The What, Why and How of a Financial Plan

THE ULTIMATE LIFE HACK:  THE WHAT, WHY AND HOW OF A FINANCIAL PLAN

There seems to be a life hack for everything out there these days. Aluminum foil in the dishwasher for extra shiny spoons, avoiding TSA lines with strollers for faster times, and toothpaste to clear foggy headlights… but what about your finances? 

Well, we have the ultimate hack for that …. A financial plan! 

The What: Basics of a Financial Plan

Think of a financial plan as your roadmap to financial success. It’s your strategic guide, outlining how to reach your financial goals. Just like a GPS, it helps you navigate through life’s twists and turns, ensuring every dollar is well-spent. It involves setting goals, creating a budget, making smart investments, and managing debt and taxes effectively. In essence, a financial plan is your key to turning aspirations into achievable milestones. It provides clarity and confidence on your financial journey.

No financial plan is the same

Every financial plan is inherently unique. It should be tailored to individual circumstances, goals, and preferences. Factors such as income, expenses, risk tolerance, and life stages contribute to the unique and personalized nature of every financial plan. It will also adapt and evolve with the individual’s journey, guaranteeing adaptability and ongoing relevance as circumstances change. It really is a living document.  However, each plan typically has similar components.

Components of a Financial Plan

A comprehensive financial plan typically includes the following key components, again varying based on the individual’s circumstances:

Financial Goals:

Incorporating financial goals into a financial plan provides a clear roadmap, giving purpose and direction to your financial decisions. These goals serve as motivating milestones, guiding your financial choices and fostering a sense of accomplishment as you work towards tangible objectives. It is important to identify short-term and long-term financial objectives.

Emergency Fund:

An emergency fund acts as a financial safety net, providing a buffer against unexpected expenses or sudden income disruptions. Including it in your financial plan ensures you’re equipped to handle unforeseen challenges without derailing your overall stability or long-term goals. Generally, we recommend at least three to six months’ worth of expenses in an emergency fund. 

Budgeting:

A budget is the compass of your financial plan, offering a comprehensive overview of both income and expenses. Beyond instilling disciplined spending habits, it establishes a structured framework for strategic allocation. It allows you to prioritize savings, investments, and goals, ultimately contributing to enhanced financial stability and control.

Debt Management:

Incorporating Debt Management into your financial plan is paramount for achieving and sustaining financial well-being. By strategically managing and reducing debt, you not only free up resources for other financial goals but also cultivate a healthier financial profile, fostering long-term stability and reducing unnecessary financial stress.

Savings Plan:

Integrating a savings plan into your financial strategy is crucial for building resilience. It allows you to allocate funds for both future goals and unexpected challenges. This disciplined approach fosters financial security and positions you to achieve long-term objectives with confidence.

Investment Strategy:

An investment strategy in your financial plan acts as a catalyst for wealth growth, leveraging your resources to generate potential returns over time. By carefully selecting investment vehicles aligned with your goals and risk tolerance, you optimize your financial portfolio, working towards long-term prosperity and financial success.

Insurance Coverage:

Are you covered? Including insurance coverage serves as a safeguard, shielding you from unforeseen risks and potential financial setbacks. Whether it’s protecting your health, property, or income, insurance provides a crucial layer of security, ensuring that unexpected events don’t jeopardize your financial stability and long-term goals.

Retirement Planning:

Retirement planning is a cornerstone of a financial plan, ensuring that you can enjoy your golden years with financial confidence and independence. It’s like giving your future self a high-five from the beach of financial freedom. By systematically preparing for retirement in your financial plan, you build a nest egg that aligns with your lifestyle goals, providing peace of mind and the freedom to savor your post-working years.

Social Security Strategy:

A Social Security strategy is essential in retirement planning due to the impact it can have on your financial well-being. Social Security benefits provide a significant source of income for many retirees. However, the timing and manner in which you claim these benefits can significantly affect the overall amount you receive.

Tax Planning:

By strategically navigating the tax landscape within your financial plan, you optimize your financial picture, dodge unnecessary tax potholes, and help to ensure that your money is working for you in the most efficient way possible.

Estate Planning:

Estate planning is the meticulous crafting of your financial legacy. It ensures that your assets are distributed according to your wishes and minimizes the burden on your loved ones. By incorporating estate planning into your financial strategy, you secure a comprehensive roadmap for the future, fostering peace of mind and preserving your financial legacy for generations to come.

Regular Review and Adjustments:

Regular reviews and adjustments are the steering wheel of your financial plan, ensuring it stays aligned with your evolving life circumstances and goals. It should be a flexible guide. By consistently revisiting and adapting, you optimize its effectiveness, making strategic changes as needed to navigate the ever-changing terrain of your financial journey.

The Why: Benefits of Having a Financial Plan

Embarking on a journey without a map can be a daunting prospect, and the same holds true for managing your finances. The benefits of having a well-structured financial plan are akin to having a reliable guide on a mountain expedition. From providing clarity and direction to ensuring efficient resource allocation, a financial plan serves as a powerful tool that empowers you to navigate the complexities of your finances.

Here are our top 5 benefits to having a financial plan.:

Goal Achievement: A financial plan helps you define and prioritize your goals, providing a roadmap for turning aspirations into actionable steps. 

Emergency Preparedness: A financial plan includes building an emergency fund, and offering a financial safety net for unexpected expenses or income disruptions.

Wealth Accumulation: A well-crafted financial plan incorporates strategies for savings and investments, allowing you to build wealth over time and work towards financial independence.

Risk Mitigation through Insurance: Integrating insurance into your financial plan safeguards against unexpected events, protecting your health, property, and income.

Retirement Readiness: Planning for retirement is a key aspect, ensuring that you have the necessary funds to enjoy a comfortable and secure post-working life.

Be part of the 35%

According to Schwab’s 2023 Modern Wealth Survey only 35% of Americans have a documented financial plan, and those who have one feel more in control of their finances. Surprisingly, this means that 65% of Americans have no plan. 

One of the biggest reasons why most said they don’t have one is that it seems too complicated to create a plan. 

Well… we disagree and that is where our life hack comes in. 

The How: Getting Started: Tips for Creating Your Financial Plan

A life hack is all about making your life easier, not more difficult. Hence, that is why we have a motto of “Do it for yourself, not by yourself.”

Don’t Complicate it- Get a professional

It can be a complicated process, but with the right people in your corner, it doesn’t have to be.  While some people may create their own financial plans, there are several reasons why you might want to seek professional assistance (Like from us… wink, wink) rather than attempting a DIY (Do-It-Yourself) approach:

Expertise: Financial planners and advisors have specialized knowledge and expertise in various aspects of personal finance.  Areas of expertise range from  investments, tax planning, insurance, and retirement planning. Their experience allows them to provide valuable insights and guidance tailored to your specific situation.

The complexity of the Financial Landscape: The financial landscape is complex, with laws, regulations, and market conditions constantly changing. A professional can help navigate these complexities, ensuring your financial plan remains relevant and effective over time.

Objectivity: An external financial planner provides an objective perspective on your financial situation. Furthermore, this objectivity can be crucial in making unbiased decisions, especially when emotions might cloud judgment in financial matters.

Comprehensive Approach: Furthermore, Financial planners take a holistic approach to your financial well-being. They consider all aspects of your financial life. They help you create an integrated plan that addresses short-term and long-term goals, risk management, and more.

Time and Effort: Ain’t nobody got time for that! Crafting a thorough financial plan requires time and effort. Professionals can efficiently guide you through the process, saving you time and ensuring that no critical aspects are overlooked.

Risk Mitigation: Professionals can help identify and manage potential risks in your plan. Whether it’s investment risk, tax risk, or other uncertainties, their expertise aids in creating strategies to mitigate these risks.

