Planning

tax preparation

Haven’t Filed Your Taxes Yet? Be Aware of These Features

,

As if the pandemic hasn’t already affected every other aspect of people’s lives, now there’s taxes. But in this case, the effect is positive. The different relief packages passed over the last year offer a host of features that can help taxpayers lower their 2020 tax bill. And if you are among the many who are filing your return later due to the extended filing deadline, you still have time to take advantage of these features.

So, as you sit down to prepare your tax return, keep in mind the following.

Stimulus checks aren’t taxable.

The millions of Americans who received stimulus checks in 2020 will not have to report it or pay taxes on it. If, for some reason, you were owed one but didn’t get it, or you did not receive the full amount that you were entitled to, you can get it in the form of a Recovery Rebate Credit when you file.

Unemployment benefits may not be taxable.

The latest relief package, the American Rescue Plan Act of 2021 (ARPA), passed in March, made the first $10,200 of unemployment benefits received by an individual taxpayer (or in the case of a joint return, received by each spouse) in 2020 tax free if your annual household income is under $150,000. For those who already filed their taxes and reported unemployment benefits before passage of the ARPA, the IRS will automatically recalculate the correct amount of taxable unemployment and refund any resulting tax overpayment (or apply it to other outstanding taxes owed).

Paycheck Protection Program (PPP) loan proceeds may be tax deductible.

For those businesses that received loans under the PPP, eligible expenses that were paid with loan proceeds may be deducted from taxable income. Keep in mind, however, that under the program, any loan forgiveness is subject to the approval of the Small Business Administration.

Those claiming the standard deduction still may be able to deduct $300 for charitable contributions.

In an effort to help charities hard-hit by the pandemic, the CARES Act allows taxpayers who take the standard deduction to deduct up to $300 in cash donations made in 2020. Usually, only those who itemize can write off donations to charity.

No penalties for early withdrawals from your retirement plan.

Normally, if you are under age 59½ and withdraw money from your qualified retirement plan — such as a 401(k) or IRA — you must pay a 10% early withdrawal tax and ordinary income tax on taxable portions of the distribution. But the CARES Act waived the penalty for early withdrawals made during 2020, up to $100,000, if you were impacted by coronavirus. What’s more, you are allowed to spread out any taxable income related to such distributions over a three-year period rather than reporting it all in your 2020 taxes.

There are a number of other tax provisions contained in the different relief packages that could also potentially reduce your tax bite for the 2020 tax year. If you are not already working with a tax professional, now may be the year to do so, as a professional may be able to identify other one-time opportunities to lower your 2020 tax bill.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

understanding your social security benefits

Social Security Benefits and You

,

Social Security Benefits and You

Social Security benefits currently represent approximately 33% of the aggregate total income of Americans aged 65 and older, according to the Social Security Administration. For future generations of retirees, Social Security may represent a much smaller percentage of retirement income.

A System at Risk

When Social Security was established in 1935, the average life span among Americans was 63 years. Today, the average lifespan is almost 79 years, according to the Center for Disease Control mortality statistics.

In 1950, 16.5 workers paid retirement benefits for each retiree. By the year 2037, the ratio may be just 2.2 workers to every one retiree.1 By then, the burden of taxes on each worker may well be unmanageable. This aging of the population has led some experts to predict that the Social Security Old Age and Survivors Insurance Trust Fund may run out of assets by the year 2034, a possibility that makes building your own funds for retirement more important than ever.

Even under the best scenario, the Social Security system was created as the foundation for retirement, but it was never intended to provide the sum total of financial security during the retirement years. So the more you can do for yourself to save and invest for retirement, the better off you may be.

How Much Will Social Security Pay?

The exact amount of your Social Security benefit will depend upon your earnings history. You can obtain an estimate of your benefits using the Social Security Administration’s online estimator. You can also create a personal mySocial Security account online or call the Social Security toll-free number at (800) 772-1213 and request form SSA-7004, the “Request for Social Security Statement” to get a personalized estimate of your benefits, plus a record of your annual earnings. Like reconciling your bank statement, your Social Security summary of annual earnings should be verified against your tax return statements, W2 forms, or your own records. If there are any discrepancies, report them at once.

Shares of Aggregate Retirement Income
For all people age 65 and older:
Social Security Benefits 33%
Pensions 21%
Earnings 34%
Asset Income 9%
Source: Social Security Administration, Fast Facts & Figures About Social Security, 2017.

