Planning

Retiring? Take Control of Your Assets

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Retiring? Take Control of Your Assets

After years of saving and investing, you can finally see the big day — retirement. But before kicking back, you still need to address a few matters. Decisions made now could make the difference between your money outlasting you or vice versa.

Calculating Your Retirement Needs

First, figure out how much income you may need. When retirement was years away, this exercise may have involved a lot of estimates. Now, you can be more accurate. Consider the following factors:

  • Your home base — Do you intend to remain in your current home? If so, when will your mortgage be paid? Will you sell your current home for one of lesser value, or “trade up”?
  • The length of your retirement — The average 65-year-old man can expect to live about 17 more years; the average 65-year-old woman, 20 more years, according to the National Center for Health Statistics. Have you accounted for a retirement of 20 or more years?
  • Earned income — The Bureau of Labor Statistics estimates that by 2022, 23% of people aged 65 or older will still be employed, almost twice the proportion that prevailed in 2002.1 If you continue to work, how much might you earn?
  • Your retirement lifestyle — Your lifestyle will help determine how much preretirement income you’ll need to support yourself. A typical guideline is 60% to 80%, but if you want to take luxury cruises or start a business, you may well need 100% or more.
  • Health care costs and insurance — Many retirees underestimate health care costs. Most Americans are not eligible for Medicare until age 65, but Medicare doesn’t cover everything. You can purchase Medigap supplemental health insurance to cover some of the extras, but even Medigap insurance does not pay for long-term custodial care, eyeglasses, hearing aids, dental care, private-duty nursing, or unlimited prescription drugs. For more on Medicare and health insurance, visit Medicare’s consumer website.
  • Inflation — Although the inflation rate can be relatively tame, it can also surge. It’s a good idea to tack on an additional 4% each year to help compensate for inflation.

Running the Numbers

The next step is to identify all of your potential income sources, including Social Security, pensions, and personal investments. Don’t overlook cash-value life insurance policies, income from trusts, real estate, and the equity in your home.

Also review your asset allocation — how you divide your portfolio among stocks, bonds, and cash. Are you tempted to convert all of your investments to low-risk securities? Such a move may place your assets at risk of losing purchasing power due to inflation. You may live in retirement for a long time, so try to keep your portfolio working for you — both now and in the future. A financial advisor can help you determine an appropriate asset allocation.

                            Robber Baron: Inflation

Here’s how a 4% inflation rate would erode $400,000 over a 25-year period. Because inflation slowly eats away at the purchasing power of a dollar, it’s important to factor inflation into your annual retirement expenses.
 

 

  This example is hypothetical and for illustrative purposes only.

A New Phase of Financial Planning

Once you’ve assessed your needs and income sources, it’s time to look at cracking that nest egg you’ve built up. First, determine a prudent withdrawal rate. A common approach is to liquidate 5% of your principal each year of retirement; however, your income needs may differ.

Next, you’ll need to decide when to tap into tax-deferred and taxable investments. The advantage of holding on to tax-deferred investments (employer-sponsored retirement plan assets, IRAs, and annuities) is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.2 However, earnings and deductible contributions in tax-deferred accounts are subject to income tax upon withdrawal — a tax that can be as high as 39.6% at the federal level. In contrast, long-term capital gains from the sale of taxable investments are taxed at a maximum of 20%.3 The key to managing taxes is to determine the best strategy given your income needs and tax bracket.

Also, tax-deferred assets are generally subject to required minimum distributions (RMDs) — based on IRS life expectancy tables — after you reach age 70½. Failure to take the required distribution can result in a penalty equal to 50% of the required amount. Fortunately, guidelines do not apply to Roth IRAs or annuities.2 For more information on RMDs, see the IRS’s RMD resource page or call the IRS at 1-800-829-1040.

