Financial planning

Why Couples Should Have a Financial Agenda Before Cohabitating

Make sure you have considered the financial, emotional and legal implications of "officially" moving in together before taking the plunge.


Key Takeaways:

  • The latest U.S. census data show there are now more nontraditional households in America than at any other time in our nation’s history.

  • Financial planning issues have never been more complicated for soon-to-be-joined couples—especially when one or both members of the couple are affluent.

  • Depending on how you and your spouse feel about your financial position, age and health, chances are estate plans, financial plans and other legal documents need updating.

Couples that are planning to move in together—whether young adults or seniors--should have a serious discussion with each other, as well as with their adult children, parents and financial advisors, who may be affected by their decision to cohabitate. They should also make sure they’re in sync with each other when it comes to personal, career, financial and family goals. Couples should also be very open about each other’s health status and any prior financial commitments they may have.

Here are eight key questions that soon-to-be-official couples should discuss before taking the next big step in their relationship:

1. What are each partner’s assets, liabilities and income? Make sure your partner can tell you ALL of the assets and debts they have in their name. They should be able to include everything if needed, along with a copy of the last two years’ income tax returns. Be honest about how much each other earns and about other sources of income (e.g., rental from a property or income from a trust fund).

Discuss debts in detail (how does each partner plan to pay them off?) and credit ratings. Bring up prior financial problems such as an inability to handle debt or a bankruptcy.

2. Does your partner want or need a cohabitation agreement? This may be a delicate topic, but you should address it head-on, especially if one partner has greater assets than the other.

3. How might wills, trusts and/or health care directives and powers of attorney be handled? Will each partner name the other as the primary beneficiary of their assets, life insurance policies and retirement plans? If there are children from a prior marriage, who will be the primary beneficiary? Who should be the one to take care of matters should something happen to either of them? If one partner has a larger estate, marriage may provide some estate-tax savings. Talk it out until you agree on what’s fair.

4. Does your partner have your same view about savings and retirement? Discuss attitudes regarding savings for the short term and the long term. Are they savers or spenders? If still working, when are you each planning to retire? What resources does your partner have for retirement, and how do they want to live those years?

5. How does your partner manage finances? Will he or she keep separate bank and investment accounts? Will you have only joint accounts, or have something in between?

If you use joint bank accounts or hold title to assets in each other’s names, then that can be used as evidence during a breakup that you had an “agreement” to divide all of your respective assets evenly. If your partner is certain that they want joint ownership of some assets, be sure an attorney drafts provisions in a written agreement specifying who owns what and what happens in the event of a breakup. The agreement should also provide guidance about handling money transfers to the other. Be sure the terms of a gift or loan are clearly stated to avoid misunderstandings later if there is a break up.

Who will pay the bills? How will expenses be divided? Will each partner do this equally or will those duties and obligations be based on income. Will one of you handle all of your financial responsibilities related to couple-hood? Will you and your partner invest together or separately?

Make sure to talk about your respective feelings toward debt. Is one you more comfortable than the other when it comes to taking on obligations? Does one of you view debt like the plague? If so, how will this be handled?

Be careful about having both of your names on a credit card. Will each of you be liable for what the other one charges. If so, your respective credit ratings can be at risk. Make sure your partner understands that if they decide to sign a joint credit card application, they should cross out the word “spouse” and substitute “co-applicant,” so you are not being presented to the world as a married couple.

6. What is your partner’s approach to financial risk? Is one of you a risk-taker and the other risk-averse? Can the two live together without driving each other crazy financially? Are you each willing and able to make changes as needed?

7. Does your partner have insurance? Find out how much and what kind of insurance each of you has. Are you both insurable? Can either of you qualify for any additional coverage through an employer?

With homeowner’s insurance, both of your will be on the policy if you co-own your residence. If only one of you is an owner, then the other needs to be named as an additional insured or must have renter’s insurance.

If each of you owns a car, the insurance company will want to issue two separate policies. That will cost you more because you won’t get a multiple car discount. If you decide to co-own each of your cars, determine the potential liability if one partner has a car accident. Find out how well you and your partner are covered if driving someone else’s car (including rental cars). Have an attorney cover the issue of ownership of the cars.

Each of you should have umbrella insurance to provide additional protection beyond the car and homeowner policies.