Adaptability: Financial planners are equipped to adapt your plan as your life circumstances change. Whether it’s a career change, marriage, birth of a child, or other life events, professionals can adjust your plan to align with your evolving goals.

Access to Resources: Financial professionals often have access to a broader range of financial tools, resources, and market insights that may not be readily available to individuals.

Accountability: A financial planner can also serve as an accountability coach and financial mentor. As such, they’ll help you stay disciplined and focused on your financial goals, especially during periods of market volatility or economic uncertainty.

Legal and Regulatory Compliance: Professionals are well-versed in legal and regulatory requirements. They can ensure that your financial plan adheres to applicable laws and regulations, preventing unintended legal consequences.

While DIY financial planning is possible, it’s important to recognize your limitations and the potential benefits of seeking professional guidance. A CERTIFIED FINANCIAL PLANNER™ or advisor can bring a level of expertise, objectivity, and comprehensive understanding that may enhance the effectiveness and success of your financial plan.

In Short

Having a well-structured financial plan is not just a strategy; it’s a necessity for securing your financial future. Above all, it’s the roadmap that guides you through life’s uncertainties, ensuring you’re prepared for both the expected and the unexpected. From managing debt to saving for retirement, a sound financial plan touches every aspect of your monetary life, providing peace of mind and a clear path forward.

Next Steps:

Understanding the intricacies of financial planning can be daunting. That’s why we’ve created the Financial Field Guide – a step-by-step guide to help you simplify, navigate, and elevate your financial life. This isn’t just any financial plan; it’s your financial life, broken down into simple, actionable steps. It is a path to a future where you’re in control of your finances, not the other way around.

Don’t leave your financial future to chance. The power to change your financial story is just a click away. Are you ready to unlock it?  Get your Financial Field Guide today!

Financial Plan Bonfire Financial

Navigating Taxes with Henry Ip, CPA

Bonfire Financial has a Podcast! 

We are excited to announce that we are launching The Field Guide Podcast! Hosted by the CEO of Bonfire Financial, Brian Colvert, CFP®, each episode will bring you ideas to simplify, navigate, and elevate your financial life. We really hope you enjoy it! Listen anywhere you stream Podcasts!

iTunesSpotify | iHeartRadio | Amazon Music | Google Podcasts | Castbox | YouTube 

 

Episode 1: Navigating Taxes with Henry Ip, CPA

We are kicking off our first episode of the Field Guide Podcast, with Henry Ip, CPA.

Henry Ip is a seasoned tax professional with a wealth of experience spanning over 17 years in the dynamic field of Tax Advisory and Compliance. Currently serving as a tax partner at Biggskofford PC in the Colorado Springs office, Henry specializes in providing strategic tax compliance and planning services to a diverse clientele, including small public and middle-market private companies and their owners.

Henry shared invaluable insights on tax planning, financial strategies, and considerations for diverse situations. This blog post aims to navigate through the key points of the discussion, shedding light on Henry’s recommendations for navigating taxes in various aspects of financial planning.

Planning for Taxes: Looking Beyond the Present

The conversation began with the crucial importance of planning for taxes. Henry stressed the need to look beyond the current year, emphasizing that tax planning involves not just minimizing taxes for the present but also preparing for future tax implications.

Roth Conversions and Qualified Charitable Distributions: Navigating Retirement Accounts

Turning to retirement accounts such as 401(k)s, the discussion explored Roth conversions and Qualified Charitable Distributions (QCDs). Henry suggested a strategy for retirees comfortable with their financial situation: using Required Minimum Distributions (RMDs) for tax-free donations to charities, meeting RMD requirements while contributing to qualified causes.

Managing Rental Properties: LLCs for Liability Protection

For individuals with Airbnb properties or rental units, Henry stressed the importance of managing personal liability by setting up Limited Liability Companies (LLCs). While not directly impacting income tax, an LLC provides essential liability protection.

LLCs and Tax Implications: Balancing Liability and Tax Benefits

Addressing the common question about the impact of LLCs on income taxes, Henry clarified that, primarily, setting up an LLC benefits individuals in terms of liability protection. However, he emphasized the significance of proper setup and ownership structure.

Selling a Business and Tax Implications: Early Planning is Key

The conversation delved into selling businesses and the associated tax consequences, emphasizing the importance of early planning. Henry recommended considering tax strategies two to five years before selling, including converting ordinary income to capital gains and exploring options for deferring income recognition.

The Importance of Early Planning: Restructuring for Tax Efficiency

Henry highlighted that early planning is essential for restructuring a business to make it more tax-efficient. This proactive approach can significantly impact the tax burden and provide sellers with various options to optimize their financial outcomes.

Filing Extensions and Audit Risks: Dispelling Myths

On the topic of filing extensions and audit risks, Henry dispelled the myth that filing an extension increases the chances of an audit. Extensions provide legal time extensions for filing, reducing stress and allowing accurate information gathering for returns.

Identity Protection PINs: Safeguarding Against Fraud

Touching on identity theft and the IRS’s Identity Protection PIN (IP PIN) program, Henry recommended applying for an IP PIN annually to prevent fraudulent tax filings, providing an additional layer of security against identity theft.

Gifting Strategies: Leveraging Exclusions for Tax-Free Gifts

Discussing client inquiries about gifting money to children, Henry suggested leveraging the annual exclusion amount for tax-free gifts. He emphasized understanding exclusion limits and considering options like 529 plans or trusts based on individual circumstances.

Maximizing Annual Exclusions: Coordinating Gifts for Maximum Benefit

Henry clarified that individuals can maximize the annual exclusion by coordinating gifts between spouses and recommending trusts for beneficiaries who may need additional financial management.

529 Plans and Tax Implications: Exploring Options for Unused Funds

The discussion on 529 plans addressed scenarios where the beneficiary doesn’t use the funds for qualified education expenses. Henry explained options such as changing beneficiaries, using funds for personal education, or exploring exceptions like disability or death.

Tax Implications of 529 Plans: Minimizing Taxes through Strategic Decisions

Henry clarified that taxes and penalties are applied only to the income portion of 529 plan withdrawals for non-qualified expenses. He provided insights into avoiding taxes by changing beneficiaries or leveraging exceptions.

Remote Work and Tax Deductions: Navigating Changes Introduced by TCJA

The conversation concluded with a focus on remote work and tax deductions, highlighting changes introduced by the Tax Cuts and Jobs Act (TCJA) of 2017. W-2 employees working from home can no longer deduct home office expenses, necessitating strategic approaches for tax optimization.

Strategies for S-Corp Owners: Navigating Tax Compliance

For S-Corp owners, Henry recommended a reimbursement approach through an accountable plan to cover business-related expenses, ensuring compliance with tax laws and optimizing deductions for business owners.

Conclusion: Navigating the Tax Landscape

Henry Ip’s expertise provided a comprehensive overview of tax planning strategies for various financial scenarios. From retirement accounts to rental properties, selling businesses, and gifting strategies, the conversation covered a wide range of topics. As individuals navigate the complexities of the tax landscape, early planning and strategic decision-making emerge as key factors in optimizing financial outcomes.

Whether you’re a business owner, retiree, or someone looking to enhance your financial literacy, the insights from Henry offer valuable guidance for making informed financial decisions. Navigating taxes is a journey, and with the right knowledge, you can confidently chart a course to better understand taxes. 

We hope you enjoyed this episode.  Be sure to like, review, and subscribe wherever you listen!

Colorado Secure Savings Mandate – What you need to know

What business owners need to know about Colorado Secure Savings Act

 

In 2020 Colorado passed the Colorado Secure Savings Program. This law mandates that small business owners enroll in a state-run retirement savings plan. The pilot program launched in October 2022 and employers throughout Colorado are now required to comply. 

