Retirement

Déjà Vu All Over Again

Here is a nice article from Dimensional:

February 2019

Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities.

Over the years, these approaches have sought to capitalize on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”

What’s hot becomes what’s not                                             

Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services. During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded. As investors reached for yield in a low interest-rate environment in the following years, other funds sprang up that claimed to offer increased income generation, and new strategies like unconstrained bond funds proliferated. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered attention among investors.

The Fund Graveyard

Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess the market by constantly trading in and out of what’s hot is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world.

With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making the right call on a specific industry, region, or individual security over a specific period. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.

It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still existed at the end of 2018. Similarly, among equity mutual funds, only 51% of the 2,786 funds available to US-based investors at the beginning of 2004 endured.

What am I really getting?

When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:

1.     What is this strategy claiming to provide that is not already in my portfolio?

2.     If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?

3.     Am I comfortable with the range of potential outcomes?

If investors are left with doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, a market portfolio offers the benefit of exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio, investors should understand the potential benefits and risks of doing so.

In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a financial advisor can help individual investors create a plan that fits their needs and risk tolerance. Pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve investors’ chances of achieving their long-term financial goals.

Conclusion

Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and implementation may be the most reliable path to success in the global capital markets.

 

Source: Dimensional Fund Advisors LP.

Past performanc is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. There is no guarantee a investing strategy will be successful. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

Eugene Fama is a member of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.

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 2

Real world examples and risk factors to consider
Robert J. Pyle, CFP®, CFA

As we discussed in Part 1, if you’re a high-earning business owner or professional Cash Balance Plans (CBPs) are an excellent tool for supercharging the value of your nest egg in the last stretch of your career. They can possibly enable you to retire even sooner than you thought you could. Here are some examples of how CBPs can work for you:


Real world examples

I just completed a proposal for a dentist who earned a $224,000 salary. At that income level, he could have maxed out his annual SEP contribution at $56,000…..or he could sock away $143,000 a year via a CBP. Even better, the CBP enabled him to make an additional retirement contributions for her staff.  When times are flush, most high-earning entrepreneurs and professionals don’t have to think twice about making their CBP contributions. But, what about when the financial markets and economy are in the tank?

Back in 2008, at the start of the global financial crisis, a couple came to me because they wanted to save the maximum before they planned to stop working. The wife was a corporate executive and the husband was a self-employed entrepreneur.  Both were in their early 60s and wanted to retire in half a dozen years. The corporate executive was already saving the maximum in her 401(k) and continued to do so from 2008 ($20,500) through 2014 ($23,500). The self-employed entrepreneur, age 61 at the time, was making about $200,000 a year and wanted to set up a plan to shelter his self-employed income.

We explored a defined benefit plan (DB) because that allowed the couple to save significantly more than they could have saved via a 401(k) alone. In fact, the single 401(k) could be paired with the defined benefit plan for extra deferral, if desired. The couple was a good fit for a defined benefit plan since they were in their early 60s, and the entrepreneur was self-employed and had no employees. We completed the paperwork and set a target contribution rate of $100,000 per year for the defined benefit plan and they were off and saving. 

Despite the terrible stock market at the start of their savings initiative, they managed to contribute $700,000 to the DB by the time they retired in 2014--all of which was tax deductible. This strategy ended up saving them about $140,000 in taxes. They also contributed to a Roth 401(k) in the early years of their savings commitment, when the market was low and that money grew tax-free.

With a DBP, you typically want to have a conservative portfolio with a target rate of return pegged at roughly 3 percent to 5 percent. You want stable returns so you will have predictable contribution amounts each year. The portfolio we constructed was roughly 75 percent bond funds and 25 percent stock funds. That allocation helped the couple preserve capital during the market slump of 2008-2009 because we dollar cost averaged the funding for the plan over its duration.

With this strategy, you don’t want to exceed a 5-percent return by too much because your contribution decreases and thus, your tax deduction decreases. On the other hand, if the portfolio generates a really poor return, then you, the employer have to make up a larger contribution. If you have a substandard return, it typically corresponds to a weak economy and you have to make up a larger contribution when your income is off. So, you want to set the return target at a reasonable, conservative level.

Solution

We rolled over the DBP into an IRA and the Roth 401(k) to a Roth IRA. For the corporate executive, we rolled over her 401(k) to an IRA.  They were now set for retirement and can continue to enjoy life without the worry as to how to create their retirement paycheck. 

Are there any income and age limits for contributing to a CBP?

Income limits are $280,000 a year in W-2 income. Depending on your age, you could potentially contribute over 90 percent of that income into a CBP.

Source, The Retirement Advantage  2019 | Click here for complete table


For successful professionals, a good time to set up a CBP is during your prime earning years, typically between age 50 and 60. You certainly don’t want to wait until age 70 to start a CBP because you want to be able to make large tax-advantage contribution for at least three to five years. You can’t start a CBP and then shut it down after only one year.

 

We did a proposal for an orthodontist recently who liked the idea of a CBP for himself, but he also wanted to reward several long time employees. Unfortunately, the ratios weren’t as good as we would have liked since many of the employees were even older than the owner, so they would have required a much larger contribution. The ratio in this case was 80 percent of the contribution to the owner and 20 percent to the employees. We like to see the ratio in the 85- to 90-percent range, however.

Age gap matters

It’s also helpful to have a significant age gap between you and your employees. Many folks don’t realize this. CBPs are “age weighted,” so it helps to have younger employees. Because those employees are older, they’re much closer to retirement, and would need to receive a larger contribution from the plan.

How profitable does your business/practice need to be for a CBP to make sense?

You have to pay yourself a reasonable W-2 salary and you have to have money on top of that for the CBP. A good rule of thumb is to be making at least $150,000 a year consistently from your business or practice. So, if you designed a plan to save $150,000 in the CBP, you’ll need $300,000 in salary plus distributions. What typically happens is the doctor/dentist pays themselves $150,000 a year in salary and then takes $150,000 in distributions from their corporation. Well, that $150,000 now has to go into the CBP, so you have to have a decent amount of disposable income.

Can employees adjust their contributions?
 
A CBP is usually paired with a 401(k) plan, so employees will have their normal 401(k) limits. In a CBP, the employer has to do a CBP “pay credit” as well as a profit-sharing contribution. The pay credit is usually about 3 percent and the profit-sharing contribution is typically in the range of 5-percent to 10- percent of an employee’s pay.


Setting up and administrating a CBP

You want a plan administrator who can navigate all the paperwork and coordinate with your CPA. There are many financial advisors out there who have expertise in setting up CBPs. You don’t have to work with someone locally; just make sure they are highly experienced and reputable.

CBPs can be more costly to employers than 401(k) plans because an actuary must certify each year that the plan is properly funded. Typical costs include $2,000 to $5,000 in setup fees, although setup costs can sometimes be waived. You’re also looking at $2,000 to $10,000 in annual administration fees, and investment-management fees ranging from 0.25 percent to 1 percent of assets.


Risks

CBPs can be tremendously beneficial for retirement saving. Just make sure you and your advisors are aware of the risk of such plans. Remember that you (the owner/employer) bear the actuarial risk for the CBP. Another risk is if the experts of your plan--the actuaries, record-keepers or investment managers—fail to live up to the plan’s expectations. You, the employer ultimately bear responsibility for providing the promised benefit to employees if a key piece of the plan doesn't work. Like a DBP, an underfunded CBP plan requires steady and consistent payments by you, the employer, regardless of economic times or your financial health. The required contributions of a DBP and CBP can strain the weakened financial health of the sponsoring organization. This is a key item to consider when establishing a CBP and what level of funding can be sustained on a go-forward basis. 

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. They 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.

 


Am I eligible for a Qualified Business Income (QBI) Deduction?

Due to recent tax law changes effective 2018, many are left in a state of confusion about what tax credits or deductions their business may qualify for.  For business owners, the Qualified Business Income deduction is one of the most advantageous new deductions available to them.  It allows for qualified businesses to deduct up to 20% of their income, reducing their tax bill by a considerable margin.  What makes a business a “Qualified Business?”

There are a several requirements to qualify for the QBI deduction.  Could your business be qualified for these tax deductions?  Read on to find out:

Optimizing Your Capital Gain Treatment Part 2

It’s a new world. When it comes to carried interest, real estate and collectibles, carefully document your purpose for holding these assets

Key Takeaways:

  • Long-term capital gains associated with assets held over one year are generally taxed at a maximum federal rate of 20 percent — not the top ordinary rate of 37 percent.

  • Just be careful if you are planning to sell collectibles, gold futures or foreign currency. The tax rate is generally higher.

  • The more you can document your purpose for holding your assets (at the time of purchase and disposition), the better your chances of a favorable tax result.

  • The deductibility of net capital losses in excess of $3,000 is generally deferred to future years.

There’s no shortage of confusion about the current tax landscape—both short-term and long term—but here are some steps you can take to protect yourself from paying a higher tax rate than necessary as we march into a new normal world.

 

Carried Interest

The Tax Cuts and Jobs Act lengthens the long-term holding period with respect to partnership interests received in connection with the performance of services. Profit interests held for three years or less at the time of disposition will generate short-term capital gain, taxed at ordinary income rates, regardless of whether or not a section 83(b) election was made. Prior law required a holding period greater than one-year to secure the beneficial maximum (20%) federal long-term capital gain tax rate.

Real estate

Real estate case law is too technical for the purposes of this article. Let’s just say the courts look at the following factors when trying to determine a personal real-estate owner’s intent:

  • Number and frequency of sales.

  • Extent of improvements.

  • Sales efforts, including through an agent.

  • Purpose for acquiring, holding and selling.

  • Manner in which property is acquired.

  • Length of holding period.

  • Investment of taxpayer’s time and effort, compared to time and effort devoted to other activities.

Unfortunately, the cases do not lay out a consistent weighting of these general factors. Always check with your legal and tax advisors before engaging in any type of real-estate transaction.


Collectibles

Works of art, rare vehicles, antiques, gems, stamps, coins, etc., may be purchased for personal enjoyment, but gains or losses from their sale are generally taxed as capital gains and losses. But, here’s the rub: Collectibles are a special class of capital asset to which a capital gain rate of 28 percent (not 20%) applies if the collectible items are sold after being held for more than one year (i.e. long-term).

Note that recently popular investments in gold and silver, whether in the form of coins, bullion or held through an exchange-traded fund, are generally treated as “collectibles” subject to the higher 28 percent rate. However, gold mining stocks are subject to the general capital gains rate applicable to other securities. Gold futures, foreign currency and other commodities are generally subject to a blended rate of capital gains tax (60 percent long-term, 40 percent short-term).