8. What names will each of you use on official financial and legal documents? Is either taking on the other’s last name? Be careful when one takes on the other’s name. Calling one’s partner a “husband” or “wife” or presenting oneself as a married couple can have serious consequences. Each of these actions may be used to support an argument for a division of assets and support payments if you break up.

Conclusion

An estimated 120 million Americans—including millions of unmarried couples that live together---do not have an up-to-date estate plan to protect themselves and their families. This makes estate planning one of the most overlooked areas of personal financial management. As there are many potential legal and financial traps with cohabitating, this may be an excellent opportunity for you and your partner to discuss your changing situation with a qualified financial advisor. The more you can keep your legal and financial house in order, the more you can enjoy the process of getting to know your partner better in a fulfilling and deeper way.

A number of organizations, including The Financial Awareness Foundation, have excellent resources about estate planning for non-traditional couples.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Charitable Gift Annuities

It’s worth the time and effort to get up to speed on CGAs

Key Takeaways:

  • A CGA enables individuals or married couples to make a gift to a charity in exchange for an income stream that will last for the lifetime of the last survivor.

  • A CGA is a tax-advantaged way to give to worthy causes and retain predictable income. Most CGAs are in the form of cash or marketable securities, but there are many other variations.

  • The deduction is available in the year of the gift and can be carried forward for five additional years if you can’t utilize it currently.

A Charitable Gift Annuity (CGA) is a split-interest gift in which the donor makes a gift, but retains a right to an income stream. Most CGAs are very straightforward; individuals or married couples make a gift to a charity in exchange for an income stream that will last for the lifetime of the last survivor. Most gifts are made in cash or marketable securities and provide immediate income to the donor.

CGA basics

First, every state has regulations regarding CGAs issued by in-state nonprofits and often in the state of nonresident donors. The CGA is a contract between the charity and the donor, and that contract, much like a commercial annuity issued by an insurance company, becomes a general obligation of the charity. This means that all the assets of the charity are available to pay the annuity income to the donor. This alone has kept many smaller charities from offering gift annuities to their donors. However, there are now organizations such as the Charitable Giving Resource Center (CGRC) that provide turnkey gift annuity programs for small organizations. Assistance includes calculation, administration, financial stability and money management resources for organizations that are too small to handle all those responsibilities themselves.

There is a nonprofit association of organizations called the American Council on Gift Annuities (ACGA) that provides guidance on gift annuities and gift annuity rates. While charities may establish their own gift annuity rates, those that don’t utilize the ACGA rates will be required by their state to hire an independent actuary to perform the necessary calculations. The ACGA rates are meant to provide a remainder balance of 50 percent of the original gift to the charity at the death of the last survivor. This means that the charities have immediate access to some amount of the donated property that they can use for their charitable purposes.

For the donor, perhaps the greatest benefit of a CGA is the ability to make a gift to a favored organization. This should always be the first part of any conversation you have with your advisors.

Tax benefits

There are a number of economic and financial benefits as well. First, there is an income tax charitable deduction for the calculated benefit to charity. The deduction is based on the net present value of the future gift. The deduction is available in the year of the gift and can be carried forward for five additional years if the donor is not able to utilize it currently. In addition to the income tax deduction, there is a possible deferral of capital gains tax. Donors who choose to give appreciated property in exchange for their annuity will not realize the immediate gain on disposition that would normally be due upon sale. The capital gains tax will be stretched out over the lives of the income beneficiaries and paid as they receive income. In fact, one of the attractive benefits of the CGA is the nature of the income. Effectively, there is the possibility of three different tiers of income with each annuity payment:

  1. Ordinary income, which is the presumed interest rate applied to the gift.

  2. Capital gains tax based on the appreciation of the property over its cost at the time of the gift.

  3. Return of capital that is free of tax.

These factors can create a very attractive “after tax” income for some donors.

Further benefits come in the area of estate planning. Assets given to charity are normally out of the estate for estate tax purposes. And though there is a retained income, since that income ceases at death it essentially removes the gifted asset from the taxable estate. While most estates won’t face federal estate tax because of the current exemption being so high, it is important to remember that many states impose their own estate tax and impose it on far smaller estates.