The purpose of this mandate is to increase access to retirement savings for workers in Colorado. The Colorado Secure Savings Act mandates that qualifying employers provide an employer-sponsored individual plan. The cost of this program will be funded through auto payroll deductions.

In general, this seems like it will have positive benefits for employees. However, it may create additional burdens for employers and may in fact limit employees’ options. Here is what small business owners need to know about the Colorado Mandated Small Business Retirement Plan.

 

Who needs to comply:

 

The Colorado General Assembly states that you, as an employer,  will be required to implement this program if: 

  • You have five or more employees
  • Have been in business for two or more years
  • Don’t have an existing qualifying plan 

Companies already offering 401ks or other qualified savings plans are not required to use the Colorado Secure Savings Program. The law states that employers with less than 5 employees or who have not yet been in business for 2 years will not be required to participate. However, they will have the option to offer the program to their employees.

 

What needs to be done:

 

While there is limited guidance at the moment from the State of Colorado, employers will be required to offer auto-enrollment and facilitate payroll deductions into the program. 

Upon enrollment, employees will opt into the default savings rate for Colorado Secure Savings, which is 5% of their gross pay. Beyond this, deferral rates may vary depending on how much you want to save each year. In addition, age, marital status, and income play a role in the amount that employees can contribute.

However, employees will be able to change their contribution amount or opt-out if desired.

As it is written so far, employers will have 14 days to send employees’ contributions to the program administrator. The program oversight will be done by the board of the Colorado Secure Savings Program. The board is currently chaired by the Colorado State Treasurer. This board will be making a process for withholding employees’ wages and remitting withheld amounts into their Colorado Secure Savings account. It’s not yet clear if the program will offer any integrations with payroll providers to facilitate the timely deposit of contributions.

 

Penalties for noncompliance:

 

Fines can be costly.  For non-compliance, fines will be $100.00 per employee per year and can ratchet up to $5000.00 annually. The compliance period is one year after implementation. 

However, they do state they plan to create a grant program to incentivize compliance. Yet no further details have been released.  The good news is it’s really easy to comply by setting up a 401k plan or another qualified plan in advance. Keep reading on to find out how.

 

General Concerns:

 

There is little to no guarantee of the level of quality or support that will be available to business owners from the state in implementing and managing the Colorado Secure Savings Program. The government has not released any real guidelines. There are some basics, but how is still very undefined. 

Further, if a company offers the state-run plan many of their higher income employees will be excluded. Employees with a Modified Adjusted Gross Income of more than $139,000 or $206,000 married filing jointly cannot participate.

As we wait for more details it’s not a bad idea to consider all the various plan options available to you and your company.

 

State Sponsored vs Employer Sponsored

 

There are a handful of states that currently have state mandated plans in place. California, Oregon, and New York are a few for instance. State sponsored plans have pros and cons, which business owners should carefully weigh. On one hand, government-mandated plans are generally a cheap solution with few fiduciary implications. On the other, these plans tend to be inflexible, one-size-fits-all. Plus they come with potential government penalties.

 

State sponsored retirement plans:

 

  • Roth IRA Investment structure (after-tax)
  • The state board selects investments
  • The plan will “travel with” people if they change jobs or leave the state
  • Excludes higher income employees
  • No employer contributions 
  • No federal tax credits for employers
  • Creates a significant burden for the employer

 

As an alternative, an employer sponsored 401k or other qualified plans may be a better option than having the state do it for you. A common misconception is that employer sponsored plans are expensive. However, that simply isn’t the case. Many plans are now being tailored for smaller companies. Plus, the IRS gives tax credits to firms with fewer than 100 employees for some ordinary and necessary costs of starting an employer sponsored plan. 

 

Employer Sponsored 401K plans:

 

  • Allow an employee to make contributions either before or after-tax, depending on plan options
  • Wide range of investments at various levels of risk chosen by the employer or by an advisor
  • Employee may direct their own investments
  • Higher Annual Salary Deferral Limit 
  • No employee income limits
  • Allows for employer contributions
  • Federal tax credits for the employer for start-up and admin costs and employee education

 

In addition, offering an employer-sponsored plan to your employees may increase your company’s competitiveness in the job market. It could also help you retain valuable staff. Plus, you and other company leaders can participate. 

If you work with a payroll services provider, the software can easily and automatically transfer employees’ funds, making the procedure effortless. Additionally, private plans typically come with the support of financial advisors. Moreover, a financial advisor can help regarding plan types and how best to implement them for your business.

Clearly, adding a 401k or other qualified plans to your company’s benefits package has strategic advantages. Yet, by not providing your employees with a retirement plan, you risk having the state impose one. 

 

Do State-Run Plans Even Work?

 

Time will tell. However, Oregon, the first state to legally mandate a retirement plan, has pretty dismal enrollment numbers. Since its inception in 2018, only 114 thousand workers have enrolled out of a potential of over 1 million total. 

Using Oregon again as an example, there are a lot of restrictions. First, the percentage contribution is fixed. Second, the employee’s first $1,000 gets put into a stabilization fund that since its inception has earned 1.52% per annum, or basically 0%,  Or less after factoring in inflation. Finally,  if and when they have more than $1,000 invested, they must decide between a fund that is a mixture of stocks and bonds and one that is invested entirely with the State Street Equity 500 Index Fund. (03/31/2022

By comparison, in the private sector, there are multiple low-cost, exchange-traded funds, most of which averaged an annual return of over 10% during the most recent 10 year period. Some would argue that directing employees away from these superior investment products arguably does a disservice to the employees.

 

Sample Administrative Duties

 

Further, Oregon has demonstrated what a significant burden the plan can be on employees. Here is a short list of employer duties that Colorado will likely have as well.

  • Submit an employee census annually
  • Track eligibility status for all employees
  • Provide enrollment packets to all employees 30 days after date of hire
  • Plus, track whether each employee has opted in or out
  • If an employee doesn’t opt out within 30 days,  set up 5% payroll deduction
  • Manually auto-escalate all employees annually unless they’ve opted out
  • Repeat auto-enroll process annually for all employees who have opted out
  • 6-month look-back for auto-escalation:
    • Track if the employee has been participating for 6 months with no auto-escalation
    • Provide 60-day notice  if they do not opt-out again
  • Hold open enrollment
  • Auto-enroll anybody who hasn’t been participating for at least 1 year

It’s too early to know whether state-run programs work. After all, Saving for retirement is a marathon, not a sprint. As an employer, it is important to weigh all options. 

 

What Are Alternatives to the Colorado Secure Savings Program?

 

If you do not already have an existing plan, and you are skeptical about a government-mandated plan, you can always make your own employer-sponsored plan. Bonfire Financial has many 401k, Simple IRA, and SEP IRA options. We provide affordable, hassle-free solutions that will reduce the administrative burden. 

 

Colorado Secure Savings vs Retirement Plan with Bonfire Financial

State Run Retirement Plan vs 401k

How can my business establish its own retirement plan?

 

Above all, retirement plans don’t have to be expensive or difficult to manage. In light of Colorado’s rollout of the Secure Savings Plan, we are offering small business owners and employers a free, no-obligation call with a CERTIFIED FINANCIAL PLANNER™ to help answer all your questions. We can help you create a better, more efficient retirement plan that is tailored to you and your employee’s specific needs. We are local in Colorado Springs and are here to help with all your retirement plan needs. 

Schedule a Call

10 actionable ways to cut taxes now and in the future

HOW TO CUT TAXES NOW AND IN THE FUTURE

 

If you just wrote a big check to the IRS, you may be wondering how you can prepare now to cut your taxes next April. We’ve got you covered. Luckily, there are several legal ways to reduce the amount of tax you pay each year that don’t just include adjusting your withholding.  Here are 10, practical and actionable, ways to help you cut your next tax bill and those in the future.