A Lifelong Strategy

A carefully crafted retirement strategy also takes into account your estate plan. A will is the most basic form of an estate plan, as it helps ensure that your assets get disbursed according to your wishes. Also, make sure that your beneficiary designations for retirement accounts and life insurance policies are up-to-date.

If estate taxes are a concern, you may want to consider strategies to help manage income while minimizing your estate tax obligation. For example, with a grantor retained annuity trust (GRAT), you move assets to an irrevocable trust and then receive an annual annuity for a specific number of years. At the end of that period, the remaining value in the GRAT passes to your beneficiary — usually your child — generally free of gift taxes. Another option might be a charitable remainder trust, which allows you and/or a designated beneficiary to receive income during life and a tax deduction at the same time. Ultimately, the assets pass free of estate taxes to a named charity.

It’s easy to become overwhelmed by all the financial decisions that you must make at retirement. The most important part of the process is to consult a qualified financial professional, a tax advisor, and an estate-planning attorney to make sure that you’re prepared for this new — and exciting — stage of your life.

                   How Much Can You Withdraw?

This chart can give you an idea how much you could potentially withdraw from your retirement savings each year. For example, if you begin with $400,000 in assets and expect an average annual return of 5% over a 25-year retirement, you could potentially withdraw $18,000 per year. Withdraw more than that each year and you may outlive your money. Also consider: This chart doesn’t take income taxes into account, which can range from 10% to 35%, depending on your tax bracket.
 
Assumes 5% average annual return, and that withdrawal rate is adjusted for annual 4% inflation rate after the first year. This example is hypothetical and for illustrative purposes only. Investment returns cannot be guaranteed.

 

1Source: Labor Force Projections to 2022, Monthly Labor Review, U.S. Bureau of Labor Statistics.

2Withdrawals from tax-deferred accounts prior to age 59½ are taxable and may be subject to a 10% additional tax. Neither fixed nor variable annuities are insured by the Federal Deposit Insurance Corp., and they are not deposits of — or endorsed or guaranteed by — any bank. Withdrawals from annuities may result in surrender charges.

3A 3.8% tax on unearned income may also apply.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

How Much Social Security Can You Expect?

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How Much Social Security Can You Expect?

One of the first steps in planning for retirement is to get an accurate read on just how much income you can expect to receive from Social Security. The exact amount of your Social Security benefit will depend upon your earnings history and retirement timing. Although Social Security provides only about a third of a typical retiree’s income, it often serves as the foundation for calculating how much other income you’ll need and how much you’ll need to save.

The best and most accurate estimate of your future Social Security benefits comes from the Social Security    Administration (SSA). If you are age 60 or older, you should be automatically sent an annual statement showing exactly how much you can expect when you retire. If you are under age 60, you can access current estimates through the SSA’s My Social Security site. You can also access SSA’s online calculators.

Here is a summary of the different ways you can get accurate estimates of your Social Security:

  • Social Security Statements are mailed annually to anyone age 60 or older who has paid into Social Security. The statements include an estimate of your monthly benefit at full retirement age, based on your earnings history. They also show your earnings history – a year-by-year breakdown of earnings on which benefits are based. You can also request a statement by creating a personal my Social Security account. Once it’s set up, you can easily access updates and view your earnings history. You can also request a statement at any time by calling 1-800-772-1213 or contacting your local SSA office.
  • Retirement Estimator gives estimates based on your actual Social Security earnings record. The calculator shows results for early (age 62), full (ages 65-67 depending upon your year of birth), and delayed (age 70) retirement. The Retirement Estimator also lets you create additional “what if” retirement scenarios based on current law.
  • Other SSA benefit calculators help you estimate your Social Security benefits if you do not have an earnings record with Social Security or cannot access it. The calculators will show your retirement benefits as well as disability and survivor benefit amounts if you should become disabled or die. A variety of calculators are available that address different circumstances.