Other applications and considerations

While we’ve covered the very basics of CGAs, there are many other things to know from the perspective of income flexibility and asset transfer. Most CGAs provide income that begins immediately upon the completion of the transfer of the asset to charity. However, it is possible to establish an annuity or series of annuities that will be deferred for a period of time. It is also possible to structure annuities that increase the payment amount over time. There are many reasons why you might consider these options. Planning for retirement is the first thing that comes to mind, but providing income to pay for a grandchild’s college tuition is also a common reason. The possibilities seem endless.

Although we have discussed gifts only of cash and marketable securities because they are the most common assets used, almost any other asset can be utilized. With only 10 percent of American wealth held in liquid assets, freeing up illiquid resources might make the best approach. CGAs can be created with gifts of artwork, real estate, cash-value insurance policies, distributions from qualified plans such as IRAs, closely held stock and almost any other asset you can think of. The rules that govern each of these assets vary, and advisors must become familiar with them in order to provide the most appropriate recommendations to their clients.

Conclusion

While CGAs can be remarkably simple on the surface, they encompass many disciplines and have many variations. Contact me any time to see how this powerful planning tool-and its many nuances--can help you better serve your charitable desires, as well as your estate and income planning needs.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

How Traveling by Cruise Ship Can Increase Your Business Deductions

Understanding the subtle intricacies of business travel deduction rules can help you save thousands of dollars. Tax the quiz.


Key Takeaways:

  • The money you spend on business travel is deductible as long as it’s used to carry out a business activity.

  • Money spent during business travel on personal activities, by contrast, is not deductible.

  • However, the normal allocation of business travel costs between business and personal expenses is not required for business travel on a cruise ship, that’s outside the 50 states for seven days or less.

  • Result: Turning a jet business trip into a cruise may not only be more relaxing, but may also make your entire trip deductible.

 

NOTE: All rules and deductions discussed in this article are accurate as spring 2019. However, always consult your tax advisor when planning to take deductions for business travel.

Situation

All the effort that your client, Ty Tannick, has spent chasing prospective billionaire client Lou Sitania is about to pay off. But before signing on the dotted line, Lou wants Ty to pay him a visit at his home in the U.S. Virgin Islands. It’s a long way from home. But doggone it, if landing a big client means leaving chilly Boston to travel to the Caribbean in mid-February, it’s a price Ty is willing to pay. So Ty books a five-day cruise to St. Thomas and brings his wife. Upon arriving in St. Thomas, Ty stays in a hotel for two days while holding meetings with Lou.

In preparing his tax return, Ty allocates the time he spent on the trip as 30 percent business, 70 percent personal.

Question

What, if anything, can Ty deduct for business travel costs?

  1. 100 percent of his total costs.

  2. 30 percent of his transportation costs and 30 percent of his costs for food and lodging.

  3. 100 percent of his transportation costs and 30 percent of his costs for food and lodging.

  4. Zero percent since the trip isn’t deductible business travel.

Answer

  1. Ty can claim deductions for 100 percent of his total costs (subject to the daily deduction limits for cruises).

Explanation

There are two kinds of deductible costs you incur when you travel on business:

  1. Business-day costs: the costs of sustaining life during a business day, including meals, snacks, drinks, cab rides and lodging; and

  2. Transportation costs: the costs of traveling to and from a business destination.

You normally have to allocate expenses between business and personal activity and can deduct only the former. But this scenario illustrates an important exception: Deductions for business travel expenses are not subject to the normal allocation between business and personal activity when you:

  • Travel to a destination outside the 50 states and the District of Columbia;

  • Travel for seven days or less (not counting the day of departure); and

  • Goes via a cruise ship.

Ty’s trip meets all three of these conditions. He could (and should) have deducted 100 percent of his total travel costs; therefore, A is the right answer.

Why the Wrong Answers (above) Are Wrong

If you answered B above—30 percent of his transportation costs and 30 percent of his costs for food and lodging—then you are wrong. That’s because deductibility of business transportation costs varies depending on two factors:

Factor 1. U.S. vs. Foreign Travel. IRS regulations distinguish between two kinds of business travel for purposes of deductible transportation costs:

  • Travel inside the 50 United States; and

  • Travel outside the 50 United States.

Ty’s trip to St. Thomas clearly qualifies as travel outside the U.S.

Factor 2. Length of Trip. For business travel outside the U.S., you must look at how long the trip lasted to determine deductibility. The key question: Did you work at least one day and travel for seven days or less, not counting the day of departure?