 

1. UTILIZE YOUR RMD FOR YOUR CHARITABLE GIVING

 

If you are 72 or older, donating your Required Minim Distribution (RMD) to a qualified charity is a great way to reduce your tax burden. These donations are considered a qualified charitable distribution (QCD) and will not be taxed up to $100,000 per account owner.

Note: The Secure Act raised the RMD age for some taxpayers to 72, but didn’t raise the QCD age from 70 1/2. 

A qualified charitable distribution can satisfy all or part of the amount of your RMD from your IRA. For example, if your required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution, you would only have to withdraw another $5,000 to satisfy your required minimum distribution.

The more you donate in this way, the more you can exclude and cut from your taxable income This is extremely helpful since RMDs are ordinary taxable income that will often push retirees into a higher tax bracket. 

Qualified charitable donations are a great way to use up your RMD if you are planning to give to charity. However, keep in mind that it must be a check sent directly from an IRA to the charity, it is not a charitable deduction per IRS rules. 

Schwab allows you to have a checkbook on your IRA that allows you to write such checks directly from your IRA. Be aware, that all donations need to be sent/cashed by 12/31 of the tax filing year. 

QCDs can offer big tax savings, as tax rates on regular income are usually the highest. Regardless of the tax benefits, designating this income for charity is a great way to begin or expand your giving and support the causes you care most about. 

 

2. TAKE ADVANTAGE OF TAX LOST HARVESTING 

 

There is always a silver lining, right? For market downturns, that silver lining is tax-loss harvesting. With tax-loss harvesting, you can use your loss to cut your tax liability and better position your portfolio going forward.

Here is how it works, in its simplest form:

  • First, sell an investment that is losing money and underperforming. 
  • Next, use that loss to reduce your taxable capital gains and potentially offset up to $3,000 of your ordinary income for the tax year. (Any amount over $3,000 can be carried forward to future tax years to offset income down the road).
  • Last, reinvest the money from the sale into a different investment that better meets your investment needs and asset-allocation strategy.

This allows you to free up cash for new investment and mitigate a tax consequence.  

As with anything tax-related, there are limitations. Please note that tax loss harvesting isn’t useful in retirement accounts because you can’t deduct the losses in a tax-deferred account. Additionally,  there are restrictions on using specific types of losses to offset certain gains. A long-term loss would first be applied to a long-term gain, and a short-term loss would be applied to a short-term gain. You also must be careful not to violate the IRS rule against buying a “substantially identical” investment within 30 days.

The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy. We always recommend talking to a professional about your specific situation. 

 

3.  FUND HSA OR FSA 

 

Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) allow pre-tax dollars to be set aside for medical, vision, and dental expenses, thus reducing your overall taxable income. Each has its own benefits.

An HSA is triple tax-advantaged, which means:

  • Contributions are made with pre-tax dollars 
  • It grows tax-free (you can invest your contributions and earn interest) 
  • Can be used tax-free for eligible expenses (

Another great thing about an HSA is that you can keep it forever. Funds roll over and never expire. On the other hand, an FSA is a “use or lose it” type of account. However, an FSA is still a good option because it is funded before tax and comes out tax-free. FSA are employer-sponsored so there is often less involved with enrolling and setting up the plan. As such self-employed filers are ineligible to open able to open an FSA. 

Regardless of which plan you have, both HSAs and FSAs are good options to help cut and reduce your taxable income.  

 

CONTRIBUTE TO A PRE-TAX RETIREMENT ACCOUNT TO CUT TAXES NOW

 

Contributing to a retirement plan may be one of the simplest ways to slash what you own to the IRS. Whether a 401k or an IRA, (learn the differences here), both offer tax savings. 

 

4. MAX OUT  YOUR 401K

 

If your employer offers a 401k, maximize it. To realize benefits on your next tax bill, contribute to a Traditional 401k rather than a Roth 401k. Traditional 401k contributions will reduce your taxable salary, another great way to cut your tax bill.

 

5. CONTRIBUTE TO A TRADITIONAL IRA

 

Additionally, if you are below the income limits, you can also contribute to a Traditional IRA. They are tax-deferred, meaning that you don’t have to pay tax on any interest or other gains the account earns until you withdraw the money. Contributions to a Traditional IRA are often tax-deductible. However, if you do have a 401k or any other employer-sponsored plan, your income will determine how much of your contribution you can deduct.

 

6. CONSIDER A CASH BALANCE PLAN

 

If you are a business owner or solopreneur and have a high income, consider a cash balance plan. A Cash Balance plan is a type of retirement plan that allows for a large amount of money to go in tax-deferred and grows tax-deferred. It is a great option for owners looking for larger tax deductions and accelerated retirement savings.

Cash Balance contributions are age-dependent. The older the participant is,  the higher the contribution can be. It can be an extra $60k to over $300k (based on age and income ) on top of combined 401k/ profit-sharing contributions. 

An attractive feature of a cash balance plan is that the company offering the benefit can take an above-the-line tax deduction on contributions. Above-the-line deductions are great for tax savings because they reduce income dollar for dollar.

 

CONTRIBUTE TO AN AFTER-TAX RETIREMENT ACCOUNT TO CUT TAXES IN THE FUTURE

 

While a 401k, Traditional IRA, and Cash Balance Plan can help curb taxes in the near term, we also recommend planning for future tax implications to help you cut your tax bill for years to come. Roth IRAs are retirement accounts that are made up of your AFTER-tax contributions, however, they offer tax-free growth and tax-free withdrawals. 

 

7. GROW TAX-FREE WITH A ROTH IRA 

 

Again, Roth IRA contributions are after-tax, so you can not deduct your contributions. Nevertheless, your distribution will be tax-free and penalty-free at age 59 ½  Something your future self will thank you for! Another benefit is that a Roth IRA isn’t subject to RMD requirements either. 

Your Roth IRA contribution limits are based on your filing status and income.

There are definitely some potential tax savings here, especially for those just starting out. It makes sense to pay taxes on the money you contribute now, rather than later, when your tax rate may be higher.

 

8. RUMINATE ON A  BACKDOOR ROTH

 

A Backdoor Roth allows people with high incomes to fund a Roth, despite IRS income limits, and reap its tax benefits. Could it be right for you?

In short, you open a traditional IRA, make non-deductible (taxable) contributions to it, then move that Traditional IRA into a Roth IRA and enjoy the tax-free growth. 

It is important to note that you can not have any money currently in an IRA, SIMPLE IRA, or SEP-IRA to make this work properly.  There are more complexities involved in setting this up, and we recommend talking with a CERTIFIED FINANCIAL PLANNER™.

 

9. ROTH CONVERSION

 

A Roth Conversion involves the transfer of existing retirement assets from a traditional, SEP, or SIMPLE IRA, or from a defined-contribution plan such as a 401k, into a Roth IRA.

You’ll have to pay income tax on the money you convert now (at your current tax rate), but you’ll be able to take tax-free withdrawals from the Roth account in the years to come

You can also use market downturns as an opportunity to do a Roth Conversion. If your IRA goes down in value because of market fluctuations, you could convert the account to a Roth, which allows you to pay a  smaller amount of taxes because the account is down in value. Then you’ll have the money in a Roth when the market recovers, which would then be tax-free.

While there is no predicting what the tax brackets and tax rates will be in the future, if taxes go up by the time you retire, converting a traditional IRA and taking the tax hit now rather than later could make sense in the long run.

 

10. PAY ATTENTION TO THE CALENDAR

 

Lastly, from a tax perspective, there is a big difference between December 31 and January 1st. While some things, such as IRA contributions can be made up until the filing deadline, many must be done during the tax year, like qualified charitable distribution.

It is important to plan as far in advance as possible to help minimize your taxes. We recommend meeting with a tax professional and your financial advisor throughout the year.