How Social Security Works

Social Security contributions are paid by you and your employer. Your contributions have been deducted from your paychecks since the day you started working and are matched by an equal amount paid by your employer. These contributions pay for:

Retirement benefits — Collectible at any time after age 62 and based on the number of years you’ve been working and the amount you’ve earned. In some cases, your children and your spouse may also be eligible for benefits on your account.

Survivor’s benefits — A kind of life insurance coverage available to your spouse and dependents.

Disability insurance — Provides a monthly income in the event you are unable to work due to a disability. Eligibility depends on the number of “credits” you have earned and your age.

Medicare — Entitles you to medical benefits and coverage, including hospital insurance after age 65. Bear in mind that Medicare is also experiencing funding issues, and the Hospital Insurance Fund could run out by 2026.

Social Security Benefits for Other Family Members

When you receive Social Security benefits, other payments may also be made to:

  • A spouse age 62 or older.
  • A spouse under age 62 who is caring for a child under 16 or a disabled child who is receiving benefits from your earnings.
  • Unmarried children under 18 (or under 19) if they are enrolled full time in high school.

When You Retire Determines What You Get

  • Currently, you can retire at normal retirement age (between age 66 and age 67 depending on when you were born) and receive full benefits.
  • Retire between 62 and normal retirement age and receive a reduced benefit.
  • Continue working and delay the receipt of benefits and get a bonus for each year of work past normal retirement age, up to age 70. “Delayed retirement credits” currently amount to 8% a year in order to encourage later retirement.

Changes in Your Monthly Benefits

Your monthly Social Security check may change to reflect the following:

  • Cost-of-living increases.
  • Eligibility for disability benefits after retirement but before you reach normal retirement age.

Make the Most of Your Benefits

You must apply for Social Security benefits and for Medicare benefits. If additional insurance is being considered, remember to apply within six months of Medicare eligibility to be accepted without regard to preexisting conditions. When you apply, you’ll want to:

  • Decide whether you’ll collect your own Social Security benefits, based on your earnings and work history, or your spouse’s. Presumably, you’ll want to choose the one that pays the most. If you retire before a spouse, you can collect your own benefits, then switch and choose the spousal benefits if they are greater.
  • Remember to apply for retirement benefits a few months before you want them to start. Some time is required to process all the paperwork, including Social Security number, proof of age, and evidence of recent earnings (W-2 forms from the last two years, or, if you’re self-employed, copies of your two most recent tax returns).
  • Apply for Medicare before you retire.
  • Apply for any additional health insurance within six months of Medicare eligibility.
  • Reconcile your Social Security earnings report with your own records at three-year intervals. Report any discrepancies.
  • Bear in mind that “earnings limitations” (which change each year) may limit the amount you may earn while still receiving Social Security benefits. Those limitations end when you reach normal retirement age.
  • Keep Social Security records up to date if you change your name in order to have your earnings credited properly.

Regardless of your Social Security options, think of Social Security as only a small percentage of your total retirement plan, and set aside a portion of your income on a regular basis. Saving and investing for your own retirement nest egg is a “must.”

 

Notes

1Fast Facts & Figures About Social Security, 2020, Social Security Administration, July 2020

 

Ways to manage your debt

Manage Your Debt

,

New Year’s Resolution: Manage Your Debt

As the new year dawns, most Americans are probably happy to bid good riddance to 2020, a year marked by the COVID-19 pandemic, lockdowns, political brawls, and challenging economic times. Many have had to take on debt to tide them over. If you’re among them, or one of the many other Americans who pay an ever increasing portion of their paychecks to service debt, now may be the ideal time to reassess your finances and take steps to manage and reduce your debt.

I Owe, I Owe…

In America today, carrying some debt is unavoidable, and even desirable, for most households. But between mortgages, car payments, student loans, and credit cards, many Americans find themselves in over their heads. In fact, the average U.S. household carries $6,124 in credit card debt, owes $27,649 in auto loans and $46,459 in student loans, and has a mortgage balance of $197,445.1 Paying off such debt can be costly, in terms of both cash on hand and your overall financial health. So it helps to plan. Start by finding out where you stand, then take the appropriate steps to dig out.

Assessing Your Debt

How much debt is too much? The figure varies from person to person, but in general, if more than 20% of your take-home pay goes to finance non-housing debt or if your rent or mortgage payments exceed 30% of your monthly take-home pay, you may be overextended.