  • Seven days or less foreign travel: If the answer is YES, you can deduct 100 percent of the cost of your direct route transportation costs of getting to and from the business destination.

  • Seven days or more foreign travel: If the answer is NO, then you only qualify for a 100 percent deduction if you pass the 76/24 test; that is, if you spent more than 75 percent of the days on business, not excluding the day of departure.

Ty did, in fact, work at least one day and travel for seven days or less. So his direct route transportation costs are 100 percent deductible.

If you answered C to the question at the beginning of this article—100 percent of his transportation costs and 30 percent for food and lodging—then you are wrong as well. That’s because Ty’s food and lodging costs are also 100 percent deductible. As we explained earlier, Ty’s transportation costs (i.e., the costs of the cruise) are 100 percent deductible. But we also said earlier that food, lodging and the other costs of sustaining life during a business day must be allocated between personal and business purposes. So what gives?

If Ty had traveled to St. Thomas by airplane, he’d have to allocate his food, lodging and other life-sustaining expenses 70/30 and deduct only 30 percent. The reason he can deduct these costs at 100 percent is because he traveled by cruise ship.

Think about it. When you pay for a cruise, your costs include not only the transport, but meals, lodging and other costs of sustaining life (assuming, of course, these items aren’t broken out as part of the cruise’s cost). In essence, these costs become part of the costs of transportation. So if transportation is 100 percent deductible, then so are the meals, lodging and other life-sustaining costs associated with it!

The moral: In addition to being more pleasurable than flying—at least for many people—traveling to a business destination by cruise ship can significantly increase your business travel deductions.

If you answered D to the question at the beginning of this articleZero percent since the trip isn’t deductible business travelthen you are wrong again. That’s because the mode of transportation doesn’t determine deductibility. In other words, you can claim business travel deductions regardless of whether you travel to and from your business destination by car, plane, train or boat.

However, deductions for business travel by cruise ship are subject to luxury water-travel daily deductions limits.

Conclusion

The costs of business travel are deductible. But the rules are complicated and significant limitations apply—like the requirement that you allocate certain costs between business and personal use. So it’s essential that you and your financial advisors know the rules about business travel deductions.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

What’s Keeping the Affluent Up at Night? Their Kids

It’s never too early help kids improve the financial literacy of the young people in your life.

Key Takeaways

  • Research shows that high-net-worth individuals care more about the impact of wealth on their heirs than how much (or how little) wealth will be passed on.

  • The average American college student graduates with $37,000 in student loan debt.

  • Two thirds of affluent Americans think the young people in their lives place too much emphasis on material possessions. Over half think they are naïve about the value of money.

  

Does great wealth really bring fulfillment? An ambitious study of the highly affluent by Boston College suggests not. The study found a surprising litany of anxieties: their sense of isolation, their worries about work and love, and most of all, their fears for their children.

Further reinforcing that finding, the biannual U.S. Trust Survey of Affluent Americans asked parents what they worried about most. Their primary worries had nothing to do with tax or wealth-transfer issues. No, their top six concerns were centered on the impact of wealth on their heirs!

  • 65 percent said: “Too much emphasis on material things”

  • 55 percent said: “Naive about the value of money”

  • 52 percent said: “Spend beyond their means”

  • 50 percent said: “Initiative could be ruined by affluence”

  • 49 percent said: “Won’t do as well financially”

  • 42 percent said: “Hard time taking financial responsibility”

Research found that the greatest  fear of affluent successful people is not about making more money, or protecting what they have—it’s about how their wealth will affect their heirs and their heirs’ families. Dr. Bob Kenny, the principal researcher of the Boston Study and also a visiting faculty member at the Institute for Preparing Heirs, stated that philanthropy is an excellent vehicle for discovering meaning and value in the wealth that heirs receive. Philanthropy he once said, “helps teach the giver that money sometimes carries its burden with it and can harm or unsettle a recipient if given without caution.”

Perhaps participating in the act of philanthropy gives an heir a clearer view of some of his or her own personal feelings about inheriting wealth.

You might say the big secret is that the rich consider their greatest treasure to be their children, not their financial assets. To hear that about the rich may alter conventional wisdom at a time when we are facing the largest transfer of wealth in history—almost $1 trillion dollars a year will be passed down to future generations for the next 50 years in the United States alone! Couple that with a historic post-transition loss rate of 70 percent and you have both a tragedy and an opportunity in the making.