 

The key to lowering your tax bill is to plan ahead and cut your tax liability in a way that makes sense for you.  It’s impossible to know what regulations, changes, and updates will go into effect during any given tax season, but rest assured that we’ll be here to help you plan. Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals today! 

Until then, take these tips to heart and remember that reducing your taxes isn’t an impossible task.

6 important things to do when turning 65 – A Retirement Checklist 

Turning 65 – A Retirement Checklist

 

Are your turning 65 soon? Turning 65 is a major milestone and pivotal age for your retirement planning. Not only is this an important age for government programs like Medicare and Social Security, but it’s also a perfect time to check other parts of your financial plan, particularly if you’re about to retire. Here are 6 important things to do as you get closer to your 65th birthday to make sure this year and the many years that follow are amazing!

 

  1. Prepare for Medicare
  2. Consider Long Term Care Insurance
  3. Review your Social Security Benefits
  4. Review Retirement Accounts
  5. Update Estate Planning Documents
  6. Get Tax Breaks

 


1. Prepare for Medicare

 

Medicare is the most common form of health care coverage for older Americans. The program has been in existence since 1965 and provides a way for seniors to have their health needs taken care of after they retire from the workforce.

 

What is Medicare?

 

Medicare is basically the federal government’s health insurance program for people 65 or older (or younger with disabilities). Medicare is primarily funded by payroll taxes paid by most employees, employers, and people who are self-employed. Funds are paid through the Hospital Insurance Trust Fund held by the U.S. Treasury.

 

When can I enroll in Medicare?

 

Starting 3 months before the month you turn 65, you are eligible to enroll in Medicare, you can also sign up during your birthday month and the three months following your 65th birthday. Essentially, you have a seven-month window to sign up for Medicare. Be mindful of your timing and enrollment because Medicare charges several late-enrollment penalties.

 

What does Medicare cover?

 

Medicare benefits vary depending on the enrollment plan you choose. Medicare is made up of four enrollment plans:  Medicare Part A, Part B, Part C, and Part D.

 

Here is a quick breakdown of the four parts of Medicare:

 

Medicare Part A: Know as the Original Medicare, Part A covers inpatient hospital care, home health, nursing, and hospice care. Part A is typically paired with Medicare Part B.

Medicare Part B: Still considered part of the Original Medicare, Part B helps cover doctor’s visits, lab work, diagnostic and preventative care, and mental health. It does not include dental and vision benefits.

Medicare Part C: This option offers traditional Medicare coverage but includes more coverage for routine healthcare that you use every day, routine dental care, vision care, and hearing. Plus, it covers wellness programs and fitness memberships. Medicare Part C is also known as Medicare Advantage and is a form of private insurance. Note that you will not be automatically enrolled in these benefits.

Medicare Part D: Medicare Part D is a stand-alone plan provided through private insurers that covers the costs of prescription drugs.  Most people will need Medicare Part D prescription drug coverage. Even if you’re fortunate enough to be in good health now, you may need significant prescription drugs in the future.

Age 65 Medicare

 

While Medicare is great it’s not going to cover all your medical expenses. You’ll still be responsible for co-payments and deductibles just like on your employer’s health plan, and they can add up quickly.

To offset these expenses, a Medicare Supplement (Medigap) insurance policy could be a good option as well. Medigap is offered by private insurance companies and covers such as co-payments, deductibles, and health care if you travel outside the U.S.

 

How can I enroll in Medicare?

 

For most people, applying for Medicare is a straightforward process. If you already receive retirement benefits from Social Security or the Railroad Retirement Board, you’ll be signed up automatically for Part A and Part B.

If you aren’t receiving retirement benefits, and you don’t have health coverage through an employer or spouse’s employer, you will need to apply for Medicare during your 7-month enrollment window.

You can sign up for Medicare online, by phone, or in-person at a Social Security office.

Please note that if you have a Health Savings Account (HSA) or health insurance based on current employment, you may want to ask your HR office or insurance company how signing up for Medicare will affect you.

 

2. Consider Long Term Care Insurance

 

Another prudent thing to do when you are turning 65 is to consider your long-term care insurance options before retirement.

 

What is long-term care insurance?

 

The goal of long-term care is to help you maintain your daily life as you age. It helps to provide care if you are unable to perform daily activities on your own. It can include care in your home, nursing home, or assisted living facility.  The need for long-term care may result from unforeseen illnesses, accidents, and other chronic conditions associated with aging.

Medicare often does not provide long-term care coverage, so it is a good idea to factor this additional coverage in.

 

Why do I need long-term care insurance?

 

While it may be hard to imagine needing long-term care now, the U.S. Department of Health and Human Services estimates that someone turning age 65 today has almost a 70% chance of needing some type of long-term care service in their lifetime.

Unfortunately, long-term care coverage is often hindsight, only thinking about it once it is needed. Planning for it now can help you access better quality care quickly when you need it and help you and your family avoid costly claims.

 

How do I get long-term care insurance?

 

First, talk with a CERTIFIED FINANCIAL PLANNER™ about whether long-term care insurance makes sense for you. Coverage can be complex and expensive. A good Financial Advisor can help guide you to a plan that is right for you.

Most people buy their long-term care insurance through a financial advisor, however, some states offer State Partnership Programs and more employers are offering long-term care as a voluntary benefit.

It is important to start shopping before you would need coverage. While you can’t predict the future, if you wait until you are well into retirement and already having medical issues, you may be turned down or the premiums may be too high to make it a feasible option.

 

3. Review your Social Security Benefits

 

If you haven’t yet started to collect Social Security, your 65th birthday is a great time to review your social security strategy to help you maximize your benefits.

 

Age 65 Social Security

 

When can I take Social Security?

 

The Social Security Administration (SSA) considers the full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born in 1960 or later, full retirement benefits are payable at age 67.

In deciding when to start receiving Social Security retirement benefits, you need to consider your personal situation.

 

How can I maximize my Social Security Benefit?

 

Turning 65 might raise questions about how to maximize your Social Security befits in retirement. Rightfully so. Receiving benefits early can reduce your payments, however, the flip side is also true. If you’re still working or have savings that will allow you to wait a while on receiving benefits, your eventual payments will be higher. Your benefits can stand to grow 8% a year if you delay until age 70. Plus, cost of living adjustments (COLA) will also be included in that increase.

In addition to delaying receiving your benefits, it is important to make sure all your years of work have been counted. SSA calculates your benefits based on the 35 years in which you earn the most. If you haven’t clocked in 35 years, or the SSA doesn’t have those years recorded, it could hurt you.

Be sure to create a “My Social Security” account and check to make sure your work history is accurately depicted. It is wise to download and check your social security statement annually and update personal information as needed.

Another potential boost in your benefit can come from claiming spousal payments.  If you were married for at least 10 years, you can claim Social Security benefits based on an ex-spouse’s work record.

Everyone’s financial situation is different, but it can be helpful to have a plan for how you’re going to approach Social Security before you turn 65.

 

4. Review Retirement Accounts

 

Even if you are not planning to retire soon, now (and every quarter for that matter) is a good time to check in on your retirement accounts. Is your portfolio allocated in a way that lines up with your target retirement date? When is the last time you met with your financial advisor? Do you need to catch up a little?  Do you have a plan for your Required Minimum Distributions?

Meeting with a CERTIFIED FINANCIAL PLANNER™ can help you evaluate your risk tolerance in comparison to your retirement goals, make sure your investments are aligned to help you retire when you want, and make a plan for you to maintain the lifestyle you want in retirement.

A financial advisor can also help with planning for 401(k) catch-up contributions, RMDs, early withdrawals, or completing a Mega Backdoor Roth IRA.

A big hurdle as retirement approaches is often all the homework you have to do. Penalties, enrollments, coverage gaps, deadlines, etc. A great financial advisor can help guide you through this process.