Other signs of overextension include not knowing how much you owe, constantly paying the minimum balance due on credit cards (or worse, being unable to make the minimum payments), and borrowing from one lender to pay another.

Here’s how you can build a clear picture of your debt situation:

  • List all of your credit cards and how much you pay to them each month;
  • List all of your fixed loans (such as car loans and student loans) and their monthly payments; and
  • List your monthly mortgage or rent payment.
  • Once you are done, add them all up. That’s your total monthly debt load.

If you find that you’re overextended, don’t panic. There are a number of steps you can follow to eliminate that debt and get yourself back on track.

Begin With a Budget

The first step in eliminating debt is to figure out where your money goes. This will enable you to see where your debt is coming from and, perhaps, help you to free up some cash to put toward debt.

Track your expenses for one month by writing down what you spend. You might consider keeping your ATM withdrawal slip and writing each expense on it until the money is gone. Hang on to receipts from credit and debit card transactions and add them to the total.

At the end of the month, total up your expenses and break them down into two categories: essential, including fixed expenses such as mortgage/rent, food, and utilities, and nonessential, including entertainment and meals out. Analyze your expenses to see where your spending can be reduced. Perhaps you can cut back on food expenses by bringing lunch to work instead of eating out each day. You might be able to reduce transportation costs by taking public transportation instead of parking your car at a pricey downtown garage. Even utility costs can be reduced by turning lights off, making fewer long-distance calls, or turning the thermostat down a few degrees in winter.

The goal is to reduce current spending so that you won’t need to add to your debt and to free up as much cash as possible to cut down existing debt.

Three Steps to Reduce Debt

Once you’ve got your budget settled, you can begin to attack your existing debt with the following steps.

Pay off high-rate debt first. The higher your interest rate, the more you wind up paying. Begin with your highest-rate credit cards and eliminate the balance as aggressively as possible. For example, assume you have two separate cards, each with a $2,000 balance, one charging 20% interest, the other 8%. By paying the maximum you can afford on the higher rate card, and the minimum on the lower-rate card until the higher-rate card is fully paid off, you will be able to reduce your overall interest costs — perhaps significantly over time.

Transfer high-rate debt to lower-rate cards. Consolidating credit card debts to a single, lower-rate card saves more than postage and paperwork. It also saves in interest costs over the life of the loan. Comparison shop for the best rates, and beware of “teaser” rates that start low, say, at 6%, then jump to much higher rates after the introductory period ends. You can find lists of low-rate cards online from sites such as CardTrak and Bankrate.

If you can only find a card with a low introductory rate, maximize the value of that low-interest period. By paying off your balance aggressively, you will reduce the balance more quickly than you will when the rate goes up.

You can also contact your current credit card companies to inquire about consolidation and lower rates. Competition in the industry is fierce, and many companies are willing to lower their rates to keep their customers. Even a percentage point or two can make a difference with a sizable balance.

Borrow only for the long term. The best use of debt is to finance things that will gain in value, such as a home or an education, or big-ticket necessities, like a washing machine or a computer — assets that will still be around when the debt is paid off. Avoid using your credit card for concert tickets, vacation expenses, or meals out. By the time the balance is gone, you’ll have paid far more than the cost of these items and have nothing but memories to show for it.

By analyzing your spending, controlling expenses, and establishing a plan, you can reduce — and perhaps eliminate — your debt, leaving you with more money to save today and a better outlook for your financial future.

 

1Source: Nerdwallet.com, 2019 American Household Credit Card Debt Study, updated June 2020. Balances are as of June 2020 for households carrying that type of debt.

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

COVID college costs

College Costs in the Era of COVID-19

,

Paying for College in the Era of COVID-19

This semester, millions of students, teachers, and college administrators are having to deal with a radically changed landscape while still managing college costs. At many institutions, classes have been cancelled or moved online. Sports programs have been suspended and dormitories, libraries, and labs shuttered. In fact, traditional campus life has been turned upside down thanks to COVID-19, and it’s unclear how long it will last.

Meanwhile, the cost of a college education is higher than ever. According to the College Board, the average total charges at four-year public colleges (in state) for the 2019-2020 academic year were $21,950. Average costs at four-year private nonprofit colleges were more than double that ($49,870).1 And while increases in costs have moderated in recent years, they continue to outpace inflation and median household income, resulting in a growing dependence on student loans; the average student borrower graduating in 2018 owed about $29,000.2

For cash-strapped students and parents, the current crisis has tipped the scales. Many are rebelling at the high costs in the face of a severely diminished college experience. Others have decided to wait until the crisis has passed before enrolling. Still others are questioning the very value of a college degree under current circumstances.