Learn how to initiate conversations about the topic of money and its impact on the future generations in your family. It’s the primary concern of the parents (not just the latest tax regulations).

In the future, well-prepared parents and grandparents will help complete the second half of the estate-planning equation—preparing their heirs for the assets. That is the future of estate planning—and good parenting.  

Thanks to The Financial Awareness Foundation, (TFAF) April is officially Financial Literacy Month in the U.S. but there’s never a bad time to focus on financial education of the next generations. A lack of financial preparedness has huge societal costs, and in the coming years as Americans age, these costs will likely increase.

We need to educate all young Americans about the importance of starting early. For example, young workers will need to save close to $1,000 per month to remain in the middle class; $925 per month for 30 years at 8 percent grows to $1.26 million, but that amount saved for 20 years only grows to about $508,000. Young people are often surprised to learn that the few hundred dollars they’re saving each month may not be enough to retire into a middle-class lifestyle.

According to TFAF, too many young people and their families are burdened with excessive education debt and other forms of debt. Student loan debt exceeds $1.3 trillion and is the second largest class of consumer debt after mortgages. For instance, the college class of 2016 graduated with an average of $37,000 in student loan debt.

We need early financial education in the home, mainstream financial literacy programs starting at a young age, and government funding for a public awareness campaign much like those on public health and safety issues. It should be incorporated into school curricula, media campaigns, corporate wellness programs, and, most importantly, ongoing parental discussions.

The next step is for you to take action. Encourage the young people in your life to educate themselves about financial freedom. They can start by reading some articles, using a mobile budgeting app, or signing up for a personal finance class at a community college. Encourage them to try to live on less than they earn each month and automatically save the difference. While they may be able to save only a little, it is OK to start small and grow into a larger savings plan over time. The key is to start now!

Conclusion

By doing so, you and your heirs will have more financial freedom and personal choice—two worthwhile things that money can help buy.  Don’t hesitate to reach out to us for assistance with short-term or long-term financial goals you may have for yourself or your young adult children. We’re here to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is a Cash Balance Plan Right for You? Part 1

Key questions to consider before pulling the trigger

By Robert J. Pyle, CFP®, CFA


You’ve worked incredibly hard to build your business, medical practice or law practice. But, despite enjoying a robust income and the material trappings of success, many business owners and professional are surprised to learn that their retirement savings are way behind where they need to be if they want to continue living the lifestyle to which they’ve become accustomed.

In response, many self-employed high earners are increasingly turning to Cash Balance Plans (CBPs) in the latter stages of their careers to dramatically supplement their 401(k)s—and their staffs’ 401(k)s as well. Think of a CBP as a supercharged (and tax advantaged) retirement catchup program. For a 55-year-old, the CBP contribution limit is around $265,000, while for a 65-year-old, the CBP limit is $333,000—more than five times the ($62,000) limit they could contribute to a 401(k) this year.

Boomers who are sole proprietors or partners in medical, legal and other professional groups account for much of the growth in CBPs. For many older business owners, the tax advantages that come with plowing six-figure annual contributions into the CBPs far outweigh the costs.


As I wrote in my earlier article: CBPs: Offering a Break to Successful Doctors, Dentists and Small Business Owners, CBPs can offer tremendous benefits for business owners and professionals who own their own practices….especially if they’re in the latter stages of their careers. There are just some important caveats to consider before taking this aggressive retirement catchup plunge.


CBPs benefit your employees as well


Business owners should expect to make profit sharing contributions for rank-and-file employees amounting to roughly 5 percent to 8 percent of pay in a CBP. Compare that to the 3 percent contribution that's typical in a 401(k) plan. Participant accounts also receive an annual "interest credit," which may be a fixed rate, such as 3-5 percent, or a variable rate, such as the 30-year Treasury rate. At retirement, participants can take an annuity based on their account balance. Many plans also offer a lump sum that can be rolled into an IRA or another employer's plan.

Common retirement planning mistakes among successful doctors


Three things are pretty common:

1) They’re not saving enough for retirement.