 

A recent report by the SSA suggests that a lot of Americans are not taking advantage of the free statements available to anyone who has paid into Social Security. According to the report, only 43% of registered my Social Security users accessed their accounts online in 2018, down from 96% in 2012.1

 

How much also depends on when you start collecting

If you want, you can sign up for Social Security benefits at age 62. However, you’ll receive less than your full benefit — somewhere between 70% and 75% — depending on when you were born. What’s more, if you are still working and make more than the yearly earnings limit ($17,640 in 2019), your benefit will be reduced by one dollar for every two dollars earned beyond that limit.

Wait until full retirement age (from 66 to 67 for those born after 1942) and you’ll receive your full benefit and face no earnings penalty. Sign up for benefits beyond full retirement age and your benefit will increase 8% a year until you reach age 70.

When you decide to collect will depend in part on how much you can expect to receive. So make a point of checking out one of the resources above.

 

 

1Source: Social Security Administration OIG, Issuance of Social Security Statements, February, 2019.

 

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

 

© 2019 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.  This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity. 

Roth IRA Conversion

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Good Window of Opportunity for Roth IRA Conversions

The Roth IRA is a powerful tax-favored retirement option since it can offer a hedge against future tax-rate increases. But beyond tax planning considerations,

Roth IRAs have several important advantages over traditional IRAs:

  1. Unlike a traditional IRA, a Roth IRA distribution is tax-free if you’ve had the account open at least five years, and reached the age of 59½, become disabled or died.
  1. You can make contributions to your Roth IRA after age 70½, depending on whether you fall within the earned income limits.
  2. Roth IRAs are not subject to the traditional IRA rules for required minimum distributions at age 70½.

The Internal Revenue Code allows IRA owners to convert significant sums from traditional IRAs to Roth IRAs. But you have to follow these important rules (among others):

  • The ability to contribute tails off at higher incomes. For 2019, the eligibility to make annual Roth IRA contributions is phased out between modified adjusted gross income (MAGI) levels of $122,000 to $137,000 (unmarried individuals) and $193,000 to $203,000 (married joint filers).1
  • The conversion is treated as a taxable distribution from your traditional IRA. Doing a conversion likely will trigger a bigger federal income tax bill and possibly a larger state income tax bill. However, today’s lower federal income tax rates might be the lowest you’ll see in your lifetime, and the tax benefits of avoiding higher taxes in future years may extend to family members after death.

 

Many tax experts suggest that the best reason to convert some or all of your traditional IRA to a Roth IRA is if you believe your tax rate during retirement will be the same or higher than what you are paying currently. Since you’re no longer allowed to reverse a Roth IRA conversion, it’s important to understand the tax ramifications. Talk to your tax advisor before taking any action.

 

Traditional vs. Roth IRA: High-level Comparison

Here is a simplified comparison of IRA rules and tax benefits. Remember, tax laws are complex and subject to change. Consult a tax advisor about your individual situation before taking action.

 

Traditional IRA Roth IRA
Age limits for contributing You must be under 70½ to contribute. You can contribute to a Roth IRA at any age.
Income limits for contributions Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits. Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits, and can be reduced or eliminated based on your modified adjusted gross income.
2019 tax-year contribution limits If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.) If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.)
Claiming deductions on tax return You may be able to claim all or some of your contributions. You cannot deduct your Roth IRA contribution.

 

 

 

 

 

 

1       Source: Bill Bischoff, “How the new tax law created a ‘perfect storm’ for Roth IRA conversions in 2019,” MarketWatch.com, Jan. 16, 2019. https://www.marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26

 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.

 

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

 

© 2019 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.

Building a Solid Financial Foundation

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Building a Solid Financial Foundation

When the markets and the economy are behaving badly, as they tend to do from time to time, it’s easy to feel helpless. But creating a solid financial foundation can help you gain control of your investments and possibly avoid mistakes that can sabotage your portfolio.