But the issue of soaring college costs is hardly new, and there are two sides to consider.

Students and Parents: Give Us a Break!

“We are paying a lot of money for tuition, and our students are not getting what we paid for,” comments one California parent, incensed at paying in-person prices for education that has moved online. On-campus facilities and services like computer labs, libraries, and networking opportunities have also been severely diminished by closures.

Already suffering from a pandemic-induced recession, many families are feeling the pinch and want relief. Students in particular have been hard hit with furloughs and layoffs, as many rely on retail service jobs to help them get by — the same jobs that have suffered the most in the face of closures and lockdowns. Many students had also signed leases for off-campus housing and are now stuck with them even if classes are cancelled. In short, students and parents are demanding tuition rebates, increased financial aid, reduced fees, and leaves of absences to compensate for what they feel is a diminished college experience.

Colleges: How Can We Manage?

Meanwhile, colleges and universities are taking a major financial hit from the pandemic. Enrollment is down. International admissions and offshore semesters have been halted. Entire programs have had to be suspended for health reasons. What’s more, substantial resources are required to set up an online curriculum, administer the courses, and train educators. There are also major costs involved with constant COVID testing of students and disinfecting of classrooms, offices, and other facilities. And, colleges must continue to pay existing vendor contracts, maintain facilities, and compensate their own staff. The situation has created an existential crisis among smaller colleges, who lack the endowments and funding of larger institutions. For many, it’s a question of survival.

A Mixed Response to Managing College Costs

Given this predicament and the widely varying circumstances faced by different institutions, it’s no surprise that their responses vary widely. A handful of universities have announced substantial price cuts. Some have cut fees. But most have kept prices flat, and a few have even increased them. While many offer refunds of fees and room and board, the reimbursement policies vary from school to school — and nearly all have drawn the line at tuition. Here’s a sampling of actions taken — or not — by different schools:

  • Full or partial refunds for room and board costs
  • Reduced tuition and fees
  • Discounts in the form of scholarships or loans
  • Renegotiated financial aid packages
  • Frozen tuition at previous year’s level
  • Imposition of “COVID fees” to cover added costs
  • Increased tuition to cover added expenses

Which of these actions a given school takes depends largely on its financial health and reputation. Smaller, private colleges with more at stake are generally offering more in the form of relief. Larger, well-endowed institutions, such as the Ivy League colleges and large state schools, trend toward the status quo. But there are many exceptions, and each institution has its own approach.

What Can You Do?

If you are a student or parent seeking compensation or relief, your options are limited, especially for the current semester. At nearly all institutions, tuition reimbursement is almost nonexistent after several weeks, no matter what the circumstances. Some schools are now offering tuition insurance, but coverage typically applies only when a student withdraws for medical reasons. To find out what relief may be available at your school, contact the registrar.

Alternatively, you can join the thousands of students and parents who have signed petitions or filed lawsuits demanding tuition cuts, housing reimbursements, and more. Check online to see if any such actions may be already in the works at your school.

In the end, like so many other issues arising from the pandemic, the current predicament facing students and schools is likely to be with us until a COVID-19 vaccine is in place. Even then, skyrocketing costs and mounting student debt pose longer-term issues. Any resolution will take time and likely have far-reaching implications for the costs and nature of a college education.

Notes:

1The College Board, Trends in College Pricing 2019.

2The College Board, Trends in Student Aid 2019.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

Converting a Traditional IRA to a Roth IRA

Converting a Traditional IRA to a Roth IRA

,

Thinking of Converting Your Traditional IRA to a Roth? Now May Be the Time

Anyone who is thinking of converting a traditional IRA to a Roth IRA may want to consider do it this year. Why? Because today’s unique conditions create an opportunity to minimize the tax bite from converting. In fact, many have already taken advantage of this opportunity, with one provider reporting a 67% increase during the first four months of 2020 compared to a year earlier.1

But before you begin to decide whether or not to convert, make sure you are familiar with what’s involved with a Roth conversion.

What’s a Roth Conversion?

When you convert your traditional IRA to a Roth IRA, any deductible contributions you had made, along with any investment earnings, are taxed as ordinary income for the year of the conversion. That means the taxable value of the conversion could push you into higher federal and state tax brackets.