2) They’re overconfident. Because of their wealth and intellect, doctors get invited to participate in many “special investment opportunities.” They tend to investment in private placements, real estate and other complex, high-risk opportunities without doing their homework.
3) They feel pressure to live the successful doctor’s lifestyle. After years of schooling and residency, they often feel pressure to spend lavishly on high-end cars, homes, private schools, country clubs and vacations to keep up with other doctors. There’s also pressure to keep a spouse happy who has patiently waited and sometimes supported them, for years and years of medical school, residency and further training before the high income years began.

Common retirement planning mistakes among successful dentists


Dentists are similar to doctors when it comes to their money (see above), although dentists tend to be a bit more conservative in their investments. They’re not as likely to invest in private placements and real estate ventures for instance. Like doctors, dentists are often unaware of how nicely CBPs can set them up in their post-practicing years. They’re often not aware that they have retirement savings options beyond their 401(k)…$19,000 ($25,000 if age 50 and over). For instance, many dentists don’t realize that with a CBP they could potentially contribute $200,000 or more. It’s very important for high earning business owners and medical professionals to coordinate with their CPA who really understands how CBPs work and can sign off on them.

Common objections to setting up a CBP

First, the high earning professional or business owner must commit to saving a large chunk of their earnings for three to five years—that means having the discipline not to spend all of their disposable income on other things such as expensive toys, memberships, vacations and other luxuries.

Another barrier they face is a reluctance to switch from the old way of doing things to the new way. Just like many struggle to adapt to a new billing system or new technology for their businesses or practices, the same goes for their retirement savings. Because they’re essentially playing retirement catchup, they’re committing to stashing away a significant portion of their salary for their golden years. It can “pinch” a little at first. By contrast, a 401(k) or Simple IRA  contribution is a paycheck “deduction” that they barely notice.

A CBP certainly has huge benefits, but it requires a different mindset about savings and it requires more administration and discipline, etc. However, if you have a good, trustworthy office administrator or if you have a 401(k) plan that’s integrated with your payroll, then that can make things much easier. It’s very important to have a system that integrates payroll, 401(k) and CBP. That can simplify things tremendously. For example, 401(k) contributions can be taken directly out of payroll and CBP contributions can be taken directly out of the owner/employer’s bank account.

Before jumping headfirst into the world of CBPs, I recommend that high earning business owners and professional rolling it out in stages over time.

1. Start with a SIMPLE IRA.
2. Then move to 401(k) plan that you can max out--and make employee contributions.

3. Add a profit sharing component for employees which typically is in the 2% range and this will usually allow you to max out at $56,000 (under 50) or $62,000 (age 50 and over)
4.  Once comfortable with the mechanics of a 401(k) and profit sharing, then introduce a CBP.


Conclusion

If you’re behind in your retirement savings, CBPs are an excellent tool for supercharging the value of your nest egg and can possibly allow you to retire even sooner than you thought. CBPs take a little more set-up and discipline to execute, but once those supercharged retirement account statements start rolling in, I rarely find a successful owner or professional who doesn’t think the extra effort was worth it.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 


Staying Organized and Financial Planning Are Keys to Success

11 tactics to make this your best year ever

Key Takeaways:

  • The beginning of a new year is a particularly good time for you and your family to review finances and to update financial plans.

  • Staying organized and planning finances are lifelong processes, and the keys to reaching and maintaining financial success.

  • Sensible financial management is more than budgeting and saving for retirement. It’s about being ready to handle a lifetime of financial challenges, needs and changes.

Happy New Year to you and your family!

The beginning of a new year is a good time to review your finances and update financial strategies and plans. This year is especially important as financially challenging times continue for many individuals and businesses, rich and poor, big and small.

Even if the 2017 Tax Cut and Jobs Act (TCJA) had not been passed, most would say that managing their personal finances is more complicated and more important than ever before. We’re living longer, but saving proportionately less. Many of us feel less secure in our jobs and homes than we did in the past. We see our money being drained by the high cost of housing, taxes, education and health care. We worry about the future, or unfortunately, in too many cases, we simply try not to think about it.

More than simply budgeting and saving

Sensible financial management means much more than budgeting and putting money away for retirement. It means being equipped to handle a lifetime of financial challenges, needs and changes; figuring out how to build assets and staying ahead of inflation; taking advantage of deflation; and choosing wisely from a constantly widening field of savings, investment and insurance options. When it comes to finances, you are faced with more pressures and more possibilities than ever before.