Bitcoin and other cryptocurrencies are treated as “property” rather than currency and will trigger long-term or short-term capital gains when the funds are sold, traded or spent. Cryptocurrencies are NOT classified as collectibles.

The difficulties arise if you get to the point that you are considered a dealer rather than a collector, or if you are a legitimate dealer but start selling items from your personal collection. In most cases, the following factors in determining whether sales of collectibles result in capital gain or ordinary income:

  • Extent of time and effort devoted to enhancing the collectible items

  • Extent of advertising, versus unsolicited offers

  • Holding period and frequency of sales from personal collection

  • Sales of collectibles as sole or primary source of taxpayer’s income

The Tax Cuts and Jobs Act, will end any further discussion about whether gain on the sale of collectibles can be deferred through the use of a like-kind exchange. The tax bill limits the application of section 1031 to real property disposed of after December 31, 2017.

Recommended steps to preserve capital gain treatment:

  • Clearly identify assets held for investment in books and records, segregating them from assets held for sale or development.

  • In the case of collectibles, physically segregate and document the personal collection from inventory held for sale.

  • Memorialize the reason(s) for a change in intent for holding: e.g., death or divorce of principals, legal entanglements, economic changes or new alternate opportunities presented.

  • If a property acquired with the intent to rent is sold prematurely, then retain documentation that supports the decision to sell: e.g., unsuccessful marketing and advertising, failed leases, news clippings of an adverse event or sluggish rental market.

  • If a property is rented out after making substantial improvements, then document all efforts to rent, and list or advertise it for sale only after a reasonable period of rental.

  • Consider selling appreciated/unimproved property to a separate entity before undertaking development. This would necessitate early gain recognition, but may preserve the capital gain treatment on the appreciation that’s realized during the predevelopment period.

  • Consider the application of Section 1237, a limited safe harbor, permitting certain non-C Corporation investors to divide unimproved land into parcels or lots before sale, without resulting in a conversion to dealer status.

Conclusion

Characterizing an asset as ordinary or capital can result in a significant tax rate differential. It can also affect your ability to net gains and losses against other taxable activities. So you must spend the time and effort needed to document the intent of the acquisition of an asset, as well as any facts that might change the character of the asset, during the holding period.

Sure, we’re all busy. But, in today’s new regulatory and tax landscape, don’t you think it’s worth taking the time to do so in order to potentially cut your future tax rate in half?

 

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.

 

Qualified Opportunity Funds

Impact investing—using wealth to create positive change in the world while also benefiting financially—has become increasingly popular, as the idea of “doing well by doing good” has gained traction among investors.

Now there’s a new type of impact investment—called Qualified Opportunity Funds—that is worth checking out if you’re looking to build wealth, reduce a capital gains tax, and improve communities across the country. For investors with these goals, the funds can potentially be a powerful part of an overall wealth plan.

Sparking economic growth

Qualified Opportunity Funds invest in properties in economically distressed communities categorized as Qualified Opportunity Zones, which have been targeted for economic development.

These funds, which are generally formed as partnerships or corporations, can own a broad range of properties—from apartment buildings to start-up businesses—that exist in Qualified Opportunity Zones. By investing in these funds, you can help give communities a much-needed economic boost.

The full article can be read here: Qualified Opportunity Funds

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.

Maximizing Small-Business Tax Deductions

Maximizing small-business tax deductions

How small-business owners can take advantage of Section 199A

The Tax Cuts and Jobs Act (TCJA) passed in December 2017 offers a wealth of opportunities to small-business owners. Among the most notable provisions is Section 199A, which provides for qualified business income (QBI) deductions. These deductions are available to taxpayers who are not corporations, including S corporations, partnerships, sole proprietorships and rental properties.

While Section 199A provides a huge tax break for small-business owners, determining who is qualified can be complicated. In addition to eligibility requirements, there are income thresholds after which deductions are phased out. Here’s a look at who is eligible to use Section 199A, as well as strategies business owners above phase-out thresholds can use to recapture QBI deductions. 

Are you eligible?           

In general, small-business owners may qualify for QBI deductions if they meet one of the following criteria:

  •  No matter the type of business, if a business owner’s taxable income falls below $157,500 for single filers or $315,000 for joint filers, that business owner is eligible for a QBI deduction. That deduction is equal to the smaller of 20% of their qualified business income or 20% or their taxable income.

  • Businesses that offer specified service—such as lawyers, accountants, athletes, financial services, consultants, doctors, performing artists, and others with jobs based on reputation or skill—may have deductions phased out if they make too much money. If your income is above $207,500 for single filers or $415,000 for joint filers, you can no longer claim the QBI deduction.

  • If you own a business that is not a service business or a specialized trade, the QBI deduction is partially phased out if your taxable income is above $157,500 for single filers or $315,000 for joint filers. The deduction is limited to the lesser of either 20% of qualified business income or the greater of the following: 50% of W-2 wages paid, or the sum of 25% of W-2 wages paid by the business generating the income plus 2.5% times the cost of depreciable assets

The retirement solution

If your income is above the phase-out limits, you can preserve your full deduction by making smart use of retirement plans. Here’s a look at a few examples of ways to strategically employ retirement plans to reduce your income and recapture a QBI deduction:

Example 1: A couple, age 50, with a specified service business

A couple, each 50 years old, has a specific service business in the form of an S corp that pays W-2 wages of $146,000 and pass-through income of $254,000, for a total income of $400,000. The couple claims the standard deduction of $24,000, making their adjusted gross income $376,000. Because of their high earnings, the couple’s QBI deduction is only $19,812 due to QBI phase-outs. Their total income is  $356,188.

The couple can capture their full QBI deduction by setting up and funding a 401(k) plan. They can set up an individual 401(k) plan, deferring $24,500 as an employee contribution and contributing 25% of salary, or $36,500, as a profit sharing contribution. The deferral and profit sharing max out their individual 401(k) plan with a total contribution of $61,000. In this way, their W-2 wages are reduced to $121,500, and their pass-through income is reduced to $217,500 after the profit sharing contribution. Their total income after the standard deduction is $315,000.

As a result, the couple can claim their full QBI deduction of $43,500 (20% of 217,500), and their income is now $271,500. With a $61,000 contribution to a 401(k), the couple was able to effectively reduce their income by $84,688. In other words, this couple was able to get 1.39 times the income reduction for every dollar they contributed to a retirement plan. 

Example 2: A couple, age 55, with a higher-income specified service business,

Business owners who earn higher income may need to deploy additional retirement plans to capture their QBI deduction. Consider an S corp that pays W-2 wages of $146,000 to the couple, and pass-through income of $317,500 for a total income of $463,500. They claim the standard deduction of $24,000 and their adjusted gross income becomes $439,500. The couple does not receive a QBI deduction because their high income results in a complete phase-out. Their total income therefore remains $439,500.

However, this couple can still take advantage of a QBI deduction by setting up an individual 401(k) plan and deferring $24,500 as an employee contribution. They also can add a defined benefit (DB) plan or a cash balance (CB) plan and contribute even more to a retirement plan. Suppose they set up a DB or a CB plan and the actuaries calculated they could contribute $100,000 to the plan for a total combined contribution of $124,500. In this case, their W-2 wages are reduced to $121,500 and their pass thru income is $217,500.

The couple’s total income after the standard deduction is $315,000. Their QBI deduction is $43,500 (20% of $217,500) and their income is now $271,500. With $124,500 in contributions to their individual 401(k) plan and DB or CB plan the couple received a $168,000 income reduction. This couple was able to get 1.35 times of income reduction for every dollar they contributed to a retirement plan.  

This material is for educational purposes and is not intended to provide tax advice. Talk to your tax professional to find out how QBI deductions may apply to your financial situation.

To learn more about how to maximize your QBI deduction, please email us at rpyle@diversifiedassetmanagement.com or call (303) 440-2906.

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

Solve the Self-Employed Retirement Dilemma

 

Solve the Self-Employed Retirement Dilemma

Here’s how to figure out the best retirement plan for your situation

The challenges of self-employment seem endless. You are your own chief marketing officer, chief financial officer, chief executive and junior assistant. With all of the roles you play, it’s no wonder that you haven’t spent much time planning for retirement.

The good news is that the right retirement plan can address more than just your retirement—it can help lower your taxes and reduce the need to rely on a welfare system in your retirement years. And you don’t have to search alone for that plan: Your financial advisor can help you weigh your plan options and build an appropriate investment strategy once you choose a plan. And your accountant can calculate the potential tax savings this new retirement plan will generate.

So which plan is right for you? The first option you should consider is an IRA or a Roth IRA. Both offer tax advantaged growth, but in different ways: The IRA grows tax deferred, meaning your contributions are tax deductible but you won’t owe taxes on your savings until you start making withdrawals. Contributions to a Roth IRA are made after taxes, but you won’t owe any taxes when you take withdrawals.

Anyone can contribute to an IRA, but not everyone is allowed to make tax deductible contributions. For instance, if you already have a retirement plan in place, your contributions likely won’t be deductible. But if you have a retirement plan, you may still be able to contribute to a Roth IRA, which bases eligibility on income levels. (In 2018, the Roth IRA income eligibility limits phase out between $120,000 and $135,000 for single filers and eligibility limits phase out between $189,000 and $199,000 for married couples filing jointly.) For 2018, individuals can make annual contributions of up to $5,500 to both IRAs and Roth IRAs. If you’re over 50, your limit rises to $6,500 a year thanks to an extra $1,000 in catch-up contributions allowed for older individuals.

If you want to save more than an IRA or Roth IRA allows, consider a formal retirement plan such as a Simple IRA, SEP IRA or an Individual 401(k).

  • The Simple IRA is easy to establish. You can contribute a maximum of $12,500 annually if you are under 50 and $15,500 if you are over 50. In addition, you can contribute 3% of any W-2 wages. One note: The deadline to establish a Simple IRA is October 31, so don’t wait until the end of the year to open an account.
  • The next option is a SEP IRA. The annual limit for a SEP IRA is $55,000 or 25% of self-employment income if you are paying yourself a salary. The deadline to establish the SEP IRA is your tax filing deadline plus extensions. Therefore, you can put off starting a SEP IRA until well into 2019. For that reason we call it “the procrastinator’s retirement plan.”
  • The third option is the Individual 401(k). The annual contribution limit for this 401(k) is $55,000 if you are under 50 and $61,000 if you are over 50. The 401(k) can either be a traditional 401(k) (contributions are pre-tax, but withdrawals are taxed) or a Roth 401(k) (contributions are after tax money, but withdrawals are tax free).
  • There are no income limits for the Roth 401(k). The deferral is made up of two parts. The first part is the employee portion, which has a limit of $18,500 if you are under 50 and $24,500 if you are over 50. This deferral can either go into the 401(k), the Roth 401(k) or a combination of both. The remainder is the employer contribution, which has a limit of 25% of compensation.
  • The deadline to establish this plan is December 31 of this year. The employer contributions can be contributed later but employee deferrals need to be in as soon as they are withheld from your paycheck. Therefore, you can’t wait like the SEP.