You will be responsible for full payment of all taxes in the year the conversion is made. If you use assets from the traditional IRA to pay those taxes, the tax amounts could be treated as premature withdrawals, so you could be subject to additional taxes and penalties.

Depending upon your personal financial situation, a Roth IRA conversion could potentially provide a tax-adjusted benefit over time, provided you meet the eligibility requirements.

Why Now?

The coronavirus pandemic has created unique conditions that may make a Roth conversion more attractive than usual.

Your taxable income may be lower

If, like millions of Americans, you have been furloughed or laid off, or your sales commissions are down, you will likely report lower taxable income for 2020. This may put you in a lower tax bracket so that monies converted to a Roth would be taxed at a lower rate than would otherwise apply (unless the amount converted pushes you into a higher bracket). For instance, converting a $15,000 IRA when your marginal federal tax rate is 12% saves $1,500 of tax compared to converting at a 22% marginal rate — and that does not include state tax, which might also drop.2

Your business may incur a loss

The pandemic is causing many businesses to close or incur a loss. If you expect to report a business loss on your personal return, you may be able to convert to a Roth at a reduced tax cost. With the Roth conversion creating additional income, you could use the loss generated by the business to offset some or all of that income.

Your IRA balance may be down

To minimize taxes, it’s better to convert assets when they’re low in value. Although U.S. stocks have recovered most of the ground lost in February and March, it’s possible your IRA balance may still be well off its peak, depending on how it is invested.

RMDs are suspended for 2020

As part of the CARES Act, required minimum distributions (RMDs) for traditional IRAs and qualified retirement plans were suspended for this year. Not taking distributions from a traditional IRA might keep or put you in a lower tax bracket by reducing your taxable income, making it even more desirable to convert to a Roth.

Current tax rates are low and could go up

The 2017 Tax Cuts and Jobs Act (TCJA) reduced federal tax rates, cutting the top marginal rate to 37%. That’s relatively low compared with recent history. Given the staggering price tag of the pandemic bailout (so far) and the ballooning budget deficit, it’s reasonable to assume that at some point, tax rates may increase. When this might happen is anyone’s guess, but converting while rates are relatively low is something to consider.

To Convert or Not?

Whether you would be better off leaving your funds in a traditional account or moving all or some of them to a Roth IRA will depend upon your personal circumstances. Generally speaking, Roth IRA conversions are best suited for investors who have significant time until retirement, are high wage earners, think they may be in a higher tax bracket at retirement, or are looking for an estate planning tool to help pass wealth to their heirs.

Whatever your circumstances, keep in mind that IRS rules governing IRAs and conversions are complex. So be sure to consult with a financial or tax professional before deciding.

Source/Disclaimer:

1Money, Roth IRA Conversions Are Surging. Here’s Why This Retirement Savings Strategy Is So Popular Right Now, June 4, 2020.

2Example is for illustration only. Your results will differ.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year your convert, you must do so before converting to a Roth IRA.

 This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

Retiring Early Because of COVID

Retiring Early Because of the Coronavirus

,

Should You Take An Early Retirement?

The story is a common one these days. You have been furloughed or laid off, just a few years before you plan to retire. Or, your work-from-home arrangement is ending, and you’re not keen on resuming the commute or going back to a crowded workspace. Retiring early may be a good idea, since fate has presented the opportunity?

Many 50- and 60-somethings are asking themselves this very question. In fact, the average American retires at age 61.1 But, that’s at least five years away from collecting full Social Security retirement benefits, not to mention pensions, which typically begin at age 65, when available. What’s more, Medicare coverage does not begin until age 65, leaving early retirees with potentially hefty health insurance premiums until Medicare kicks in.

Anyone contemplating retiring early will want to plan carefully and ask several important questions.

When Should You Begin Collecting Social Security?

You can begin collecting Social Security retirement benefits as early as age 62. But you will face a significant reduction if you start before your normal retirement age: from 66 to 67, depending upon when you were born. Those choosing to collect before that age face a reduction in monthly payments by as much as 30%. Also, there is a stiff penalty for anyone who collects early and earns wages in excess of an annual earnings limit ($18,240 in 2020).

What age is best for you will ultimately depend upon your financial situation as well as your anticipated life expectancy. For most people, holding off until normal retirement age is worth the wait. But you may want to consider taking your benefits earlier if:

  • You are in poor health.
  • No longer working and need the benefit to help make ends meet.
  • Earn less than your spouse and your spouse has decided to continue working to help earn a better benefit.