The good news is that as complex as today’s financial world is, there’s no real mystery to sound personal money management. What you need is a solid foundation of organization and decision-making, plus the willingness to put those two things into action. I’ll talk about those core principles in just a minute.

Effective financial management involves certain procedures that you don’t usually learn from your parents or friends—and unfortunately they aren’t currently taught in our schools. It’s more than just a matter of gathering enough information and then making a logical decision. In fact, for many people, the constant barrage of economic news, fragmented financial information and investment product advertisements is part of the problem. Information overload can be a major obstacle to sorting out choices and making wise decisions.

The Financial Awareness Foundation, a California-based not-for-profit organization developed a simple personal financial management system that’s designed to help you save time and money, while providing a systematic approach to help you better manage finances. The key is to stay organized, remain aware of money issues, and make deliberate choices about ways to spend, save, insure and invest your assets. That’s so much smarter than simply following your emotions or “going with the flow.”

Getting organized

1. Paperwork. Everyone has primary financial documents—birth certificates, marriage certificates, current year net-worth statement, retirement plan beneficiary statements, deeds of trust, certificates of vehicle title, last three tax returns, gift tax returns, insurance policies, wills, trusts, powers of attorney, passwords, digital paperwork, etc. Organize this information and keep it in a safe central location that ties into your paper and digital filing systems.

2. Net Worth. Know where you stand by inventorying what you own and what you owe. The beginning of a new year is an excellent time to do this, but you can do it any time. Just be sure to do this personal inventory at least once a year.

3. Cash Flow. Gain control of cash flow by spending according to a plan, not spending impulsively.

4. Employment Benefits. Make sure you fully understand employee benefits (the “hidden paycheck”) at your company. Maximize any dollar amounts that your employer contributes toward health insurance, life insurance, retirement plans and other benefits.

Financial planning

5. Goal Setting. Before you begin the financial planning process, ask yourself what’s really important to you financially and personally. These are key elements of planning for your future; they affect your options, strategies and implementation decisions.

6. Financial Independence and Retirement Planning. A comfortable retirement, perhaps at an early age, is one of the most common reasons people become interested in financial planning. Determine how much money is a reasonable nest egg to reach and maintain your financial independence. Then work with your advisors to determine the right strategy to make that goal a reality.

7. Major Expenditures Planning. A home, a car, and a child’s or grandchild’s college education—these are all big-ticket items that are best planned for in advance. Develop sound financial strategies early on for effectively achieving the funding you need for those big bills down the road.

8. Investments Planning. For most of us, wise investing is the key to achieving and maintaining our financial independence as well as our other financial goals. Establish and refresh investment goals, risk tolerance and asset allocation models that best fit your situation.

9. Tax Planning. Your financial planning should include tax considerations, regardless of your level of wealth. Proactively take advantage of opportunities for minimizing tax obligations.

10. Insurance Planning. Decide what to self-insure and which risks to pass off to insurance companies—and at what price you’re willing to do so.

11. Estate Planning. Develop or update your estate plan. If you get sick or die without an up-to-date estate plan, the management and distribution of assets can become a time-consuming and costly financial challenge for loved ones and survivors.

It is estimated that over 120 million Americans do not have up-to-date estate plans to protect themselves and their families. This makes estate planning one of the most overlooked areas of personal financial management. Estate and financial planning is not just for the wealthy; it is an important process for everyone. With advance planning, issues such as guardianship of children, management of bill-paying and assets—including businesses and practices—care of a child with special needs or a parent, long-term care needs, wealth preservation, and distribution of retirement assets can all be handled with sensitivity and care and at a reasonable cost.

Conclusion

Staying organized and planning wisely are the keys to financial success. Short of winning the lottery or inheriting millions, few people can attain and maintain financial security without some forethought, strategy and ongoing management. The beginning of a new year is an excellent time for you and your family to review finances and update financial plans.


Let’s have a great 2019!

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Withdrawal Strategies: Tax-Efficient Withdrawal Sequence

Key Takeaways:

  • Retirees’ portfolios may last longer if they incur the least amount of income tax possible over their retirement period.

  • Retirees should focus on minimizing the government’s share of their tax-deferred accounts.

  • Make sure your advisor is helping you select the appropriate dollar amount and the appropriate assets to liquidate in order to fund your retirement lifestyle.