How do these plans stack up? Let’s look at an example. Say you are self-employed and you pay yourself $50,000 in W-2 salary. Here are the limits for each plan.

Retirement Plan summary.PNG

What’s the verdict? The 401(k) is the big winner. The Simple IRA is a good option for those with lower incomes, while the SEP is good for those who tend to procrastinate.

If these contribution limits are not enough, then you might want to consider a Defined Benefit Plan, which can be paired with a 401(k). Contribution limits to Defined Benefit plans are based on actuarial calculations, but you could be able to contribute $200,000 or more each year.

As always, it is important to coordinate with your financial professional to see what plan is best for you. Please contact me if you’d like to explore your retirement savings options.

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

Diversified Asset Management, Inc. - 2018 3rd Quarter Newsletter

New Ways To Influence The Next Generation

The Tax Cuts And Jobs Act of 2018 (TCJA) gives you more good reasons to help you children, grandchildren, great nieces and nephews. Any amount you give to a 529 account that's used to pay for qualified expenses for college as well as private or religious schooling before college is deductible. With tax reform eliminating all or a large chunk of state income-tax deductions for many individuals in 2018, giving to a 529 lightens your state income-tax load while perhaps changing a life of a family member or friend and influencing their values.

Are You “Rich” Or Not? New Survey Hits The High Points

Do you consider yourself rich? If you own a couple of mansions, a fleet of luxury cars, and financial accounts reaching high into the millions, it may be easy to answer that question. But other well-to-do people might struggle with the issue of whether they are "rich" or not. 

New Deduction Rules For Business Owners

If you are a small business owner, Washington, D.C. has changed tax rules to lower your burden but the new rules are fairly complex. Many small businesses, and some that aren't so small, are "pass-through companies," tax-jargon that means the entity's net income isn't taxed at the corporate level but flows straight to their owners' personal returns. That income is taxed at personal income tax rates, as opposed to corporate rates that are generally lower.

Five Retirement Questions To Answer

How much money do you need to save to live comfortably in retirement? Some experts base estimates on multiple of your current salary or income, while others focus on a flat amount such as a million dollars. Either way, the task can be daunting.

A Guide To The New Rules On Tax Deductions In 2018

Uncle Sam giveth, and Uncle Sam taketh away. New federal tax code, which went into effect in 2018 and affects the return you'll file in spring 2019, lowers taxes by expanding some deductions, but restricts or outright eliminates others.

Giving More To Loved Ones – Tax-Free

While it may be better to give than to receive, as the adage contends, both givers and receivers should be happy with the new tax law. The annual amount you can give someone tax-free has been raised to $15,000, from $14,000 in 2017.

To read the newsletter click on the link below:

Diversified Asset Management, Inc. - 2018 3rd Quarter Newsletter

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.

Flash Report - The Road to Longevity: Living to 120—and Beyond?

Medical technology can now identify risk factors in the human body long before they impact your health.

A medical revolution is underway—one that’s making it possible for us to extend our lives for decades by stopping now-fatal diseases before they can take hold of our bodies. In the coming years, we’ll not only be able to live longer, but also have fuller lives characterized by enduring physical mobility and mental sharpness.

Here’s a closer look at the personal longevity revolution—and what it could mean to you and your family as you seek to live your best life.

Stop disease before it starts: the power of biomarkers and genomes

Perhaps the most interesting component of longevity care is the role of biomarkers in understanding genomic risk and promoting long-term health.

Biomarkers are biological data points that reveal the current physical state of affairs of a particular condition. Most biomarkers are blood tests for future risk, but they also might include other health data points like a calcium score or even simpler values like heart rhythm and blood pressure.

 

Click here to read more:

The Road to Longevity Living to 120—and Beyond-Flash Report

 

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.

Contribution Limits to 401K

Here is a nice article provided by Kimberly Lankford of Kiplinger:

 

By Kimberly Lankford, Contributing Editor   

 

September 6, 2017

 

Now is a good time to review your 401(k) contributions to make sure you're getting your employer's full match. 

 

Q. I've been contributing to my 401(k), and my employer matches a portion of my contributions. Does the $18,000 maximum for contributions include the employer match, or does it apply only to my individual contributions? Is it too late to increase my contributions to get the full employer match by the end of the year?

 

A. The $18,000 maximum (or $24,000, if you're age 50 or older) applies only to your contributions. The overall maximum for 2017, which includes the employer match, is $54,000 ($60,000 if you're 50 or older), even though it would be very unusual for your employer to add that much money to your account.

 

Match calculations vary by 401(k) plan. But the average match in plans administered by Fidelity Investments is 4.5% of a worker's pay. This is a great time of year to review your 401(k) contributions and make sure you're getting as much money as possible from your employer. About 20% of people don't contribute enough to get the full match, says Fidelity's Meghan Murphy.

 

The procedures for changing your contributions vary by plan, but you can usually make revisions online or by calling the plan administrator at any time. Your new contribution level will generally take effect within two pay periods, says Murphy. Find out how your employer calculates the match before deciding how to boost your contributions. Some limit how much they'll match per pay period, so if you add a lot of money all at once, you may not get the full match. In that case, you should spread your extra contributions out over the rest of the year.

 

Be careful not to contribute more than the annual limit. Your plan administrator usually tracks the amount you contribute for the year, so that you don't accidentally cross the limit when you boost the money you put in. But it's a good idea to keep track of the amount yourself, too. And it's particularly important to monitor contributions if you've changed jobs in 2017 and your new plan administrator doesn't know how much you've put away in your old employer's plan for the year.

 

This is also a good time to make sure you're taking advantage of catch-up contributions if you're 50 or older. You can contribute up to an extra $6,000 anytime in the year you turn 50. No need to wait until your birthday.

 

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.

 

10 Things You Must Know About Medicare

Here is a nice article provided by the Editors of Kiplinger’s Retirement Report:

 

By the Editors of Kiplinger’s Retirement Report | Updated May 2017

 

Heading into your retirement years brings a slew of new topics to grapple with, and one of the most maddening may be Medicare. Figuring out when to enroll, what to enroll in and what coverage will be best for you can be daunting. To help you wade easily into the waters, here are ten essential things you need to know about Medicare.

 

Medicare Comes With a Cost

Medicare is divided into parts. Part A, which pays for hospital services, is free if either you or your spouse paid Medicare payroll taxes for at least ten years. (People who aren't eligible for free Part A can pay a monthly premium of several hundred dollars.) Part B covers doctor visits and outpatient services, and it comes with a monthly price tag -- for most people in 2017, that monthly cost is about $109. New enrollees pay $134 per month. Part D, which covers prescription drug costs, also has a monthly charge that varies depending on which plan you choose; the average Part D premium is $34 a month. In addition to premium costs, you'll also be subject to co-payments, deductibles and other out-of-pocket costs.

 

You Can Fill the Gap

Beneficiaries of traditional Medicare will likely want to sign up for a medigap supplemental insurance plan offered by private insurance companies to help cover deductibles, co-payments and other gaps. You can switch medigap plans at any time, but you could be charged more or denied coverage based on your health if you choose or change plans more than six months after you first signed up for Part B. Medigap policies are identified by letters A through N. Each policy that goes by the same letter must offer the same basic benefits, and usually the only difference between same-letter policies is the cost. Plan F is the most popular policy because of its comprehensive coverage. A 65-year-old man could pay from $1,067 to $6,772 in 2017 for Plan F depending on the insurer, according to Weiss Ratings.

 

There Is an All-in-One Option

You can choose to sign up for traditional Medicare -- Parts A, B and D, and a supplemental medigap policy. Or you can go an alternative route by signing up for Medicare Advantage, which provides medical and prescription drug coverage through private insurance companies. Also called Part C, Medicare Advantage has a monthly cost, in addition to the Part B premium, that varies depending on which plan you choose. With Medicare Advantage, you don't need to sign up for Part D or buy a medigap policy. Like traditional Medicare, you'll also be subject to co-payments, deductibles and other out-of-pocket costs, although the total costs tend to be lower than for traditional Medicare. In many cases, Advantage policies charge lower premiums but have higher cost-sharing. Your choice of providers may be more limited with Medicare Advantage than with traditional Medicare.

 

High Incomers Pay More

If you choose traditional Medicare and your income is above a certain threshold, you'll pay more for Parts B and D. Premiums for both parts can come with a surcharge when your adjusted gross income (plus tax-exempt interest) is more than $85,000 if you are single or $170,000 if married filing jointly. In 2017, high earners pay $187.50 to $428.60 per month for Part B, depending on their income level, and they also pay extra for Part D coverage, from $13.30 to $76.20 on top of their regular premiums.

 

When to Sign Up

You are eligible for Medicare when you turn 65.

If you are already taking Social Security benefits, you will be automatically enrolled in Parts A and B. You can choose to turn down Part B, since it has a monthly cost; if you keep it, the cost will be deducted from Social Security if you already claimed benefits.

For those who have not started Social Security, you will have to sign yourself up for Parts A and B. The seven-month initial enrollment period begins three months before the month you turn 65 and ends three months after your birthday month. To ensure coverage starts by the time you turn 65, sign up in the first three months.

If you are still working and have health insurance through your employer (or if you’re covered by your working spouse’s employer coverage)you may be able to delay signing up for Medicare. But you will need to follow the rules, and must sign up for Medicare within eight months of losing your employer’s coverage, to avoid significant penalties when you do eventually enroll. (See also: FAQs About Medicare.)

 

A Quartet of Enrollment Periods

There are several enrollment periods, in addition to the seven-month initial enrollment period. If you missed signing up for Part B during that initial enrollment period and you aren't working (or aren’t covered by your spouse’s employer coverage), you can sign up for Part B during the general enrollment period that runs from January 1 to March 31 and coverage will begin on July 1. But you will have to pay a 10% penalty for life for each 12-month period you delay in signing up for Part B. Those who are covered by a current employer’s plan, though, can sign up later without penalty during a special enrollment period, which lasts for eight months after you lose that employer coverage (regardless of whether you have retiree health benefits or COBRA). If you miss your special enrollment period, you will need to wait to the general enrollment period to sign up. Open enrollment, which runs from October 15 to December 7 every year, allows you to change Part D plans or Medic are Advantage plans for the following year, if you choose to do so. (People can now change Medicare Advantage plans outside of open enrollment if they switch into a plan given a five-star quality rating by the government.)