How Will You Fund Health Care Costs?

A big obstacle to early retirement is health insurance. If you are working for a company that pays all or most of your health insurance, you could face hundreds of dollars in added monthly expenses if you retire before age 65. Plus, most companies no longer offer retiree health benefits, and if they do, the premiums can be high or the coverage low. In addition to health insurance premiums, there are also co-pays, annual out-of-pocket deductibles, uncovered procedures, and out-of-network costs to consider — not to mention dental and vision care costs.

On the positive side, the Affordable Care Act (ACA) prohibits insurance companies from discriminating because of preexisting illnesses and limits how much they can charge based on age. And for those with lower incomes, government subsidies may be available.

What Will Early Retirement Mean for Your Investing and Withdrawal Strategies?

Perhaps the most significant concern for early retirees — one that is often overlooked — is how retiring early will impact their investing and withdrawal strategies. Retiring early means taking larger distributions from your retirement savings in the early years until Social Security and pension payments begin. This can have a significant impact on how long your savings last, perhaps more so than if larger distributions are taken later in retirement. Consider the following:

  • Delay withdrawals from tax-favored retirement accounts, such as individual retirement accounts (IRAs) or 401(k) plans. The longer you wait to withdraw this money, the more you can potentially benefit from tax-deferred compounding. Instead, consider tapping into taxable accounts first.
  • Adjust your withdrawal rate to help ensure that your savings will last throughout a lengthened retirement. Financial planners typically recommend a 4%-5% annual withdrawal rate at retirement, but you may want to lower this since you will need your savings to last longer.
  • Structure your investments to include a significant growth element. Since your money will have to last longer, you will want to consider including stocks or other assets that carry high growth potential. Stocks are typically more volatile than bonds or other fixed-income investments but have a better long-term record of outpacing inflation.

So, if the coronavirus pandemic has left you thinking about retiring early, make sure you are prepared. The first place to start is with a detailed plan that includes estimated income and expenses. Work with a financial professional to put in place a plan that factors in all of the necessary elements you will want to consider.

 

Source/Disclaimer:

1Source: Gallup, Snapshot: Average American Predicts Retirement Age of 66, May 10, 2018.

 

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

Estate Plan Review

Your Estate Plan: Time for a Checkup

,

Your Estate Plan: Time for a Checkup

COVID 19 has brought tragedy to many families and businesses and impacted personal finances. It has also rendered many an estate plan inaccurate and unrepresentative of current circumstances. If you, your family or your beneficiaries have been affected by the virus, you may need to review and make changes to your plan. Consider the following questions in your review.

Are your beneficiary designations still accurate?

If you have lost someone named in your estate plan, you’ll need to make the appropriate changes. This could include changing beneficiaries, trustees, executors, healthcare decision-makers, your legal power of attorney or any other parties named in the plan.

You’ll also want to ensure that your beneficiary designations are up-to-date for your retirement accounts, such as an IRA (Individual Retirement Account) or 401(k), where beneficiaries are designated directly, rather than through your will.

Has the size of your estate changed?

If you have taken a financial hit as a result of the pandemic, then you may need to adjust some aspects of your estate plan. Adjustments may also be needed if the size of your estate has increased significantly. A large change in the total value of your assets could affect the distribution of your assets, particularly if you have made specific bequests to individuals or charities rather than dividing your estate proportionally. If you own a business, you may also need to consider how its value may have changed and how that might impact your plans to pass on control.

Are your minor children still protected?

If you have named a guardian for your minor children, check to ensure that person is still willing and able to serve in that role. And ask yourself if you still have confidence in your choice of guardian. A different job, a move out of state, or other changed circumstances may make your original choice no longer optimal.

In addition, it may make sense to keep the financial responsibilities of guardianship separate from the actual care of the minor children. You could choose a professional fiduciary to provide financial management on behalf of the minor children and name a family member to provide their actual day-to-day care.

Is your life insurance coverage still appropriate?

If your circumstances have altered materially as a result of the pandemic, you may also want to take a look at your life insurance coverage, too. Any significant changes to your life — births, deaths, marriages, or divorces — could affect your life insurance needs. It’s important to ensure that you have adequate coverage for you and your loved ones.

Do you have up-to-date documents?