Your Net Worth — A Place to Start

Having a current picture of your finances is an important first step in building a solid foundation. By determining your net worth at the same time every year, you’ll know what sort of financial shape you’re in and whether you’re making progress toward your goals. To find your net worth, list all of your assets, including bank and investment accounts, real estate, retirement plans, life insurance, business interests, etc. Then subtract your liabilities, such as your mortgage, credit card debt, loans, etc. The amount that’s left is your net worth. If you don’t like the number, look for ways to either decrease your debts or increase your assets.

Lost Without Them

Setting specific goals can help you focus your investing efforts. Prioritize the goals you’ve set according to their importance and your time frame for needing the money. Keep in mind that the goals you have now will probably change over time, so be flexible. Revisit your goals periodically and revise them when necessary.

Make It Personal

You can’t control what happens in the economy, but you can control your own behavior. Instead of worrying about whether the market is up or down or which investments will be hit hardest by a decline, think about the things you can do that could make a difference. Investing money on a regular basis or adjusting your portfolio’s asset allocation are steps that can help put you in control.1

Good Behavior

Think about creating a written investment statement that describes your risk tolerance, rebalancing schedule, and reasons for selling an investment.2 Having guidelines to follow can keep you from making mistakes that might thwart your plans. You might also want to review your own financial track record. Tax returns and brokerage statements can tell you a lot about your past successes and failures. Keep in mind that past performance is no guarantee of future results.

 

1Asset allocation and dollar-cost averaging do not assure a profit or protect against a loss. Dollar-cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares though periods of high and low prices.

2Consider the tax consequences when selling investment shares. Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.

 

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

 

Planning with a Living Trust

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Adding a Personal Backup With a Living Trust

The managers of well-run businesses usually name “backups” to keep things going smoothly — just in case. That’s also a smart plan for your personal finances, where you risk experiencing financial losses or other difficulties if you can’t make your own decisions because of a long illness or other unexpected problem.

You might prepare for this unhappy possibility by giving a family member or another trusted individual the legal power to act for you if necessary. But what would happen if you made an unsophisticated individual your personal financial backup? You might be more comfortable using what is called a “living trust” — with a professional trustee that could easily step into your financial management role if needed.

Standby Protection

Here’s how a living trust could potentially work. You initially transfer assets into the trust, naming yourself as the trustee. You also name a reliable, experienced trustee as the successor trustee. At that time, you simply continue managing your finances as usual, until the circumstances that you’ve specified in your trust agreement — an illness or extended travel, for instance — prevent it. Then, the successor trustee will take over management of the trust assets for as long as necessary.

Other Advantages

Providing a reliable financial backup is just one advantage a living trust can offer. Another is flexibility. You maintain control of your assets during your lifetime, and are free to make changes anytime. For example, you could give your trustee more or less responsibility, amend the trust’s provisions, or even cancel the trust entirely.

Here’s an additional advantage. Your trust can protect your family after your death by keeping your assets under a professional investment manager’s uninterrupted care. And living trust assets don’t pass through probate. That can make the settlement of your estate easier, faster, and often much less costly.

Eventually, your family or other beneficiaries will receive the trust’s assets on the schedule you’ve arranged and under the conditions you’ve specified. That’s another advantage — the ability to determine what happens to your wealth over the long term. And the terms of the trust are private, unlike the terms of a will that passes through the probate process.

Trial Period

Last, there’s a practical advantage: You can give your future asset management arrangements a test drive. If your trustee manages the trust assets during your lifetime, you’ll be able to decide whether you’re satisfied with the arrangements you’ve made — and with the quality and reliability of the trustee’s services.

 

 

 

 

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. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Brush Up On Your IRA Facts

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If you are opening an individual retirement account (IRA) for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.