 

Costs in the Doughnut Hole Shrinking

One cost for Medicare is decreasing -- the dreaded Part D "doughnut hole." That is the period during which you must pay out of pocket for your drugs. For 2017, the coverage gap begins when a beneficiary's total drug costs reach $3,700. While in the doughnut hole, you’ll receive a 60% discount on brand-name drugs and a 49% federal subsidy for generic drugs in 2017. Catastrophic coverage, with the government picking up most costs, begins when a patient's out-of-pocket costs reach $4,950.

 

You Get More Free Preventive Services

Medicare beneficiaries can receive a number of free preventive services. You get an annual free "wellness" visit to develop or update a personalized prevention plan. Beneficiaries also get a free cardiovascular screening every five years, annual mammograms, annual flu shots, and screenings for cervical, prostate and colorectal cancers.

 

What Medicare Does Not Cover

While Medicare covers your health care, it generally does not cover long-term care -- an important distinction. Under certain conditions, particularly after a hospitalization to treat an acute-care episode, Medicare will pay for medically necessary skilled-nursing facility or home health care. But Medicare generally does not cover costs for "custodial care" -- that is, care that helps you with activities of daily living, such as dressing and bathing. To cover those costs, you will have to pay out of pocket or have long-term-care insurance. Traditional Medicare also does not cover routine dental or eye care and some items such as dentures or hearing aids. For more on tests, items or services that Medicare doesn't cover, check www.medicare.gov/coverage/your-medicare-coverage.html.

 

You Have the Right to Appeal

If you disagree with a coverage or payment decision made by Medicare or a Medicare health plan, you can file an appeal. The appeals process has five levels, and you can generally go up a level if your appeal is denied at a previous level. Gather any information that may help your case from your doctor, health care provider or supplier. If you think your health would be seriously harmed by waiting for a decision, you can ask for a fast decision to be made and if your doctor or Medicare plan agrees, the plan must make a decision within 72 hours.

 

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.

Tax Strategies for Retirees

Nothing in life is certain except death and taxes. —Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.

Less Taxing Investments

Municipal bonds, or "munis" have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table).1 The higher your tax bracket, the more you may benefit from investing in munis.

Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For insta nce, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It's also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 20%.* In light of this, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

The Tax-Exempt Advantage: When Less May Yield More

Taxes.png

Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you'll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 39.6%, while distributions—in the form of capital gains or dividends—from investments in taxable accounts are taxed at a maximum 20%.* (Capital gains on investments held for less than a year are taxed at regular income tax rates.)

For this reason, it's beneficial to hold securities in taxable accounts long enough to qualify for the favorable long-term rate. And, when choosing between tapping capital gains versus dividends, long-t erm capital gains are more attractive from an estate planning perspective because you get a step-up in basis on appreciated assets at death.

It also makes sense to take a long view with regard to tapping tax-deferred accounts. Keep in mind, however, the deadline for taking annual required minimum distributions (RMDs).

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple—the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant's and beneficiary's lifetimes, based on the participant's age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you'll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.

Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.2 In fact, you're never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.2 For this reason, you may wish to liquidate investments in a Roth IRA after you've exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your money accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases, spousal beneficiaries are ideal, because they have several options that aren't available to oth er beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you're close to the threshold for owing estate taxes. In 2016, the federal estate tax applies to all estate assets over $5.45 million. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $14,000 per individual ($28,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed—or gains tapped—at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild's higher education expenses.

Strategies for mak ing the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

Source(s):

1.  Capital gains from municipal bonds are taxable and interest income may be subject to the alternative minimum tax.

2.  Withdrawals prior to age 59½ are generally subject to a 10% additional tax.

*Income from investment assets may be subject to an additional 3.8% Medicare tax, applicable to single-filer taxpayers with modified adjusted gross income of over $200,000, and $250,000 for joint filers.

Required Attribution

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

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

 

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 com pensation 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 co ntent should not be construed as investment, legal, accounting or tax advice.

Frequently Asked Retirement Income Questions

When should I begin thinking about tapping my retirement assets and how should I go about doing so?

The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid- to late 50s. A series of meetings with a financial advisor may help you make important decisions such as how your portfolio should be invested, when you can afford to retire, and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.

How much annual income am I likely to need?

While studies indicate that many people are likely to need between 60% and 80% of their final working year's income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today's retirees.

How much can I afford to withdraw from my assets for annual living expenses?

As you age, your financial affairs won't remain static: Changes in inflation, investment returns, your desired lifestyle, and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with a qualified financial advisor and review your personal situation.

When planning portfolio withdrawals, is there a preferred strategy for which accounts are tappe d first?

You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.

If you maintain a traditional IRA, a 401(k), 403(b), or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70½. The amount of the annual distribution is determined by your life expectancy and, potentiall y, the life expectancy of a beneficiary. RMDs don't apply to Roth IRAs.

Are there other ways of getting income from investments besides liquidating assets?

One such strategy that uses fixed-income investments is bond laddering. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering may help you maintain a relatively consistent stream of income while managing your exposure to risk.1

In addition, many of today's annuities offer optional living benefits that may help an investor capitalize on the market's upside potential while protecting investment principal from market declines and/or providing minimum future income. Keep in mind, however, that riders vary widely, have restrictions, and that additional fees may apply. Your financial advisor can help you determine whether an annuity i s appropriate for your situation.2

When crafting a retirement portfolio, you need to make sure it is positioned to generate enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation. Dividing your portfolio among stocks, bonds, and cash investments may provide adequate exposure to some growth potential while trying to manage possible market setbacks.

Source(s):

1.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability and change in price.

2.  Annuity protections and guarantees are based on the claims-paying ability of the issuing insurance company.

Required Attribution

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

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

 

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 indiv idualized 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.

12 Reasons You Will Go Broke in Retirement

Here is a nice article provided by Stacy Rapacon of Kiplinger:

 

Retirement is a major milestone that brings many life changes. One thing that doesn't change for most people: the fear of running out of money. According to the Transamerica Center for Retirement Studies, the most frequently reported retirement worry is outliving savings and investments. Across all ages, 51% of respondents cited this concern, and 41% of retirees claim the same fear. Additionally, only 46% of retirees think they've built a nest egg large enough to last through retirement.

Now is the time to face your fears. Take a look at a dozen ways you could go broke in retirement and learn how to avoid them. Some you can avert with careful planning; others you have little control over. But you can prepare your finances to make the best of whatever may come.

1.  You Abandon Stocks:

It's true that stocks can be risky. For example, so far in 2016, Standard & Poor's 500-stock index, a benchmark for many investors, has experienced several wild swings, opening with a 5% decline in January and including a headline-grabbing, single-day drop of 3.4% on June 24 in response to the Brexit. So once you're retired, you might be inclined to move your money out of stocks altogether and instead focus on preserving your wealth.

But that would be a mistake. Despite the volatility, the S&P 500 is up about 6% year-to-date, as of mid October 2016. Without stocks, "you don't get the growth that you need," says Carrie Schwab-Pomerantz, senior vice president at Charles Schwab and author of The Charles Schwab Guide to Finances After Fifty. "You need your money to continue to grow through those 20 to 30 years of retirement." She recommends maintaining a stock allocation of at least 20% during retirement for your portfolio to outpace inflation and help maintain your lifestyle.

2.  You invest too much in stocks:

On the other hand, you're right: Stocks are risky. "You don't want to have too much in stocks, especially if you're so reliant on that portfolio, because of the volatility of the market," says Schwab-Pomerantz. There's no one-size-fits-all formula, but for the average investor Schwab-Pomerantz recommends moving to 60% stocks as you approach retirement, then trimming back to 40% stocks in early retirement. Later in retirement, allocate 20% to stocks.

If you're hesitant to make these portfolio adjustments yourself and don't want to work with a financial adviser, consider investing in target-date mutual funds instead. These funds are designed to reduce exposure to stocks gradually over time as you approach (and surpass) your target date for retirement. Not all target-date funds are the same, even if they sport the same retirement target year in their names. Be aware of specific funds' expenses and asset-allocation strategies to ensure they are affordable and fit your needs.

3.  You Live Too Long:

More time to enjoy the life you love is a joy; trying to afford it can be a pain. Current retirees are expecting a long retirement—a median of 28 years, according to the Transamerica Center for Retirement Studies. And 41% of retirees expect their retirements to go on for more than three decades. Women have to plan for an even longer life. According to the Centers for Disease Control and Prevention, a man who was age 65 in 2014 can expect to live to age 83, on average, while a woman of the same age may reach 85.5 years.

When saving for retirement, plan for a long life. But if it starts to look like your nest egg will come up short, you have to adjust your budget. For example, it might behoove you to downsize your home or relocate to an area with low taxes and living costs. You may even consider finding ways to pull in extra income, such as starting an encore career, taking a part-time job or cashing in on the sharing economy, if you can.

4.  You Spend Too Much:

It might seem obvious, but most of us—retired or not—are guilty of making this mistake and could benefit from a reminder to quit it. In fact, according to the Employee Benefit Research Institute, nearly 46% of retired households spent more annually in their first two years of retirement than they did just before retiring.

And retirees on a fixed income are particularly vulnerable to the ill effects of committing this error. "One of the biggest mistakes, I think, is that people continue to spend the way they did in their earning years without taking a close look at their current income," says Schwab-Pomerantz. "For retirees, budgeting is more important than ever." (Use Kiplinger's Household Budgeting Worksheet to get your expenses under control.)

5.  You rely on a single source of income:

Multiple income streams are better than one, especially in retirement. Case in point: Social Security is the primary source of income for 61% of retirees, according to the Transamerica Center for Retirement Studies. And 44% of retirees report that one of their biggest financial fears is that Social Security will be reduced or cease to exist in the future. Based on current projections, Social Security will only be able to pay 77% of promised retirement benefits beginning in 2035.

A pension, which 42% of retirees use as a source of income, or inheritance likely can't stand alone to support you through retirement, either. But when you put them all together, along with your self-funded retirement accounts—such as 401(k)s and IRAs—then you have a more stable and diversified financial base to rely on throughout your retirement.

6.  You can't work:

Another good reason for needing plenty of savings and multiple streams of income to support you in retirement: You can't count on being able to bring in a paycheck if you need it. While 51% of workers expect to continue working some in retirement, only 6% of retirees report working in retirement as a source of income.