Any updates needed as a result of your review will need to be reflected in your estate documents. These typically include a will, healthcare proxy, and power of attorney. They may also include a living will or trust documents. Keep in mind, however, that estate planning can be a complex endeavor. Therefore, any estate planning decisions or changes are best made with the help of a qualified legal professional and the rest of your professional team.

 

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

The CARES Act and your Savings Plan

The CARES Act and Your Retirement Savings

, ,

Think Twice Before Tapping into Your Retirement Savings

New legislation — the CARES Act — permits qualified individuals to take early distributions from their retirement assets, such as their 401(k) or individual retirement account (IRA) — penalty free. The rules – which sunset after 2020 – are designed to help the many cash-strapped Americans who have suffered financially as a result of the coronavirus epidemic. But tapping into your retirement savings has its costs, and there may be better ways to shore up your short-term cash flow.

The CARES Act

The Act permits qualified individuals to take distributions of up to $100,000 from their IRA or workplace retirement savings plan (if allowed by the plan) without incurring the 10% additional tax on early distributions that would otherwise generally apply to distributions made prior to age 59½. Amounts withdrawn may be repaid within three years, if desired. Note, however, that ordinary income taxes apply to all pretax funds withdrawn, although taxpayers may elect to report the income over three tax years instead of one.

These coronavirus-related distributions may only be made to a “qualified individual” on or after January 1, 2020, and before December 31, 2020. A qualified individual includes anyone who has been diagnosed with the SARS-CoV-2 virus or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, or whose spouse or dependent has been diagnosed. It also includes individuals who experience adverse financial consequences as a result of: being quarantined, furloughed, laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19; being unable to work on account of a lack of childcare due to the virus or disease; closing or reducing hours of a business owned or operated by the individual due to the virus or disease; or other factors as determined by the Treasury Secretary.

The Act also relaxes rules on borrowing from a retirement plan account. If authorized by the plan, qualified individuals may borrow as much as $100,000 or 100% of their vested account balance. These limits are effective from March 27, 2020 to September 22, 2020.

Additionally, qualified individuals with an outstanding loan (on or after March 27, 2020) may delay loan repayments due during the period from March 27, 2020 to December 31, 2020 for up to one year.

Consider the Costs

Withdrawing or borrowing money from your retirement account may seem like an easy way to shore up your short-term cash flow, but there are long-term costs to consider. Most notably, if you withdraw funds and don’t repay them, you’ll be reducing your retirement nest egg, perhaps significantly. And making up for withdrawn balances means contributing more — potentially much more — down the road. That’s because time is a critical ally when saving for retirement. The more time your contributions and earnings have to grow, the better the chance you will be able to reach your retirement savings goals.

If you don’t withdraw the funds altogether, but just borrow them from your plan, you must generally pay back the loan within five years, or earlier if you lose your job or leave your employer voluntarily before the loan is paid back. Otherwise, it will be considered a taxable distribution, requiring you to pay income tax on the amount of the loan. What’s more, current law protects funds held in a qualified plan from creditors in the event of a bankruptcy. So if you are experiencing extreme financial difficulty, keeping funds in your qualified plan may be one way to limit the damage. Even if you’re allowed to defer some loan payments because of the CARES Act, you’ll want to weigh the potential downsides before borrowing.

There May be Better Alternatives

As any financial professional will attest, borrowing from your future to fund today’s temporarily negative cash flow is generally not a good strategy. Instead, consider other sources of funds such as:

  • Short-term loans
  • Tapping into a home equity line of credit
  • Borrowing from friends or relatives

You also may want to consider ways to reduce current costs until your cash flow improves.

  • Reduce credit card payments by consolidating balances on a low-rate card
  • Contact current lenders to arrange for a temporary payment freeze
  • Cut back on discretionary expenses and make a budget

Also keep in mind that the provisions of the CARES Act are temporary. So if the economic fallout from the coronavirus epidemic has left you strapped for cash, try to maintain a long-term focus and stick to your plan.

                                                                                                                                                                            

 

This material was prepared by LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Managing your finances during COVID

Managing Finances during COVID19

, ,

Smart Financial Strategies for Unexpected Events

A once-in-a-lifetime event such as the coronavirus pandemic forces us to reassess many things we may have taken for granted. Most of us take our personal good health for granted. Many of us assume we will always get by financially, that we will always be able to earn money in some way, and that, in a worst-case-scenario, the government will be there to step in and help.