Asset Placement Decision

A winning investment strategy is about much more than choosing the asset allocation that will provide the greatest chance of achieving one’s financial goals. It also involves what is called the asset location decision. Academic literature on asset location commonly suggests that investors should place their highly taxed assets, such as bonds and REITs, in tax-deferred accounts and place their tax-preferred assets, such as stocks, in taxable accounts.

In general, your most tax-efficient equities should be held in taxable accounts whenever possible. Holding them in tax-deferred accounts can result in the following disadvantages:

  • The potential for favorable capital gains treatment is lost.

  • The possibility of a step-up in basis at death for income tax purposes is lost.

  • For foreign equities, foreign tax credit is lost.

  • The potential to perform tax-loss harvesting is lost.

  • The potential to donate appreciated shares to charities and avoid taxation is lost.

Asset location decisions can benefit both your asset accumulation phase and retirement withdrawal phase. During the withdrawal phase, the decision about where to remove assets in order to fund your lifestyle should be combined with a plan to avoid income-tax-bracket creeping. This will ensure that your financial portfolio can last as long as possible.

Tax-Efficient Withdrawal Sequence

Baylor University Professor, William Reichenstein, PhD, CFA wrote a landmark paper in 2008 that’s still highly relevant today. It’s called: Tax-Efficient Sequencing of Accounts to Tap in Retirement. It’s fairly technical, but it provides some answers about the most income-tax-efficient withdrawal sequence to fund retirement that are still valid today. According to Reichenstein, “Returns on funds held in Roth IRAs and traditional IRAs grow effectively tax exempt, while funds held in taxable accounts are usually taxed at a positive effective tax rate.”

Reichenstein also noted that only part of a traditional IRA’s principal belongs to the investor. The IRS “owns” the remaining portion, so the goal is to minimize the government’s share, he argued.

Tax-Efficient Withdrawal Sequence Checklist

In our experience, retirees should combine the goal of preventing income-tax-bracket creeping over their retirement years with the goal of minimizing the government’s share of tax-deferred accounts.

To achieve this goal, the dollar amount of non-portfolio sources of income that are required to be reported in the retiree’s income tax return must be understood. These income sources can include defined-benefit plan proceeds, employee deferred income, rental income, business income and required minimum distribution from tax-deferred accounts. Reporting this income, less income tax deductions, is the starting point of the retiree’s income tax bracket before withdrawal-strategy planning.

The balance of the retiree’s lifestyle should be funded from his or her portfolio assets by managing tax-bracket creeping and by lowering the government ownership of the tax-deferred accounts. The following checklist can assist the retiree in achieving this goal:

  1. Avoid future bracket creeping by filling up the lower (10% and 12%) income tax brackets by adding income from the retiree’s tax-deferred accounts.

  2. If the retiree has sufficient cash flow to fund lifestyle expenses but needs additional income, convert traditional IRAs into Roth IRAs to avoid tax-bracket creeping in the future. This will also allow heirs to avoid income taxes on the inherited account balance.

  3. Locate bonds in traditional IRAs rather than in taxable accounts. This will reduce the annual reporting of taxable interest income on the tax return.

  4. Manage the income taxation of Social Security benefits by understanding the amount of reportable income based on the retiree’s adjusted gross income level.

  5. Liquidate high-basis securities rather than low-basis securities to fund the lifestyle for a retiree who needs cash but is sensitive to additional taxable income.

  6. Aggressively create capital losses when the opportunity occurs to carry forward to future years to offset future capital gains.

  7. Allow the compounding of tax-free growth in Roth IRAs by deferring distributions from these accounts.

  8. Consider a distribution from a Roth for a year in which cash is needed but the retiree is in a high income tax bracket.

  9. Consider funding charitable gifts by transferring assets from a traditional IRA directly to the charity. This avoids the ordinary income on the IRA growth.

  10. Consider funding charitable gifts by selecting low-basis securities out of the taxable accounts in lieu of cash. This avoids capital gains on the growth.

  11. Manage capital gains in taxable accounts by avoiding short-term gains.

Conclusion

You and your advisor should work together closely to make prudent, tax-efficient withdrawal decisions to ensure your money lasts throughout your retirement years. Contact us any time if you have questions about your retirement funding plans or important changes in your life circumstances.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.