Whether you work is not always up to you. In fact, 60% of retirees left the workforce earlier than planned, according to the Transamerica Center for Retirement Studies. Of those, 66% did so because of employment-related issues, including organizational changes at their companies, losing their jobs and taking buyouts. Health-related issues—either their own ill health or that of a loved one—was cited by 37%. Just 16% retired early because they felt they could afford to.

7.  You get sick:

As you age, your health is bound to deteriorate, and getting the proper care is expensive. According to a 2015 report from the Employee Benefit Research Institute, a 65-year-old man would need to save $68,000 to have a 50% chance of affording his health-care expenses in retirement (excluding long-term care) that aren't covered by Medicare or private insurance. To have a 90% chance, the same man would need to save $124,000. The news is worse for a 65-year-old woman, who would need to save $89,000 and $140,000, respectively. Be sure you're doing all you can to cut health-care costs in retirement by considering supplemental medigap and Medicare Advantage plans and reviewing your options every year.

Long-term care bumps up the bill even more. For example, the median cost for adult day health care in the U.S. is $1,473 a month; for a private room in a nursing home, it costs a median of $7,698 a month, according to Genworth. No wonder 44% of retirees fear declining health that requires long-term care and 31% fear cognitive decline, dementia and Alzheimer's disease. Consider getting long-term-care insurance to help cover those costs, and use these tactics to make it affordable.

8.  You tap the wrong retirement accounts:

This mistake probably won't leave you flat broke, but lacking a smart withdrawal strategy can cost you. The most tax-efficient way to go, suggests Schwab-Pomerantz, is to draw down the principal from your maturing bonds and certificates of deposit first, since they are no longer bearing interest. Next, if you're 70½ or older, take your required minimum distributions from your traditional tax-deferred accounts, such as IRAs and 401(k)s, focusing on assets that are overweighted or no longer appropriate for your portfolio. You face a stiff penalty from the IRS for neglecting to take RMDs on time.

Then, sell from your taxable accounts, for which you only have to pay the capital-gains tax. (Note: Retirees in the two lowest income tax brackets pay no tax at all on their capital gains.) Finally, withdraw from your tax-deferred and Roth accounts, in that order.

9.  You don't consider taxes:

Needing to be tax-smart extends beyond your drawdown strategy (see #8). Where you live impacts what you pay in taxes big time. That's part of why so many people flock to Florida and Arizona after they retire. Along with the warm weather and ample sunshine, those states offer two of the country's ten most tax-friendly environments for retirees. Other states with retirement-friendly tax codes include Alaska, Georgia and Nevada.

Of course, taxes alone shouldn't dictate where you live in retirement. Friends, family and other community ties play a major role. But you have to keep state and local taxes in mind (especially sales taxes, property taxes and taxes on retirement income) when planning your budget. Take a look at our state-by-state guide to taxes on retirees for more.

10.  You bankroll the kids:

A mistake made out of love is a mistake all the same. You may feel obligated to assist your children financially—paying for college, contributing to the down payment for a first home and covering them in emergencies, for example. But doing so at the expense of your retirement security may cause bigger problems for both you and your kids in the long run.

"It sounds awful to think a parent won't help [his children], but you're only going to become a drag on your kids eventually if you don't really focus on your own financial security during those later years," says Schwab-Pomerantz. "You gotta take care of yourself first."

11.  You are underinsured:

Cutting costs in retirement is important, but scrimping on insurance might not be the best place to do it. Adequate health coverage, in particular, is essential to prevent a devastating illness or injury from wiping out your nest egg. Medicare Part A, which covers hospital services, is a good start. It’s free to most retirees. But you’ll need to pay extra for Part B (doctor visits and outpatient services) and Part D (prescription drugs). Even then, you’ll probably want a supplemental medigap policy to help cover deductibles, copayments and such. "Medicare is very complex, and it's more expensive than people realize," says Schwab-Pomerantz. "So it definitely needs to be part of the budgeting process."

And don't forget about other forms of insurance. As you age, your chances of having accidents both at home and on the road increase. In fact, according to the Centers for Disease Control and Prevention, an average of 586 adults who are 65 and older are injured every day in car crashes. Beyond your own medical expenses, all it can take is a single adverse ruling in an accident-related lawsuit to drain your retirement savings. Review the liability coverage that you already have through your auto and home policies. If it’s not sufficient, either bump up the limits or invest in a separate umbrella liability policy that will kick in once your primary insurance maxes out. Premiums on a $1 million umbrella policy might run about $300 a year.

12.  You get scammed:

Older adults are particularly vulnerable to scam artists and fraudsters. The FBI notes that seniors are prime targets for such criminals because of their presumed wealth, relatively trusting nature and typical unwillingness to report these crimes. Even worse, the perpetrators may be closer than you think. According to a study from MetLife and the National Committee for the Prevention of Elder Abuse, an estimated one million elders lose $2.6 billion a year due to financial abuse—and family members and caregivers are the perpetrators 55% of the time.

Some common scams to watch out for: Con artists may pretend to represent Medicare to collect your personal information. Cheap prescription drugs marketed online could be knock-offs, and you may be handing over your credit card information in exchange for endangering your health. Charity workers seeking donations for disaster aid might actually pocket the money for themselves. See our advice on how to protect yourself from fraudsters.


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.

15 Worst States to Live in During Retirement

Here is a nice article provided by Stacy Rapacon of Kiplinger: 


Number crunching alone can't tell you where to retire. That's a choice you'll ultimately need to make on your own. But identifying the places that hold the lowest appeal for retirees can at least help narrow your search.

We rated all 50 states based on quantifiable factors that are important to many retirees. Our rankings penalized states with high living expenses—especially taxes and health care costs—and rewarded states with relatively prosperous populations of residents age 65 and up. We also ranked states lower if their populations are medically unhealthy, or if the state has fiscal health problems (red ink in state budgets could lead to tax hikes and program spending cuts for seniors).

Using our methodology, the following 15 states rank as the least attractive for retirees. That doesn't make them terrible places to live. They might, indeed, be great states in which to work or raise a family. You might even choose to stick around in retirement simply to be close to your grandchildren. But in dollars-and-practical-sense terms, retirees might be better off looking to settle elsewhere.

The average health care cost in retirement of $387,731 we cite is a lifetime cost for a 65-year-old couple who are expected to live to 87 (husband) and 89 (wife). For a complete explanation of our methodology and our data sources, see the Methodology slide at the end of this slide show.

15.  Minnesota

Population: 5.4 million

Share of population 65+: 13.6% (U.S.: 14.5%)

Cost of living: 2% above the U.S. average

Average income for 65+ households: $43,623 (U.S.: $50,291)

Average health care costs for a retired couple: About average at $387,007 (U.S.: $387,731)

Minnesota's tax rating for retirees: Least Tax Friendly

The Land of 10,000 Lakes is a hard place for retirees to stay afloat. Above-average living expenses and below-average incomes can equate to imbalanced budgets in retirement. Plus, the tax situation adds an extra burden. One of the 10 Worst States for Taxes on Retirees, Minnesota taxes Social Security benefits the same as the feds. Most other retirement income, including military, government and private pensions, is also taxable. And the state's sales and income taxes are high.

On the other hand, Minnesota is a great place for health-focused retirees. The state is the third-healthiest in the country for seniors, according to the United Health Foundation rankings, which are based on people's behaviors, such as physical activity, as well as community support and clinical care provided. In fact, Rochester, home of the renowned Mayo Clinic, ranks seventh among the best small metro areas for successful aging, according to the Milken Institute, in part due to its abundance of health care providers.

14.  West Virginia

Population: 1.9 million

Share of population 65+: 16.8%

Cost of living: 3% below the U.S. average

Average income for 65+ households: $38,917

Average health care costs for a retired couple: Below average at $370,403

West Virginia's tax rating for retirees: Tax Friendly

Despite its below-average living costs and positive tax rating, the Mountain State offers some rocky terrain for retirees. According to a recent report from the Mercatus Center at George Mason University, West Virginia ranks as the eighth-worst state in terms of fiscal soundness, indicating low confidence that it can keep up with short-term expenses and long-term financial obligations.

The state also scores poorly for the health of its 65-and-over population, ranking 45th in the country, according to the United Health Foundation. While 41.8% of older adults nationwide enjoy excellent or very good health, only 29.5% of those in West Virginia can say the same.

13.  Maine

Population: 1.3 million

Share of population 65+: 17.0%

Cost of living: 6% above the U.S. average

Average income for 65+ households: $38,504

Average health care costs for a retired couple: Below average at $367,832

Maine's tax rating for retirees: Not Tax Friendly

The Pine Tree State can be a bit prickly when it comes to its retirees. While Social Security benefits are not subject to state taxes, most other retirement income is taxable. There's even an estate tax. Plus, the Mercatus Center at George Mason University ranks Maine as the ninth-worst state in the country in terms of fiscal soundness.

Individuals in the state may have an equally difficult time balancing their own budgets. With below-average household incomes, retirees may struggle to cover Maine's above-average living costs.

12.  Kentucky

Population: 4.4 million

Share of population 65+: 14.0%

Cost of living: 9% below the U.S. average

Average income for 65+ households: $39,935

Average health care costs for a retired couple: About average at $384,317

Kentucky's tax rating for retirees: Tax Friendly

Kentucky seniors suffer the third-worst state of health in the country, according to the United Health Foundation's rankings. Among its challenges are a high rate of smoking, limited access to low-cost, nutritious food, and a low number of quality nursing homes. Also, physical inactivity among residents age 65 and up has increased to 40.2% over the past two years, compared with a national rate of 33.1%.

The Bluegrass State does offer low living costs, as well as a number of tax breaks for retirees. Social Security benefits, as well as up to $41,110 of other retirement income, are exempt from state taxes. However, with a low ranking of 45th in the country for fiscal soundness, those tax benefits may not be very secure. Also, despite the state's overall affordability, plenty of older residents struggle to make ends meet: 11.4% of those age 65 and older are living in poverty, compared with 9.4% for the U.S. as a whole.

11.  Indiana

Population: 6.5 million

Share of population 65+: 13.6%

Cost of living: 4% below the U.S. average

Average income for 65+ households: $39,260

Average health care costs for a retired couple: About average at $388,954

Indiana's tax rating for retirees: Not Tax Friendly

With its below-average living expenses, Indiana might seem like a winner for retirees. But when you consider the well-below-average household income, the older residents of the Hoosier State start looking more like underdogs. And the tax situation doesn't help their cause much. Most retirement income other than Social Security benefits is taxable at ordinary rates.