IRAs in America

IRAs continue to play an increasingly prominent role in the retirement saving and investment strategies of Americans. According to the Investment Company Institute (ICI), more than one third of U.S. households owned IRAs in 2017. Traditional IRAs, the most common variety, are held by more than one quarter of U.S. households, followed by Roth IRAs and employer-sponsored IRAs (including SEP-IRAs, SAR-SEP IRAs, and SIMPLE IRAs).1

Contributions and Deductibility

Contribution limits. In general, the most you can contribute to an IRA for 2018 is $5,500 and it rises to $6,000 in 2019. However, if you are age 50 or older, you can make an additional “catch-up” contribution of $1,000, which brings the maximum annual contribution to $6,500.

Eligibility. One potential area of confusion around IRAs concerns an individual’s eligibility to make contributions. In general, tax rules require that you must have compensation to contribute to an IRA. Compensation includes income from wages and salaries and net self-employment income. If you are married and file a joint tax return, only one spouse needs to have the required compensation.

With regard to Roth IRAs, income may affect your ability to contribute. For tax year 2018, individuals with an adjusted gross income (AGI) of $120,000 (goes up to $122,000 in 2019) or less may make a full contribution to a Roth IRA. Married couples filing jointly with an AGI of $189,000 (goes up to $193,000 in 2019) or less may also contribute fully for the year. Contribution limits begin to decline, or “phase out,” for individuals with AGIs between $120,000 and $135,000 ($122,000 and $137,000 in 2019) and for married couples with AGIs between $189,000 and $199,000 ($193,000 and $203,000 in 2019). If your income exceeds these upper thresholds, you may not contribute to a Roth IRA.2

Deductibility. Whether you can deduct your traditional IRA contribution depends on your income level, marital status, and coverage by an employer-sponsored retirement plan. For instance:2

  • If you are single and covered by an employer-sponsored retirement plan, your traditional IRA contribution for 2018 will be fully deductible if your AGI was $63,000 or less ($64,000 or less in 2019). The amount you can deduct begins to decline if your AGI was between $63,000 and $73,000 ($64,000 and $74,000 in 2019). Your IRA contribution is not deductible if your income is equal to or more than $73,000 ($74,000 in 2019).
  • If you are married, filing jointly, and the spouse making the IRA contribution is covered by an employer-sponsored retirement plan, your 2018 IRA contribution will be fully deductible if your combined AGI is $101,000 or less ($103,000 or less in 2019). The amount you can deduct begins to phase out if your combined AGI is between $101,000 and $121,000 ($103,000 and $123,000 in 2019). You may not claim an IRA deduction if your combined income is equal to or more than $121,000 ($123,000 in 2019).
  • If you are married, filing jointly, and your spouse is covered by an employer-sponsored plan (but you are not), you may qualify for a full IRA deduction if your combined AGI is $189,000 or less. The amount you can deduct begins to phase out for combined incomes of between $189,000 and $199,000 ($193,000 and $203,000 in 2019). Your deduction is eliminated if your AGI on a joint return is $199,000 ($203,000 in 2019) or more.
  • If neither you nor your spouse is covered by an employer-sponsored retirement plan, your contribution is generally fully deductible up to the annual contribution limit or 100% of your compensation, whichever is less.

Keep in mind that contributions to a Roth IRA are not tax deductible under any circumstances.

Distributions

You may begin withdrawing money from a traditional IRA without penalty after age 59½. Generally, previously untaxed contributions and earnings are taxable at the then-current regular income tax rate. Nondeductible contributions are generally not taxable because those amounts have already been taxed.

You must begin receiving minimum annual distributions from your traditional IRA no later than April 1 of the year following the year you reach age 70½ and then annually thereafter. If your distributions in any year after you reach 70½ are less than the required minimum, you may be subject to an additional federal tax equal to 50% of the difference.

Unlike traditional IRAs, Roth IRAs do not require the account holder to take distributions during his or her lifetime. This feature can prove very attractive to those individuals who would like to use the Roth IRA as an estate planning tool.

 

This communication is not intended as investment and/or tax advice and should not be treated as such. Each individual’s situation is different. You should contact your financial professional to discuss your personal situation.