But assumptions are always there to be challenged. And adverse situations always should teach us some lessons. What lessons can we take away from the current crisis that will help us better prepare for an event that appears suddenly and upends many of our day-to-day activities? Specifically, what steps should we take to ensure that we will have enough money set aside to see us through another crisis? What can we do going forward so that we will be able to pay our bills and handle unforeseen expenses if we lose our jobs? Why is it a good idea to limit our debt burden, and how can we achieve this goal?

Here are some ideas that could jump-start your thinking.

Spend Less Than You Earn

It’s easier said than done. But it is one of the most effective ways of building up your savings and your personal wealth. You may have to reevaluate what you consider important — especially if shopping has always been enjoyable for you. You can still shop, just not as often and only for items that you or your family members truly need.

Set yourself a goal of setting a percentage of your pay aside for savings. If need be, start small so you don’t get discouraged. Then, increase the percentage you save after a few months.

Look for Ways to Boost Savings

Now that you have decided to spend less than you earn, you can start to look seriously at ways to increase your savings. For example, you may be able to find some extra cash by shopping around for better rates on your utilities, cell phone service, and auto or home insurance. If your credit score is good, you may be able to find a credit card with a lower interest rate than you currently pay. And, if you can afford the closing costs, refinancing your mortgage could potentially unlock some solid savings.

If you do not have a budget, now is the time to create one. A budget can help most people organize and control their spending. If you track your spending for a few months, you can use that information to cut back on impulse buying and spending on nonessential items and redirect that money to savings and investments.

Be sure to direct some of that money to your own emergency fund. An emergency fund should be used to pay for unexpected, large expenses so you don’t have to borrow the money. Financial experts say that, ideally, your emergency fund should be able to cover six months of living expenses — including mortgage and auto payments. It sounds like a lot to save, but you may be surprised how much you can save when you focus on that goal.

Take Control of Your Debt

Debt is like savings in reverse. When you are in debt, you keep paying interest on goods and services that you probably consumed two or three years ago. If you carry consumer debt, now is the time to get a handle on that situation. You are not in a good place if:

  • Your credit card balance is growing
  • You are paying only a minimum on your bills
  • You are missing payments or paying late.

For every loan and credit card you carry, find out how much you owe, the interest rate, and the payment schedule. You can use this information to figure how much money you can afford to put toward paying down your debt and how long it will take. These strategies can help:

  • Pay off the card with the highest interest rate first;
  • Transfer your balance to a card with a lower interest rate; and/or
  • Pay more than the minimum amount. Paying more than the minimum is critically important since the less you pay, the greater the interest will be and the longer it will take to pay off your balance.

Every few months, check your expenses to see if you can find other funds to use to reduce your debt. If possible, consider part-time work and use what you earn to pay off your debts. In the meantime, do not take on additional debt. Try using cash (or your debit card) instead of credit for as many transactions as possible.

Protect Your Earning Power

If you are a working parent, your family’s financial well-being is tied closely to your ability to make a living. If you were to have an accident or fall ill, your disability could destabilize your finances. If you do not have a private disability income insurance policy, consider getting one. The payments from the policy would help pay for critical everyday expenses when your disability prevents you from working and collecting a salary. Before you purchase insurance, though, make sure you understand the policy’s definition of disability and all the other policy terms.

 

You also may want to name someone you trust to make financial and health care decisions if you become unable to make them for yourself. Talk to your attorney to learn more about the options available in your state. And you might consider setting up a living trust that allows the trustee of the trust to handle your financial affairs if you cannot.

Review Your Investing Strategy

Finally, remember that risk is a given in investing. Some investments carry a higher risk of loss than others. However, riskier investments typically offer higher potential returns than more conservative alternatives. When you invest you have to decide how much investment risk you can comfortably handle while seeking higher returns, and choose your investments accordingly. It helps to review your investing approach and your tolerance for possible investment losses at least once a year.

Facing the Future

Every crisis is different. However, those who think ahead and have some strategies in place to deal with the financial aspects of a crisis are potentially more likely to do better than those who do not plan.

 

This material was prepared by LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

The cost and availability of Life Insurance depend on many factors such as age, health, and amount of insurance purchased. In addition to premiums, there are contract limitations, fees, exclusions, reductions of benefits, and charges associated with policy. And if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent upon the claims-paying ability of the issuing company.

Should I refinance my mortgage?

Should You Refinance?

,