The state's health ranking is also among the 10 worst in the country. Some of the challenges Indiana's older residents face are high rates of obesity, physical inactivity and premature deaths, according to the United Health Foundation.

10.  Wisconsin

Population: 5.7 million

Share of population 65+: 14.4%

Cost of living: 10% above the U.S. average

Average income for 65+ households: $37,673

Average health care costs for a retired couple: About average at $387,705

Wisconsin's tax rating for retirees: Mixed

High living costs and low average incomes can put a yoke on retirees in Wisconsin. In fact, the state's average household income for seniors is the second-lowest in the country, behind only Montana. The tax situation in the Badger State doesn't help, either. Social Security benefits are exempt from state taxes, but most other retirement income is subject to taxation (though there are some breaks for low-income residents).

If you can afford it, though, the state capital of Madison holds its charms for retirees, offering an abundance of quality health care facilities, as well as plenty of museums, libraries and the University of Wisconsin.

9.  Vermont

Population: 626,358

Share of population 65+: 15.7%

Cost of living: 19% above the U.S. average

Average income for 65+ households: $42,599

Average health care costs for a retired couple: Below average at $373,830

Vermont's tax rating for retirees: Least Tax Friendly

It's not easy being retired in the Green Mountain State. Exorbitantly high living costs and taxes weigh heavily on below-average incomes. Social Security benefits, as well as most other forms of retirement income, are subject to state taxes, and the top income tax rate is a steep 8.95% (which kicks in at $411,500 for both single and married filers).

On a positive note, Vermont boasts the healthiest seniors in the country, according to the United Health Foundation's rankings. Burlington, a small city on the shores of Lake Champlain, rates as a great place to retire thanks to beautiful surroundings that surely help boost physical activity and overall health among the locals.

8.  Montana

Population: 1.0 million

Share of population 65+: 15.7%

Cost of living: 1% above the U.S. average

Average income for 65+ households: $36,933

Average health care costs for a retired couple: Below average at $377,877

Montana's tax rating for retirees: Least Tax Friendly

Despite its Treasure State nickname, it can be hard to hold onto your fortune in Montana. Living costs are about average, but incomes are well below the norm. In fact, the average household income for residents age 65 and up is the lowest in the country. The tax situation certainly doesn't help. One of the 10 Worst States for Taxes on Retirees, Montana taxes most forms of retirement income, and the top rate of 6.9% kicks in once taxable income tops just $17,000.

Still, Big Sky Country seems to retain a large number of retirement-age folks: The state's 65-and-older population is 15.7%, compared with 14.5% for the U.S. The great (albeit cold) outdoors, including Yellowstone and Glacier national parks, may be what trumps the state's drawbacks for adventurous retirees. Great Falls, on the high plains of Montana's Rocky Mountain Front Range, proves particularly popular with the over-65 crowd, which makes up 16.1% of the metro area's population.

7.  Rhode Island

Population: 1.1 million

Share of population 65+: 15.1%

Cost of living: 13% above the U.S. average

Average income for 65+ households: $55,802

Average health care costs for a retired couple: Above average at $392,592

Rhode Island's tax rating for retirees: Least Tax Friendly

Tiny Rhode Island packs in big bills for older folks. On top of the above-average living costs, it's one of the 10 Worst States for Taxes on Retirees, taxing virtually all sources of retirement income at ordinary rates. (Note: Starting in 2016, the state will begin to give residents a break on Social Security taxes.) The state sales tax is 7%.

On the bright side, the above-average incomes for older residents can make those burdensome costs a bit more bearable.

6.  Massachusetts

Population: 6.7 million

Share of population 65+: 14.4%

Cost of living: 17% above the U.S. average

Average income for 65+ households: $61,436

Average health care costs for a retired couple: Above average at $413,007

Massachusetts's tax rating for retirees: Not Tax Friendly

The Bay State harbors some heavy costs for retirees. On top of the high overall living costs, the total a couple can expect to pay for health care throughout their retirement is the second-highest in the country, trailing only Alaska.

And though the average household income for seniors is high, taxes can take a big bite out of those earnings. Social Security benefits are exempt, but effective in 2016 most other retirement income is taxed at the state's flat rate of 5.1%.

5.  Illinois

Population: 12.9 million

Share of population 65+: 13.2%

Cost of living: 4% above the U.S. average

Average income for 65+ households: $51,079

Average health care costs for a retired couple: Above average at $398,927

Illinois's tax rating for retirees: Mixed

The Prairie State's fiscal standing has been sliding downward for years. Illinois has weighty long-term debts, large unfunded pension liabilities and big budget imbalances. All this puts it squarely at the bottom of the state rankings for fiscal soundness, according to George Mason University's Mercatus Center. In October 2015, ratings agency Fitch downgraded the state's credit rating to near-junk status.

On the plus side, the state doesn't tax distributions from a variety of retirement income sources, including 401(k) plans and individual retirement accounts. For now, that is. Given such a poor fiscal state, tax breaks are hardly assured, and higher taxes are on the table. Already, state and local sales taxes rise above a combined 10% in some areas, and they will be even higher effective July 1, 2016.

4.  Connecticut

Population: 3.6 million

Share of population 65+: 14.8%

Cost of living: 29% above the U.S. average

Average income for 65+ households: $63,726

Average health care costs for a retired couple: Above average at $402,594

Connecticut's tax rating for retirees: Least Tax Friendly

The Constitution State does little to promote the general welfare of its resident retirees. In fact, Connecticut ranks among the 10 tax-unfriendliest states for retirees. Real estate taxes are the second-highest in the country. Some residents face taxes on Social Security benefits, and most other retirement income is fully taxed, with no exemptions or tax credits to ease the burden. Because Connecticut ranks 47th out of all states for fiscal soundness, state taxes are not likely to go down any time soon.

All those taxes come on top of high living costs, the second-highest in the country, tied with New York and behind only Hawaii. One plus: Connecticut residents can often afford the costs. The state's average household income for seniors is the fourth-highest in the U.S., and its poverty rate for residents age 65 and older is a low 7.1%, compared with 9.4% for the U.S.

3.  California

Population: 38.1 million

Share of population 65+: 12.1%

Cost of living: 15% above the U.S. average

Average income for 65+ households: $62,003

Average health care costs for a retired couple: Above average at $394,831

California's tax rating for retirees: Least Tax Friendly

Another one of the 10 Worst States for Taxes on Retirees, the Golden State could be fool's gold as a retirement choice. Except for Social Security benefits, retirement income is fully taxed, and California imposes the highest state income tax rates in the nation (the top rate is 13.3% for single filers with $1 million incomes and joint filers with incomes above $1,039,374). The state sales tax combined with additional local levies can reach as high as 10%.

Everything seems bigger in California, including high living expenses. Indeed, plenty of older residents are unable to bear it: 1 in 10 Californians age 65 and over are living in poverty.

2.  New Jersey

Population: 8.9 million

Share of population 65+: 14.1%

Cost of living: 22% above the U.S. average

Average income for 65+ households: $66,409

Average health care costs for a retired couple: Above average at $403,420

New Jersey's tax rating for retirees: Least Tax Friendly

Retirees planning to plant themselves in the Garden State might want to reconsider. Both living costs and taxes in New Jersey take a big bite out of retirement nest eggs. The combined state and local tax burden is the second-highest in the nation. And it doesn't ease up after you die—the money you leave behind is subject to both an estate tax and inheritance tax (though there are exemptions for spouses and some others). Plus, with the second-worst ranking for fiscal soundness, behind only Illinois, the tax picture is unlikely to improve soon.

More bad news: New Jersey's living costs are the fourth-highest in the country, with retiree health care costs ranking third-highest in the nation. Still, residents seem to bear the burden well. The average income for 65-and-up residents is the third-highest in the U.S., and the poverty rate for the age group is a low 7.9%.

1.  New York

Population: 19.6 million

Share of population 65+: 14.1%

Cost of living: 29% above the U.S. average

Average income for 65+ households: $63,174

Average health care costs for a retired couple: Above average at $397,107

New York's tax rating for retirees: Least Tax Friendly

One (pricey) Big Apple spoils the entire Empire State. Manhattan reigns as the most expensive place to live in the U.S., with costs soaring 127.4% above the national average, according to the Council for Community and Economic Research. New York sports the second-highest living costs of any state, behind only Hawaii.

Despite boasting an average income for residents age 65 and older that's among the top five in the country, the same age group suffers a poverty rate of 11.4%, worse than the national 9.4% rate.

Worst States for Retirement 2016

Our Methodology

To rank all 50 states, we weighed a number of factors:

Taxes on retirees, based on Kiplinger's Retiree Tax Map, which divides states into five categories: Most Tax Friendly, Tax Friendly, Mixed, Not Tax Friendly and Least Tax Friendly.

Cost-of-living, with data provided by FindTheData.com.

Average health care costs in retirement are from HealthView Services and include Medicare, supplemental insurance, dental insurance and out-of-pocket costs for a 65-year-old couple who are both retired and are expected to live to 87 (husband) and 89 (wife). With a national average of $387,731, the average couple can expect to spend about $8,400 per person per year in retirement on health care costs. Note: Some of the worst states for retirees have less than average costs in this category, a positive factor for most retirees, but other factors drove the lower rankings.

Rankings of each state's economic health are provided by the Mercatus Center at George Mason University and are based on various factors including state governments' revenue sources, debts, budgets and abilities to fund pensions, health-care benefits and other services.

Rankings of the health of each state's population of residents 65 and over are from the United Health Foundation and are based on 35 factors ranging from residents' bad habits (smoking and excessive drinking) to the quality of hospital and nursing home care available in the state.

Household incomes and poverty rates are from the U.S. Census Bureau. While many of the worst states for retirees in our rankings have above-average household incomes, high average living costs in those states tend to offset the higher incomes.

Final note: Population data, including the percentage of the population that is age 65 and older, is also provided by the Census data. They are highlighted in these rankings, but were not a factor in our methodology for ranking the states. We provided this additional information for readers to decide for themselves whether they are important factors. Some retirees may want to live in states with higher-than-average retiree populations. For others, this isn't important.


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.

10 Worst States for Taxes on Your Retirement Nest Egg

Here is a nice article provided by Sandra Block of Kiplinger:

Retirees have special concerns when evaluating state tax policies. For instance, the mortgage might be paid off, but how bad are the property taxes—and how generous are the property-tax breaks for seniors? Are Social Security benefits taxed? What about other forms of retirement income—including IRAs and pensions? Does the state impose its own estate tax that might subtract from your legacy? The answers might just determine which side of the state border you’ll settle on in retirement.