1Investment Company Institute, “The Role of IRAs in US Households’ Saving for Retirement,” 2017.

2Internal Revenue Service, Notice 2017-64.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

student debt

Bearing the Burden of Student Loan Debt

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Bearing the Burden of Student Loan Debt

If you are weighed down by student loan debt, you are not alone. Recent data shows that there are 44.5 million student loan borrowers in the U.S., and they owe a collective $1.5 trillion. What’s more, 45% of recent graduates have student loan debt and a whopping 62.5% of Americans with some form of student loans outstanding are age 30 or older. The average college graduate with a bachelor’s degree left school with $28,446 in student debt in 2016.1 To put this in perspective, the average starting annual salary for new graduates in 2018 was $50,390.2

Paying off these loans is often a challenge. Beyond the burden of monthly payments, the high level of debt can derail long- and short-term financial goals. One study showed that only 39% of recent graduates with student debt believe they’ll be able to pay it off in 10 years. The researchers also estimated that a graduate of the class of 2018 will have to wait until age 36 before being able to purchase a first home with a 20% down payment and won’t be able to retire until age 72.1

Strategies to Start the Repayment Process

Although the amount of your student debt may seem overwhelming, repayments don’t have to be. Long-held budgeting strategies such as managing everyday expenses and limiting purchases by credit card can be effective ways of finding the cash to put toward student loan payments. Additionally, borrowers have other options depending upon the type of loan they hold.

Graduates who took out federal loans — which represent the bulk of total student debt –have different options and protections at their disposal. Among these are the following:

Standard repayment. Loans are repaid in equal amounts over a stated period, generally 10 years. This is typically the default plan if another option is not selected.

Extended repayment. Under this plan, repayments can be extended up to 25 years. Monthly payments are generally lower than with the standard plan, but total payments are significantly higher due to the extended time period.

Graduated repayments start out lower than under the standard option and increase gradually so that the loan can be paid off in 10 years.

Income-driven repayment is available to borrowers who can demonstrate a partial financial hardship. Typically, repayments are capped at 10-20% of income and repayments can extend up to 25 years.

Income-sensitive repayment also requires a partial financial hardship, and repayment amounts are a function of your annual income and other factors

What if You Default?

There can be serious consequences should a borrower decide to not repay, or to stop repaying, a student loan. Defaulting on a student loan can result in low credit scores that can affect the ability to obtain a future loan or employment. Moreover, student loan debt might not be forgiven in bankruptcy proceedings under current bankruptcy law.

Borrowers who have difficulty repaying a loan may look into some of the hardship-based repayment programs described above. Additionally, the Public Service Loan Forgiveness Program might apply to individuals who work in nonprofit organizations or certain fields, including public education and law enforcement.

If you are facing a mountain of student debt, consider your options and contact your lender, who may be willing to renegotiate the terms.

1Source: Nerdwallet, 2018 Student Loan Debt Statistics, December 4, 2018.

2Source: Korn Ferry, High Demand, Low Reward: Salaries for 2018 College Graduates Flat, Korn Ferry Analysis Shows, May 14, 2018.

 

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

 

© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.  This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity. 

financial plan

Getting Ready for 2019

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Getting Your Financial Plan Ready for 2019

Last month I wrote about how the Tax Cuts and Jobs Act could affect your year-end planning. Now I’d like to look at year-end planning from a broader perspective. This list should help you get your financial plan ready for the new year:

 

  • It All Starts With Saving…

    Whether you use Mint, a spending tool from your financial advisor, or a year-end report from your bank or credit card issuer, it’s important to track your spending habits. Having a handle on how you spent your money in 2018 will give you an idea of how you can save more in 2019. Sticking to a budget isn’t easy, so start by analyzing reoccurring expenses to find opportunities to save more. It could be cutting the cord (I switched to DirectTV Now this year!), switching to a family cell phone plan or reaching out to your insurance agent to review your policies.

