasing power than a traditional 401k with the same balance. Regardless of what your current retirement plan offers, you can feel confident knowing that both before-tax and Roth 401ks can provide a secure retirement when paired with solid and strategic planning.

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

This 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 complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Kali Hassinger and are not necessarily those of Raymond James. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Every investor's situation is unique, you should consider your investment goals, risk tolerance and time horizon before making any investment decision. Prior to making an investment decision, please consult with a financial professional about your individual situation.

Sources: http://www.hbs.edu/faculty/Publication%20Files/front-loading_taxation_b10a2f45-48ff-45ff-9547-99039cf8e9da.pdf

https://www.wsj.com/articles/roth-vs-traditional-401-k-study-finds-a-clear-winner-1497233040?mod=e2fb&mg=prod/accounts-wsj

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Planning Ahead: How Having an Estate Plan can avoid a Headache

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Contributed by: Matt Trujillo, CFP® Matt Trujillo

Can you believe 2017 is half over already?! That New Year’s resolution that you had to get your estate planning documents drafted is already getting a little stale. For those procrastinators amongst you, I thought I would write about what happens if you pass without a will or trust in place.

First let’s define what the legal term is for people that pass away without a valid will or trust in place. The term used is “Intestacy.”

What is intestacy?

You are said to have died intestate if you pass without a valid will. Intestacy laws govern the property distribution of someone who dies intestate. Each of the 50 states has adopted intestate succession laws that spell out how this distribution is to occur, and although each state's laws vary, there are some common general principles. The laws are designed to transfer legal ownership of property the recently deceased owned or controlled to the people the state considers their heirs. These laws also control how these individuals are to receive this property and when the property is distributed.

Example:

Frank is a Michigan resident and is married with two minor children. He keeps meaning to write his will but hasn't gotten around to it yet. One day, Frank gets hit by a truck while crossing the street and dies instantly. Because he has no will, the intestate succession laws of Michigan govern how his property is distributed. Under Michigan law, 50 percent of Frank's property passes to his wife, and 50 percent passes to Frank's two minor children (25 percent each). Had Frank had a will, he could have left everything to his wife.

Technical Note:

Real property is distributed under the intestacy laws of the state in which it is located. Personal property is distributed under the intestacy laws of the state in which you are domiciled at the time of your death.

Why should you avoid intestacy?

  • Cost

    • Intestacy can be more costly than drafting and probating a will. In most states, an administrator must furnish a bond, where you can often waive this requirement in your will. Also, an administrator's powers are limited, and he or she must get permission from the court to do many things. The cost of these proceedings is paid by your estate.

  • You can't decide who gets your property

    • State intestacy laws will determine who receives your property. These laws divide up your property among your heirs, and if you have no heirs, the state itself will claim your property.

    • Unlike beneficiaries under your will who can be anyone to whom you wish to leave property, heirs are defined as your legal spouse and specific relatives in your family. If the state can find no heirs, it could claim the property for itself (the property escheats to (goes to) the state). The laws of your state determine the order in which heirs will receive your property, the percentage that each will receive, and in what form they will receive it, whether in cash, property, lump sum, annuity, or other form.

  • Special needs are not met

    • State intestacy laws are inflexible. They do not consider special needs of your heirs. For example, minor children will receive their share with no strings attached, whether they are competent to manage it or not.

  • Heirs may be short-changed

    • The predetermined distribution pattern set out by state law can end up giving a larger portion of your estate to an heir than you intended for he or she to have. It may also leave one of your heirs with too little.

  • You can't decide who administers your estate

    • If you die intestate, the probate court will name an administrator to manage your estate. You will have no say in who settles your estate.

  • You have no say in who becomes a guardian for your minor children

    • A court will appoint personal and property guardians for your minor children, since you didn't specify otherwise. You will also expose the assets you leave your child to the management skills of someone you may not approve of.

  • Relations take priority over friends and others

    • State intestacy laws will distribute your property to family members in a preset pattern. These laws do not take your relationship with your family into account when dividing up your estate. As a result, that brother that you haven't spoken to in 20 years may end up with a portion of your assets that you'd rather he not have.

  • Tax planning options are eliminated

    • Without a will or some other means of disposing of your property, you can't plan to minimize or provide payment of income or estate taxes.

  • Family fights can occur

    • Who gets Grandma's jewelry? Or what about that stamp collection that you began 30 years ago? Distribution by intestacy law provides no answers to specific questions like these. If these questions cannot be resolved peaceably, lawsuits may result or the property in question may end up being sold and the proceeds distributed to the squabbling family.

How is property distributed under intestacy?

The pattern of distribution varies immensely from state to state. You must check with your state to find out what its intestate's will looks like. Generally, the rules are as follows:

  • If you leave a spouse, but no children, the spouse takes the entire estate

  • If you leave a spouse and children, each takes a share

  • If you leave children and no spouse, the children take the entire estate in equal shares

  • If you leave no spouse or children, the entire estate goes to your parents

  • If you leave no spouse, children, or parents, the entire estate goes to your siblings (or your siblings' descendants)

  • If you leave none of the above, the entire estate goes to your grandparents and their descendants (your aunts, uncles, and cousins)

  • If you leave no heirs, the next takers are your deceased spouse's heirs

  • If there are no heirs on either side, the next to take are your next of kin, those who are most nearly related to you by blood

  • If there are no next of kin, your estate escheats to the state

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. While we are familiar with the legal and tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on legal or tax matters. These matters should be discussed with the appropriate professional.

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