These 10 states impose the highest taxes on retirees, according to Kiplinger’s exclusive 2016 analysis of state taxes. Three of them treat Social Security benefits just like Uncle Sam does—taxing as much as 85% of your benefits. Exemptions for other types of retirement income are limited or nonexistent. Property taxes are on the high side, too. And if that weren’t bad enoug h, some of these states are facing significant financial problems that could force them to raise taxes, cut services, or both.

10.  Utah:

State Income Tax: 5% flat tax

Average State and Local Sales Tax: 6.69%

Estate Tax/Inheritance Tax: No/No

The Beehive State joins our list of least tax-friendly states this year, replacing Rhode Island (which no longer taxes Social Security benefits for residents with adjusted gross income of as much as $80,000/individual, $100,000/joint).

Utah offers few tax breaks for retirees. Income from IRAs, 401(k)s, pensions and Social Security benefits is taxable at the 5% flat tax rate. The state does offer a retirement-income tax credit of as much as $450 per person ($900 for a married couple). The credit is phased out at 2.5 cents per dollar of modified adjusted gross income over $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for married people fili ng jointly.

On the plus side, property taxes are modest. Median property tax on the state's median home value of $223,200 is $1,480, 11th-lowest in the U.S.

9.  New York:

State Income Tax: 4.0% (on taxable income as much as $8,450/individual, $17,050/joint) – 8.82% (on taxable income greater than $1,070,350/individual, $2,140,900/joint)

Average State and Local Sales Tax: 8.49%

Estate Tax/Inheritance Tax: Yes/No

New York doesn’t tax Social Security benefits or public pensions. It also excludes as much as $20,000 for private pensions, out-of-state government pensions, IRAs and distributions from employer-sponsored retirement plans. New York allows localities to impose an additional income tax; the average local levy is 2.11%, per the Tax Foundation.

The Empire State also has some of the highest property and sales tax rates in the U.S. Food and prescription and nonprescription drugs are exempt from state s ales taxes, as are greens fees, health club memberships, and most arts and entertainment tickets.

The median property tax on the state's median home value of $279,100 is $4,703, the 10th-highest rate in the U.S.

While New York has an estate tax, a law that took effect in 2015 will make it less onerous. Estates exceeding $4,187,500 are subject to estate tax in fiscal year 2016–2017, with a top rate of 16%. The exemption will rise by $1,062,500 each April 1 until it reaches $5,250,000 in 2017. Starting Jan. 1, 2019, it will be indexed to the federal exemption. But if you’re close to the threshold, get a good estate lawyer, because New York has what’s known as a "cliff tax." If the value of your estate is more than 105% of the current exemption, the entire estate will be subject to state estate tax.

8.  New Jersey:

State Income Tax: 1.4% (on as much as $20,000 of taxable income) – 8.97% (on taxable income greater than $500,000)

Average State and Local Sales Tax: 6.97%

Estate Tax/Inheritance Tax: Yes/Yes

The Garden State's tax policies create a thicket of thorns for some retirees.

Its property taxes are the highest in the U.S.The median property tax on the state's median home value of $313,200 is $7,452.

While Social Security benefits, military pensions and some retirement income is excluded from state taxes, your other retirement income could be taxed as high as 8.97%. And New Jersey allows localities to impose their own income tax; the average local levy is 0.5%, according to the Tax Foundation.

Residents 62 or older may exclude as much as $15,000 ($20,000 if married filing jointly) of retirement income, including pensions, annuities and IRA withdrawals, if their gross income is $100,000 or less. However, the exclusion doesn’t extend to distributions from 401(k) or other employer-sponsored retirement plans.

New Jersey is one of only a couple of states that impose an inheritance and an estate tax. (An estate tax is levied before the estate is distributed; an inheritance tax is paid by the beneficiaries.) In general, close relatives are excluded from the inheritance tax; others face tax rates ranging from 11% to 16% on inheritances of $500 or more. Estates valued at more than $675,000 are subject to estate taxes of up to 16%. Assets that go to a spouse or civil union partner are exempt.

Proposals to increase the state’s estate-tax threshold—the lowest in the U.S.—to levels that would ensnare fewer estates have been derailed by the state’s financial woes. George Mason University’s Mercatus Center ranks New Jersey 48th in its analysis of states’ fiscal health.

7.  Nebraska:

State Income Tax: 2.46% (on taxable income as much as $3,060/individual, $6,120/joint) – 6.84% (on taxable income greater than $29,590/individual, $59,180/joint)

Average State and Local Sales Tax: 6.87%

Estate Tax/Inheritance Tax: No/Yes

The Cornhusker State taxes Social Security benefits, but new rules that took effect in 2015 will exempt some of that income from state taxes. Residents can subtract Social Security income included in federal adjusted gross income if their adjusted gross income is $58,000 or less for married couples filing jointly or $43,000 for single residents.

Nebraska taxes most other retirement income, including retirement-plan withdrawals and public and private pensions. And the state’s top income-tax rate kicks in pretty quickly: It applies to taxable income above $29,590 for single filers and $59,180 for married couples filing jointly.

Food and prescription drugs are exempt from sales taxes. Local jurisdictions can add an additional 2% to the state rate.

The median property tax on the state's median home value of $133,800 is $2,474, the seventh-highest property-tax rate in the U.S.

Nebraska's inheritance tax is a local tax, ranging from 1% to 18%, administered by counties. Assets left to a spouse or charity are exempt.

6.  California:

State Income Tax: 1% (on taxable income as much as $7,850/individual, $15,700/joint) – 13.3% (on taxable income greater than $1 million/individual, $1,052,886/joint)

Average State and Local Sales Tax: 8.48%

Estate Tax/Inheritance Tax: No/No

California exempts Social Security benefits, but all other forms of retirement income are fully taxed. That’s significant, because residents of the Golden State pay the third-highest effective income tax rate in the U.S.

Early retirees who take withdrawals from their retirement plans before age 59½ pay a 2.5% state penalty on top of the 10% penalty imposed by the IRS.

At 7.5%, state sales taxes are the highest in the country, and local taxes can push the combined rate as high as 10%.

The median property tax on the state's median home value of $412,700 is $3,160.

5.  Montana:

State Income Tax: 1% (on as much as $2,900 of taxable income) – 6.9% (on taxable income greater than $17,400)

Average State and Local Sales Tax: None

Estate Tax/Inheritance Tax: No/No

You won’t pay sales tax to shop in the Treasure State, but that may be small comfort when you get your state tax bill.

Montana taxes most forms of retirement income, including Social Security benefits, and its 6.9% top rate kicks in once your taxable income exceeds a modest $17,400.

Montana allows a pension- and annuity-income exemption of as much as $3,980 per person if federal adjusted gross income is $35,180 ($37,170 if filing a joint return) or less. If both spouses are receiving retirement income, each spouse can take up to the maximum exemption if the couple falls under the income threshold. Montana also permits filers to deduct some of their federal income tax.

The median property tax on the state's median home value of $196,800 is $1,653, below average for the U.S.

4.  Oregon:

State Income Tax: 5% (on taxable income as much as $3,350/individual, $6,700/joint) – 9.9% (on taxable income greater than $125,000/individual, $25 0,000/joint)

Average State and Local Sales Tax: None

Estate Tax/Inheritance Tax: Yes/No

Although Oregon doesn’t tax Social Security benefits, most other retirement income is taxed at your top income tax rate. Making matters worse, localities can tack on an additional 2% of income taxes.

The Beaver State allows residents to subtract as much as $6,350 of their current year’s federal income tax liability, after credits. There is also a retirement-income credit for seniors with certain income restrictions.

One bright spot in Oregon's tax picture: no sales tax. You can buy anything in the state and never pay a penny in sales taxes.

The median property tax on the state's median home value of $239,800 is $2,570.

Oregon's estate tax applies to estates valued at more than $1 million—one of the lowest thresholds nationwide. The top rate is 16%. Assets left to a surviving spouse or registered domestic partner are exempt.

3.  Minnesota:

State Income Tax: 5.35% (on taxable income less than $25,180/individual, $36,8 20/joint) – 9.85% (on taxable income greater than $155,650/individual, $259,420/joint)

Average State and Local Sales Tax: 7.27%

Estate Tax/Inheritance Tax: Yes/No

The North Star State offers cold comfort on the tax front to retirees.

Social Security income is taxed to the same extent as it is on your federal return. Pensions are taxable regardless of whether they are military, government or private pensions. Income tax rates and the sales tax rate are high.

Food, clothing, and prescription and nonprescription drugs are exempt from state sales tax. A few cities and counties also add a sales tax.

The median property tax on the state's median home value of $188,300 is $2,148, about average for the U.S. Minnesota homeowners of any age may be eligible for a refund if property taxes are high relative to their incomes.

Minnesota’s estate tax hits estates valued at just $1.6 million or more. Assets left to a surviving spouse are exempt. The maximum estate tax rate is 16%.

2.  Connecticut:

State Income Tax: 3% (on taxable income as much as $10,000/individual, $20,000/joint) – 6.99% (on taxable income greater than $500,000/individual, $1 million/joint)

Average State and Local Sales Tax: 6.35% for most items; 7% for certain luxury items

Estate Tax/Inheritance Tax: Yes/No

The Constitution State is a tax nightmare for many retirees.

Its real estate taxes are the fourth-highest in the nation. Median property tax on the state's median home value of $267,200 is $5,369.

Most types of retirement income are taxed, along with a portion of Social Security benefits for taxpayers above certain income thresholds. (Social Security benefits are exempt for individual taxpayers with federal adjusted gross income of less than $50,000 and for married taxpayers filing jointly with federal AGI below $60,000.) Retirement plans, private pensions and out-of-state government and federal civil-service pensions are fully taxed. Fifty percent of federally taxable military income is exempt.

There are no local sales taxes in Connecticut, so you’ll pay only the statewide rate of 6.35% on your purchases. Clothing, footwear and accessories priced at more than $1,000 and luxury items (such as jewelry) worth more than $5,000 are taxed at 7.75%.

The state also faces massive pension liabilities that could force it to raise taxes even higher. The Mercatus Center at George Mason University ranks it 50th in its analysis of states’ fiscal health.

Connecticut imposes an estate tax on estates valued at $2 million or more at a progressive rate starting at 7.2%. The rate rises to a maximum of 12% for an estate valued above $10.1 million. Connecticut is the only state with a gift tax that applies to real and tangible personal property in Connecticut and intangible personal property anywhere for permanent residents.