If you are wondering how to find a great financial advisor, we have put a simple guide here. Or, we would love for you to schedule an appointment now to meet with one of our CERTIFIED FINANCIAL PLANNERs™.

 

5. Update Estate Planning Documents

 

The next item on the retirement checklist of important things to do when Turning 65 is to get your estate planning documents and legal ducks in a row. If you do not yet have an estate plan, will, medical directive, or financial power of attorney, it is time to get those in order. It is not too late! If you do have them, take some time to update them.

Have you had recent changes in personal circumstances? Do you need to update beneficiaries? Reviewing your plan at regular intervals, in addition to major life events, will help ensure that your assets and legacy are passed on in accordance with your wishes and that your beneficiaries receive their benefits as smoothly as possible.

Further, it is also a good idea to take inventory and organize all your financial documents. Keep a list of all your accounts (banking and investment), insurance, and estate documents as well as key contact information in a safe place. Make note of any safety deposit boxes you have. Keeping all this info organized and in one place will be a big help to your loved ones during a difficult time.

You’ll feel great knowing that you and your family are prepared

 

6. Get Tax Breaks

 

Finally, don’t let medicare be the only gift to you when you turn 65. Starting in the year you turn 65, you qualify for a larger standard deduction when you file your federal income tax return. You may also qualify for extra state or local tax breaks at age 65.

Many states also offer senior property tax exemptions as well. For example, in Colorado for those who qualify, 50 percent of the first $200,000 of the actual value of the applicant’s primary residence is exempted. Check with your local tax assessor to see what property tax breaks may be available to you.

 

Bonus – Turning 65 Birthday Advice

 

Relax and enjoy it. As much as turning 65 is a time to plan for retirement, it is also a time to celebrate.

If you plan to indulge in a much-deserved tropical getaway or a quick trip to visit your grandchildren, you may be able to take advantage of new travel discounts. Delta, American, and United Airlines all offer senior discounts on selected flights. Additionally, many hotels, car rental companies, and cruise lines all also offer senior discounts. So treat yourself!

Happy 65th! Cheers to many more!

Have more questions? We’d love to talk. You can reach us at 719-394-3900 or you can schedule a call here!

Retirement vs. Inflation

How to protect your retirement from inflation 

 

It’s the ultimate battle of good vs evil. Retirement vs. Inflation. Inflation is the arch-enemy of your retirement savings and if you’re near retirement – or even thinking about it – now is a good time to pay particularly close attention to your money.  According to the Bureau of Labor Statistics Press Release on January 12, 2022, it is clear that prices are rising and inflation is here. Overall, prices have climbed 7% year over year which is the greatest increase in over 40 years. Truly there is no other topic that seems to be getting more attention right now than inflation. 

On top of that, the pandemic has most certainly shaken the sense of security that Americans felt when it comes to their finances and a lot of people feel more vulnerable than they did two or three years ago. Even if you have been diligent about saving for retirement inflation can eat into your nest egg quickly.

 

Why Inflation Happens

 

Inflation is, oddly, both incredibly simple to understand and absurdly complicated. It is worth taking a pause and understanding why inflation is happening in the first place. 

In the simplest terms, inflation happens when prices broadly go up. In other words, the average price of everything is increasing (housing, food, gas, cars, etc.). Generally, it is not a bad thing, as wages also rise. Ideal inflation according to the U.S. Federal Reserve targets an annual inflation rate of 2%. Most policymakers believe it leads to a healthy economy. However, we are currently sitting at 7%. A bit off the mark is an understatement. Here is a visual to give you an idea of where we are in relation to just 10 years ago. 

Inflations Impact on Your Retirement

Source: US Inflation Calculator

 

Why is inflation so high right now?

 

Again, simply put…blame the pandemic. In response to the pandemic, the Fed started adding an unprecedented amount of money into the economy via emergency stimulus funds to quickly get the country out of the recession, plus they slashed interest rates. People started spending more and demand was up. Good, right?

Yet, months and months of this fueled inflation because supply wasn’t able to recover as fast. Take for example the automobile industry. Many auto-manufacturers shut down during the pandemic and were slow to get things moving again, some still are, mostly due to supply chain issues. It is a classic formula of high demand plus limited supply equals higher prices. 

Further, inflation is hard to predict because it depends on what people expect of inflation in the future. For example, if businesses expect higher prices and wages next year, they’ll raise prices now. If workers expect higher prices and wages next year, they’ll ask for higher wages now. So Fed Chairman Jerome Powell has long been calling the recent inflation “transitory”, meaning in other words, only a temporary correction of the pandemic. 

However, both Powell and Treasury Sectary Janet Yellen admitted last month (Decemebr 2021) that it is time to retire the term. So, prices will continue to go up and the government is finally admitting it. Now what? 

 

How to protect your retirement from inflation 

 

Maximize Social Security Benefits

 

With rising costs it may be hard to offset inflation with your traditional retirement benefits, such as social security. However, you can work to maximize your social security benefits by delaying them. Delayed Retirement Credits help you to increase your benefit by a certain percentage each month that you delay starting your benefits. If you can wait to start getting your social security checks until age 70 your monthly payments will be higher and will adjust to the annual cost of living when you do begin to take them. 

It is important for everyone to maximize their social security benefits. This is a small step that could potentially hedge off some inflation and help your retirement savings go a little further. 

 

Get aggressive with any Consumer Debt

 

The Feds have signaled it will aim to make some aggressive policy moves in response to the current situation. It is likely we may see as many as three rate hikes this year, two more next year, and another two in 2024. If you have any outstanding credit card debt now is the time to pay it down before interest rates go up. Any variable rate debt will get very pricey. If you cannot pay it off all at once, but you have good credit try and take advance of some zero to low-interest balance transfers. Doing this will help insulate you from the coming higher interest rates. 

 

Take advantage of lower mortgage interest rates now

 

While mortgage rates move based on long-term bond yields, a spike in consumer prices will certainly make a rise in mortgage rates more likely.  Right now mortgage rates are still low. If you have considered refinancing to a lower rate (or buying a new home) this is your sign to look into it further depending on the term left on your mortgage. If rates do go up, you may wish you would have done it sooner. Also, as mentioned above, if you have an adjustable home equity line it could be at risk for an increase. Call a mortgage broker today to see what options you have. 

 

Look at your portfolio and make adjustments as needed

 

As financial advisors, this is something we are watching closely. Here are some of the general recommendations we have, however, everyone’s financial situation is different so we recommend contacting us (or talking to CERTIFIED FINANCIAL PLANNER™) before making any changes. Also, keep in mind if rates don’t go up like crazy these recommendations may not be the best and may underperform your hopes. 

First, at the very least, review your investment allocations. If you have bonds in your portfolio, we recommend short-term bond funds until interest rates go up. Ultimately these are going to be less risky with rising interest rates. While they may not have as much earning potential they can weather the inflation storm better. 

Also, with rising prices, finding stocks with dividends can add value to a portfolio. Think consumer-based large-cap stocks. Likewise, financial stocks also commonly benefit from higher prices and inflation. These types of investments may help keep pace during an inflationary environment.  

Finally, consider diversifying with Digital Assets, such as Bitcoin. Essentially, owning Bitcoin means you are betting against the world’s fiat currencies. Most major digital assets have a fixed number of coins or have capped the potential circulation growth. Interestingly, the infamous billionaire investor, Paul Tudor Jones, has even claimed that crypto protects better against inflation than gold. While there still may be limited evidence that crypto can hedge inflation and will cure all as it itself is often susceptible to market jitters, it certainly is worth looking into if it fits your risk tolerance and time horizons. 