 

  • Instead of Resolutions, Have a Plan…

    This is a good time to look at where you were last year at this time and see if you stuck with your financial plan. If anything has changed in 2018 that affects your long-term goals, this is the time to address them in your plan.

 

  • Make Sure You Have a Liquidity Plan…

    The rule of thumb is to make sure you keep three to six months of expenses in cash to act as an emergency fund. This may be too broad of an approach as everyone’s situation is different. If you take a lot of risk in your career you may want to hold more cash. A larger cash reserve could also apply to retirees that rely on their investments for most of their income.

 

  • Last Chance To Max Out Retirement Plan Contributions…

    The maximum 401(k) employee elective salary deferral for 2018 is $18,500. If you are age 50 or older, you can put in an additional $6,000 as a catch-up contribution. If you are a participant in a SIMPLE IRA plan, the maximum salary deferral is $12,500 and a $3,000 catch-up contribution can be made. The deadline for these contributions is December 31st. If you can put away more for 2018, contact your human resources department to see if more can be taken out of your last paycheck.

 

  • Make sure you take required minimum distributions (RMDs) from your retirement accounts…

    According to the IRS, you must take your first required minimum distribution (RMD) for the year in which you turn age 70½ by April 1st of the following year. After that first year, the distributions must be made by December 31st. Remember, required minimum distributions also apply to inherited IRAs. You must start taking distributions by December 31st in the year following the death of the original owner.

 

  • Is a Roth Conversion Right For You…

    Any money that you convert to a Roth IRA is generally subject to income taxation in the year that you do it. But over the long term, the money will continue to grow tax-free. It also won’t be subject to required minimum distributions (RMD) in retirement. Traditional IRA account owners should consider the tax ramifications, age and income restrictions about executing a conversion from a Traditional IRA to a Roth IRA. Roth conversions must be done by December 31st. If you made any non-deductible contributions to a retirement plan or IRA in 2018, you may be able to convert those to a Roth without any additional tax consequences.

 

  • Review Your Investments and Harvest Tax Losses… 

    2018 has been a volatile year with many asset classes down year to date. You may be able to harvest some losses in your non-retirement investment accounts by offsetting them with realized gains. You can also realize up to $3,000 as a capital loss against your taxable income.

 

  • Making the deadline for a charitable gift… 

    Most charitable gifts must be postmarked or received by December 31st to qualify for a deduction. If you are retired and taking distributions from a retirement account, part of your RMD can be met by making a Qualified Charitable Distribution (QCD). A QCD doesn’t give you a charitable deduction, but it counts against satisfying your required minimum distribution for the year. Therefore, it is excluded from your taxable income. Like your RMD, the deadline for this distribution is December 31st.

 

  • Deducting 529 contributions… 

    Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. If you are in a home state’s plan that offers an income tax deduction on contributions, make sure you get your contribution in by December 31st.

 

  • Is Your Estate Plan Up to Date?… 

    Has anything changed in 2018 that would be a reason to make modifications to your will, health care proxy, or power of attorney? This is also a good time to make sure you have the desired beneficiary(s) on all of your retirement accounts and insurance policies.

 

  • Making the Most of Spending Accounts…

    For 2018, if you are in a high-deductible health-insurance plan, you can fund a health savings account (HSA). Individuals can put away as much as $3,450 before taxes, while families, can put away $6,900. Those age 55 and older can contribute an additional $1,000. You have until April 15th to fund an HSA. If you funded a flexible spending account (FSA) through your employer in 2018, you may have to spend down your balance by the end of the year. Unlike an HSA, FSAs typically don’t allow you to carry over much of a balance into the following year.

 

  • Should You Bunch Medical Expenses by Year End?… 

    For 2018, the adjusted gross income (AGI) floor was lowered to 7.5% and will return to 10% in 2019. Any medical expenses above 7.5% of your AGI can be itemized for deductions. To claim the deduction, you must have itemized deductions that exceed your standard deduction (which is now $24,000 for a married couple). You may consider covering some medical expenses before the end of the year that you were going to hold off on, if it will raise your itemized deductions above your standard deduction. Also, 2019 will be a more difficult year to claim the deduction since the AGI floor returns to 10%.

 

As always is the case, these suggestions are only intended to be used as general information and are not intended to be tax advice. You should always consult a tax professional before making tax planning decisions and work with a trusted financial advisor to help you make the most of 2019.

 

All the best in the New Year.

 

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from 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. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

 

Year End Tax Planning: TCJA Edition

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Year End Tax Planning: TCJA Edition

With the passage of the Tax Cuts and Jobs Act (TCJA) last December, year-end tax planning could impact even more individuals. A lot has already been written about how it has limited two key itemized deductions: mortgage interest and state and local taxes (SALT). There are also many potential benefits. The TCJA expands the standard deduction and availability of the child tax credit, made reforms to itemized deductions and the alternative minimum tax, and lowers marginal tax rates. Given these changes, here are some things to consider going into the end of the year:

 

  • Is Tax Deferral Still the Way to Go?- Some individual taxpayers will see their effective tax rate go down in 2018. If you are one of those people, you may want to rethink making tax-deferred contributions to your retirement savings. If you are already in a low tax bracket, you may see more of a long-term benefit by contributing after tax money. In addition to a Roth IRA, some employer retirement plans allow for Roth contributions. Withdrawals from the account may be tax free, as long as they are considered qualified. There are some limitations and restrictions. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. It should also be noted that future tax laws can change at any time and may impact the tax benefits of Roth IRAs.

 

  • Should You Convert Tax-Deferred to Roth?- In addition to making new retirement contributions with after tax money, you may benefit from converting money you have in a tax-deferred retirement account to a Roth IRA. Keep in mind, that any money that you convert to a Roth IRA is generally subject to income taxation in the year that you do it. But over the long term, the money will continue to grow tax-free and won’t be subject to required minimum distributions (RMD) in retirement. Roth conversions must be done by December 31st. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. 

 

  • Should You Take Out More Than Your RMD?- For some retirees with a low income or high medical deductions (threshold decreased from 10% of AGI to 7.5% for 2018), it may actually make sense to take more out of retirement accounts than the required minimum distribution. Even if you don’t need the money to cover expenses, the amount taken above the RMD can be converted to a Roth.

 

  • Bunching Up Your Deductions- With the combination of the standard deduction being doubled and big-ticket deductions, like mortgage interest and SALT, being limited, it is more difficult to meet the threshold for itemizing deductions. With careful planning, you may be able to bunch up deductions like charitable contributions, medical expenses, and unreimbursed employee expenses in one calendar year to get you over the threshold. For example, if you normally make $5,000 in charitable contributions in a calendar year, consider contributing $10,000 to a charity or donor advised fund, and nothing the following year. The donor advised fund will allow you to take the deduction in the year the contribution is made, but offers discretion to give money out over time to the charities of your choosing. While donor advised funds have many advantages, some disadvantages to be aware of include but are not limited to possible account minimums, strict limits on grant allocations, management fees and the potential that future tax laws may change at any time that may impact the tax treatment and benefits of donor advised funds

 

  • Consider a QCD- If you are already age 70 ½, and making charitable contributions, you may consider a Qualified Charitable Distribution (QCD). A QCD doesn’t give you a charitable deduction but it counts against satisfying your required minimum distribution for the year. Therefore, it is excluded from your taxable income. Like your RMD, the deadline for this distribution is December 31st.

 

Keep in mind that these suggestions are only intended to be used as general information and are not intended to be tax advice. You should always consult a tax professional before making tax planning decisions and work with a trusted financial advisor to see how the recent tax laws can affect your investment plan.

 

 

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from 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. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.