Again, we emphasize not making any dramatic changes to your investments until you’ve consulted with a professional. Our experience has taught us that unforeseen events can happen and do happen, so it is best to stay diversified, rebalance as needed, and always come back to your long-term goals. We are happy to talk with you about your specific situation anytime. Schedule a call here.

 

In conclusion

 

Inflation can impact your retirement in a variety of ways. If you’re not on the right path to protect yourself against inflation it will be increasingly difficult for you to live comfortably when you can are no longer working. Adjusting your investment strategy, spending habits, and expectations to account for inflation is extremely important for retirees and those close to retirement.

How to prepare for Biden’s new tax laws

President Joe Biden hasn’t hidden his desire to raise taxes on corporations and the wealthy. It is his way to fund a multi-trillion infrastructure package and new social programs. Details are likely to change as the legislation makes its way through Congress, yet many are already wondering how to prepare for Biden’s new tax laws. 

While history reveals that the stock market does well during periods of higher taxes (as higher taxes often come with stronger economic growth), it doesn’t mean you should sit idly by and not do anything with your money amidst increased taxation. In fact, higher taxes will require an investor to be more adaptive and diligent.

 

Here are some ways you can prepare for Biden’s new tax laws:

 

—– (or scroll to the bottom for the recap video) —–

 

Long-Term Capital Gains and Qualified Dividends

 

Proposed change: 

 

The proposed Biden tax plan includes nearly doubling the long-term capital gains (gains on assets held for over a year) for those making more than $1 million. This is up from a 20% maximum rate (plus 3.8% net investment income tax) to 39.6% (plus 3.8% net investment income tax). This results in a top marginal rate of 43.4 percent. 

 

How to prepare: 

 

We are firm believers that long-term goals, not taxes, should be the primary driver of decisions. However, preparing for Biden’s new tax laws surrounding capital gains could compel some high-income investors to consider selling off assets before the tax hike takes effect. Others will look into alternative strategies to lower their taxes.

Gauging the impact of capital gains requires careful analysis. It is important to look at projections of future income and tax brackets. Capital gains taxes, unlike income taxes, are discretionary. This means that investors have greater flexibility on when to sell their investments. As such can determine how much tax they will have to pay in a specific tax year.  For example, there may be years in the future when someone’s income falls below the proposed $1 million threshold, resulting in a lower rate.

As a rule of thumb, realize capital gains when necessary to fund goals and manage risk. Consider realizing capital gains at today’s low rates (pre-Biden’s changes) if needed to fund shorter-term goals. For longer-term goals, investors may choose to retain the investments in the event future tax reform lowers the capital gains tax rate.

Also, consider utilizing an asset location strategy by placing inefficient tax assets in tax-deferred or nontaxable accounts. Interest income, dividend income, and realized capital gains do not get taxed in IRAs. We also recommend considering installment sales to regulate annual income levels, keeping income under $1 million as much as possible.

 

Basis Step-Up at Death

 

“In this world nothing can be said to be certain, except death and taxes.” -Benjamin Franklin

 

Proposed change: 

 

Biden’s new tax plan is proposing to end the longstanding tax exemption for investment appreciation when a taxpayer dies. This tax break is the step-up in basis. Changing it could raise taxes at death significantly for top-earning Americans.

Currently, if you inherit an asset that increased in value when the person who died owned it, the asset’s basis is increased to the property’s fair market value at the date of the previous owner’s death. This adjustment is called a “step-up” basis. The increase in basis also means that the person who inherits the property can sell it immediately without paying any capital gains tax because there is technically no gain at that point to tax.

The current step-up saves taxpayers more than $40 billion a year, according to the congressional Joint Committee on Taxation. The new proposal would take back some of that to help pay for social programs. It would be a profound change to a provision that has been in the tax code for 100 years.

Under the proposal, the un-taxed gains on investments held at death, such as stocks, land, or a home, would likely be taxed at a top rate of 39.6%, above an exemption of $1 million per individual, plus $250,000 more for a primary home. For married couples, the total exemption would be doubled, to up to $2.5 million of gains.

 

How to prepare: 

 

Potential strategies that could help with this rule change include the use of flexible grantor trusts, which allow swapping assets, borrowing, loaning;  Irrevocable trusts which permit gifting to charity to avoid a deemed sale and capital gains); consider prioritizing low-basis assets for charitable giving. If this proposal goes into effect, we suggest discussing options with your advisor and tax professionals.

 

Estate and Gift Tax Changes

 

Proposed change: 

 

Under Biden’s new tax laws he is proposing to reduce the estate and gift tax exemption amount to $3.5 million. Maybe lower. The current exemption amount is $11.7 million. A reduction in this amount will result in more tax for many families at death. For example, an estate of $5 million (currently under the $11.7 million limit) would be taxable for amounts over $3.5 million.

 

How to prepare: 

 

Consider using and funding a GRAT (grantor retained annuity trust) to transfer excess growth of appreciating assets while minimizing gift and estate taxes. Today’s GRAT rates are historically low, so this is an ideal time to create a GRAT. Consider funding trusts now.  Particularly those that are expected to need cash to meet future expenses, such as life insurance premiums, in case annual exclusions are capped. We recommend discussing such strategies with your lawyer and/or CPA. 

Further, you can still implement annual gifting. Current limits allow for gifts up to $15,000 per donee per year. A solid strategy used to pass wealth while staying within IRS limits. A  married donee may gift $15,000 to a spouse, as well. 

 

Individual Income Tax

 

Proposed change: 

 

Biden is also proposing to increase the top individual ordinary income tax rate to 39.6% for families making more than $400,000 ($200,000 for individuals). The current tax law is 37% top individual ordinary income tax rate. The proposed income tax increase is relatively small.  It would return it to 2013-2017 levels, however, there are still some tax mitigation opportunities. 

 

How to prepare: 

 

First, make sure you are fully funding your 401k and IRAs, further convert traditional IRAs into a Roth IRA, i.e. a Backdoor Roth. Revisit elections on deferred compensation plans. 

 

Other Proposed Tax Laws

 

Biden’s proposed new tax laws include much more than listed here. These are the biggest changes, to read more about all the proposed changes reference The American Jobs Plan and The American Family Plan.

Although definitive tax policy changes have not yet been enacted, it is highly likely we will see changes to the tax landscape late in 2021 or early 2022. Biden’s new tax laws could have a significant impact on your finances and taxes, with specific changes on investment income. Bonfire Financial can help you create a financial plan and optimize your tax strategy based on your needs and goals.

If you have questions on how to prepare for Biden’s new tax laws or are interested in scheduling a financial planning audit, please reach out to our CFP® professionals at 719-394-3900.

 

—– (watch the recap video) —–

 

Credit Card Rewards

Let’s talk about credit card rewards. But first, let’s talk about mindset.  It takes a different mindset to make money verse saving money.  Making money is all about adding value to others while saving money is about making your dollar go further and often delaying instant gratification.  The trick to savings is getting to a point where it is automatic. Making the dollar go further, however, is about being creative and using the various tools at your disposal. One of them being credit cards. Credit cards can be one of your best resources for helping your money go further.  To that point, I live off my credit cards and try to put absolutely every purchase I make on them.

 

Credit Card Rewards

 

Credit cards are fantastic because of the rewards they give back.  Every dollar you would spend anyway can go towards enhancing your lifestyle. It could be points for a hotel stay, free flights, cashback, or much more. What is great about these rewards is that they do not cost you anything extra if you use your credit card correctly.

So here is how I use my credit cards and how I suggest others do the same.

First things first, if you buy anything on a credit card you must be able to pay it off immediately.  This is by far the most important part of all of this. This isn’t new advice, but it is solid advice. If you cannot pay off the monthly balance every month then this strategy is not for you and you should stick to a debit card or cash.  (Although, credit cards are a much easier way to track spending than using cash).

What I do is set up the payment to come out automatically every month and pay the statement balance in full. Yes, all of it. Every last penny.  This makes it really easy not to forget to take care of it at the end of the month.

Any bills that will allow me to pay with a credit card I will set it up to pay them automatically with the card.  Utility bills, gym memberships, home remodeling projects, business expenses, I even go as far as doing my charitable giving with my credit card when it allows.

The surprising thing is that the more available credit you have and do not use helps improve your credit score.  Some experts believe you should only use 30% of your available credit.  But honestly the more available credit you have the better, so do not hesitate to call your credit card company once or twice a year to ask for a limit increase. Remember, credit card companies compete ferociously with each other, this can really benefit you.

Also, be sure to watch out for companies charging you a processing fee for using a credit card. This is usually a case-by-case basis, but you need to make sure the points or rewards you are getting are worth any extra fees.  For example, the DMV wanted to charge me 3.25% for using a credit card, but I would have only received 2% cashback… in this case, I wrote a check.

 

Picking the best Credit Card Rewards

 

Today it seems like there is an unlimited number of types of credit cards you can get and each one has different rewards and benefits.  Some are for travel, some are cashback, and some are store-specific rewards. It can be confusing. Luckily, Money did a nice article about which cards are best in a variety of categories, check it out here: The Best Credit Cards of 2020.

Picking a card can be tricky and you need to think about how you spend your money to pick the best one.  I personally like to use the rewards for travel.  Well, when we can travel. (Thanks COVID) It is such a great feeling to stay at 5 Star hotel and not pay for it or get a night in the mountains during peak season ski sea for free.

It is also fun to fly for free.  My family and I usually get a least one free vacation a year.  Currently, I am stockpiling my points until some of the travel bans are lifted but plans are in the works.  Ask yourself how you spend money.  I have had clients use their points for new gear at REI, grocery runs at Costco or even Disney World tickets.  Which is going to add the most value to your life.  Keep it simple though, pick 2-3 and stick with it. Too many credit cards can get difficult to manage.

It really is about getting more for your dollar.  Because you pay off the balance each month, you do not incur interest charges or extra expenses. When I buy things on a credit card I am not spending more or buying things I would not normally buy.  These rewards allow me to save more money and still get the lifestyle I want.  It is like the best life hack.  Having the right credit cards can help you live a richer life!

 

Squeeze more out of your credit cards

 

Points and rewards are an obvious no-brainer. However, there are also some other advantages of paying with a credit card that are often overlooked. Some can give you longer warranties and insurance on your purchases. Many have great purchase protection options, far better than any debit card.  Some can provide trip cancellation insurance and/or car rental insurance. Plus, if you are lucky concierge services. Many services can help you plan your next trip, arrange for concert tickets, or even land a sought-after restaurant reservation. Think of it as your own personal assistant.

The list is long for the benefits of using credit cards to buy your everyday items and I only scratched the surface of how to maximize them.  Credit cards can be a wonderful tool but use them correctly and responsibly.  With great power comes great responsibility, or something like that! Now go forth and get those rewards.

Money Savings Secrets: Amazon Prime

MONEY SAVINGS SECRETS: AMAZON PRIME

 

Do you love saving money? Do you love Amazon? If you are anything like 50% of the U.S. population, we are guessing you do! A recent statistic showed that nearly half of U.S. households are Amazon Prime subscribers. While the free two-day shipping may be enough for many to sign up, Prime offers a ton of other money saving benefits (many of which you may not know about). So we have rounded up our top money saving secrets for Amazon Prime. We hope you and your wallet enjoy!

 

1. Save on Groceries:

 

All Prime members already get special in-store deals at Whole Foods, but they also now receive an extra 10% on sale items. Make sure you have the Whole Foods app downloaded and linked to your Amazon account for checkout.

 

2. Get free Books:

 

If your library card gets more of a workout than your ATM you will love this one. Prime members can download a free digital book every month, plus you can also borrow a book each month from Kindle Owner’s Lending Library. This perk is priceless, especially when it can be used to get these books.

 

3. Free Photo Storage:

 

This is one of our favorites! Prime Photos gives you unlimited photo storage- yes..unlimited! This is a great way to organize, store and share photos,  plus you can ditch any other service you have been paying for.

 

4. Earn Shopping Credits:

 

So you don’t really need your order in two days? Even better…select No-Rush Shipping and get discounts and rewards for future orders.

 

5. Free Music Streaming:

 

Prime members also get Prime Music which includes over 2 million songs. Create your own playlist and take your music with you- your membership gets your music on up to 10 devices.

 

6. Watch Free Movies and TV:

 

Prime Video is more commonly known but certainly still worth mentioning. You literally get thousands of free TV shows and movies, so ditch the Redbox and start saving. Plus their original shows are great (I mean, have you ever seen Jack Ryan?!) You’re welcome.

 

7. Free Magazines:

 

Travel + Leisure, Wired, Money, Good Housekeeping, and more…all free with your membership! These digital magazines are available through the Kindle app on any smartphone, tablet or computer.

 

8. Free Samples:

 

Amazon has a sample site that is a lot better than a cart battle at Costco. Some are free, some are not, but even if you pay for a sample you will get a credit towards a future purchase.

 

9. Get Exclusive Deals:

 

As a Prime Member, you get special deals and discounts. 25% off dog food, 50% off sunscreen- you name it- make sure to browse through member deals as they change often.

 

10. Get 2% Rewards with Amazon Reload:

 

Amazon Reload offers a 2% reward every time you reload your Amazon.com Gift Card balance.

 

Who knew Prime had so many perks?!

The question, however,  still remains- is the $119 per year worth it? Analysts recently scrutinized all the perks that Prime membership now offers, and estimated that it is worth $785 annually. We’d say that’s a deal!

Have you used any of these Amazon Prime Money Savings Secrets? Any we forgot? Not yet a Prime Member- not to worry, you can sign up here.

 

Spread the love- Be sure to share this post!

 

Amazon Prime Money Saving Tips

Please note this post includes affiliate ad links -As an Amazon Associate, we earn from qualifying purchases.

3 Questions to ask before making any financial decision

 

Whether it is hiring a financial advisor, picking a mutual fund, or refinancing your mortgage it is a good idea to ask a lot of questions when it comes to your money. However, if you only ask a few, here are our top 3 questions to ask before making any financial decision.

 

What is the investment philosophy?

 

Make sure to ask yourself if the investment makes sense to you. It may be great for 99% of the population but is it a fit for you and your current situation. Does it match up with your risk tolerance and timeline?  Really take the time to contemplate this.  Further, do you understand it? Or is it too complex? Understanding this will help move you forward in a meaningful way.

 

Do I trust the person giving the advice or offering the investment?

 

Simply put, what is your gut telling you about who is behind this. What is the person’s credibility and credentials? Was it your cousin Eddie spouting off a stock tip at the family reunion? Or a longtime friend and financial advisor who has been in the industry for years? It may seem like a no-brainer to ask this question, but it is sometimes easy to get caught up in the hype of the product and the potential returns.

A quick way to tell if an advisor truly has your best interest in mind is if they are CFP® (Certified Financial Planner)- learn more on that here, but in short, it means they are a true fiduciary and must have your best interest in mind regardless of commissions. Trust is so important, don’t take it lightly.

 

What is the downside risk, and can I afford it?

 

What can you stand to lose? Sure, look at what the potential of the investment is, but don’t ignore the risk. Make sure the amount you invest matches your risk tolerance. The old saying stands true here- “Don’t put all your eggs into one basket.”  Before you make an investment decision know the risks.

Short and simple, those are the top 3 questions to ask before making any financial decision!

Are you considering an investment and aren’t sure if it is right for you? Asked these questions and are still unsure? We are here to help…just give us a call.

 

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