1.  Vermont:

State Income Tax: 3.55% (on taxable income as much as $39,900/individual, $69,900/joint) – 8.95% (on taxable income greater than $415,600/individual, $421,900/joint)

Average State and Local Sales Tax: 6.17%

Estate Tax/Inheritance Tax: Yes/No

The Green Mountain State doesn't coddle retirees. It has a steep top income tax rate, and most retirement income is taxed. Vermont treats Social Security benefits the same way the federal government does, which means as much as 85% of your benefits could be taxed.

Vermont limits deductions to $15,000 for single residents and $31,500 for married couples. If your income is $1 million, that would cost you about $5,000 in additional state taxes every year.

Local jurisdictions can add 1% to the state sales tax. Food for home consumption, clothing, and prescription and nonprescription drugs are exempt. But you’ll pay 9% tax on prepared foods, restaurant meals and lodging, and 10% if you order a glass of wine or beer in a restaurant.

The median property tax on the state's median home value of $214,600 is $3,797, the eighth-highest property-tax rate in the U.S. Eligible Vermont residents can make a claim for a rebate of their school and munici pal property taxes if their household income does not exceed a certain level.

Like many of the states on this list, Vermont imposes its own estate tax on estates that exceed $2.75 million – a relatively low threshold that ensnares more estates than the federal death tax. The maximum estate-tax rate is 16%. Assets left to a surviving spouse are exempt.

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 no t be construed as investment, legal, accounting or tax advice.

Millennials: On Investing and Retirement

Move over Baby Boomers. These days all eyes are on Millennials, those young adults between the ages of 18 and 34 who are now America's largest living generation.1 According to the U.S. Census Bureau, Millennials in the United States number more than 75 million -- and the group continues to expand as young immigrants enter the country.1

Due to its size alone, this generation of consumers will undoubtedly have a significant impact on the U.S. economy. When it comes to investing, however, the story may be quite different. One new study found that 59% of Millennials are uncomfortable about investing due to current economic conditions.2 Another study revealed that just one in three Millennials own stock, compared with nearly half of Generation-Xers and Baby Boomers.3

On the Retirement Front

How might this discomfort with investing manifest itself when it comes to saving for retirement -- a goal for which time is on Millennials' side? According to new research into the financial outlook and behaviors of this demographic group, 59% have started saving for retirement, yet nearly two-thirds (64%) of working Millennials say they will not accumulate $1 million in their lifetime. Of this group, half have started saving for retirement -- 37% of which are putting away more than 5% of their income -- despite making a modest median $27,900 a year.2

As for the optimistic minority who do expect to save $1 million over time, they enjoy a median personal income that is about twice that -- $53,000 -- of the naysayers. Three out of four have started saving for retirement and two-thirds are deferring more than 5% of their income; 28% are saving more than 10%.2

So despite their protestations, their reluctance to embrace the investment world, and a challenging student loan debt burden -- a median of $19,978 for the 34% who have student loan debt -- Millennials are still charting a slow and steady course toward funding their retirement.2

For the Record …

Here are some additional factoids about Millennials and retirement revealed by the research:

•  The vast majority (85%) of Millennials view saving for retirement as a key passage into becoming a "financial adult."

•  A similar percentage (82%) said that seeing people living out a comfortable retirement today encourages them to want to save for their own retirement.

•  Those who have started saving for retirement said the ideal age to start saving is 23.

•  Those who are not yet saving for retirement say they will start by age 32.

•  Of those who are currently saving for retirement, 69% do so through an employer-sponsored plan.

•  Three out of four said they do not believe that Social Security will be there for them when they retire.

•  Most would like to retire at age 59.
 
Source(s):

1.  Pew Research Center, "Millennials overtake Baby Boomers as America's largest generation," April 25, 2016.

2.  Wells Fargo & Company, news release, "Wells Fargo Survey: Majority of Millennials Say They Won't Ever Accumulate $1 Million," August 3, 2016.

3.  The Street.com, "Only 1 in 3 Millennials Invest in the Stock Market," July 10 2016.
 

Required Attribution


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

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


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.
 

Business Owner or Corporate Exec: Are You On Track to Retire (Someday)?

If you are a business owner, corporate executive or similar professional, “success” often means at least two things. There’s the career satisfaction you’ve worked your tail off for. Then there’s that question that starts whispering in your ear early on, growing louder over time: 

Am I on track to retire on my own terms and timeline? (And if not, what should I do about it?) 

While every family’s circumstances are unique and personalized retirement planning is advised, the ballpark reference below can help you consider how your current nest eggs stack up. It shows the savings you’ll want to have accumulated, assuming the following: 

•  You’re saving 10–16% of your salary (or equivalent income) and receiving an annual raise of 3%.

•  Your annual investment return is 6%.

•  At retirement (age 65) you want to spend 40% of your final salary (with Social Security making up an additional 20–40% of the same). 

•  You plan to withdraw 4% annually from your portfolio.

Salary vs. Age vs. Desired Savings Today (To Retire at 65)

Savings 2.JPG

Still feeling a little overwhelmed by the size of the chart? Let’s look at some plausible scenarios. 

Let’s say you are a 40-year-old couple earning $100,000 annually. The table suggests you should have saved about $317,000 by now. If you continue to save 10–16% of your salary every year and the other assumptions above hold true as well, you should be on track to retire at age 65 and replace 40% of your final paychecks by withdrawing 4% of your portfolio each year. If you’re already 50 and pulling in $200,000, your savings should be right around $1.067 million to be on track in the same manner. 

Do your numbers not add up as well as you’d like? No need to panic, but it’s likely you’ll want to get planning for how you can make up the gap. That may mean saving more, retiring later in life, investing more aggressively or employing a judicious combination of all of the above. 

If you’re not sure how to get started, I recommend turning to a professional, fee-only advisor who you’re comfortable working with. He or she should be able to offer you an objective perspective to help you decide and implement your next steps. In the meantime, here is one tip to consider. 

How To Channel Your Salary Increases Into Retirement Assets

As you approach retirement, many business owners’ or corporate executives’ salaries tend to increase, while some of their expenses (such as the mortgage) remain level. If that’s the case and you’re behind on your retirement savings, you may be able to direct your annual salary increases into increased saving. 

For example let’s say you’ve been saving 7% of your salary, or $10,500/year, and you receive a 3% raise.  Take that extra 3% ($4,500) and direct it into savings. Without having to alter your current spending, you’re now saving 9.7% of your salary or $15,000 total.  If you get another 3% raise the following year, do it again and you’ll be saving $19,635 or about 12.3% of your $159,135 salary. 

And so on. If you can’t allocate all of every raise every year to increased savings, do as much as you’re able and the numbers should start adding up, without having to significantly tighten your belt. Who knows, as you and your spouse see the numbers grow, you may even begin to enjoy the exercise. 

One repeated caveat before we go: Remember that the table above offers only rough saving guidelines. It’s certainly not the final word, and should not be taken as such. In addition to saving for retirement, you’ll want to ensure that the rest of your financial house is in order, so your plans won’t be knocked off course by life’s many surprises. 

Again, a financial professional can assist. He or she can help ensure that your investment portfolio is well diversified (to manage investment risk), your estate plan is current, your advance directives and insurance policies are in place, and your tax strategies are thoughtfully prepared.  

So, start with the chart, and give us a call if we can tell you more. 


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.

Cash Balance Plans: Offering a Break to Successful Doctors, Dentists and Small Business Owners in Boulder CO

For successful small business owners, cash balance plans can offer larger contributions than 401(k) limits allow.

Are you a small, highly profitable business owner looking for ways to (a) reduce your current taxes and/or (b) dramatically step up your tax-sheltered retirement savings?  If so, a cash balance plan may be worth looking into for your company.

What Is a Cash Balance Plan?

A cash balance plan is a retirement savings vehicle, crafted with the small business owner in mind. When combined with a safe harbor 401(k) or profit sharing plan, it can allow you to make significant, tax-deductible contributions to your own and select partners’ retirement savings, while controlling the costs of your contributions to employee retirement accounts.

What Are the Potential Benefits?

Here are a few of the possibilities a cash balance plan can offer:

·         It can position you to contribute considerably more toward your tax-sheltered retirement savings than 401(k) limits allow – up to $200,000 or more annually (depending on your age, income, years in business and other IRS limits).

·         Your annual contributions are tax-deductible.

·         You can make varying levels of contributions for you and partners in your firm.

·         You must contribute to your employees’ 401(k) accounts, but the contributions can be modest, typically in the range of 5.0–7.5% employee’s salary.

 

What Does It Take to Set Up a Cash Balance Plan?

In addition to accompanying it with a 401(k) or profit-sharing plan as required, your cash balance plan usually works best when all of these conditions are met:

·         You are a small business owner, age 40 or older, with 1–10 employees.

·         Your expected income is relatively predictable for at least the next five years.

·         You can contribute up to $200,000 or more annually for the next five years.

 

How Does It Work?

To establish your cash balance plan, you open one trust investment account for the plan, where investments are pooled for participants. Participants typically include you, and any partners or key employees. As the business owner and plan sponsor, you are the plan’s fiduciary trustee, charged with prudently managing its investments (or selecting and monitoring an investment manager to do so for you).

Each cash balance plan participant has a hypothetical “account” that earns a set interest credit annually, regardless of the plan’s actual investment performance. Contributions are then adjusted annually as needed, to fill any underperformance gap that may occur.

Investment Strategy Counts

If you’re reading between the lines, the structure of your plan means that it is both your fiduciary duty as well as in your best financial interests to be careful about how you invest your cash balance plan’s pooled assets.

You probably have taken or are continuing to take plenty of rewarding risks in your thriving business. Your cash balance plan serves as venue for offsetting those risks with a stable approach to preserving the wealth you’ve worked so hard to accumulate. Typically, we’d suggest something in the range of a three percent performance target, generated by a conservatively managed, low-cost portfolio.

Cash Balance Plans in Action

Case # 1 – A Medical Practice with 1-10 Employees*

Dr. Curtis, age 53, is a successful internal medicine practitioner with four employees. During the next decade, she wants to maximize her own retirement savings while contributing to her staff’s retirement accounts. Here’s how that might look:

CB chart1.JPG

Dr. Curtis’ estimated annual tax savings is approximately $78,500, with 93 percent of her contributions funding her own retirement.

Case #2 – Four Business Partners with No Employees*

Four partners in a successful law firm have varying preferences for funding their retirement accounts during the next five years. A cash balance plan can help the senior partners save at accelerated levels, while junior partners can contribute more modestly. Here’s what that might look like:

CB chart2.JPG

The partners’ combined annual estimated tax savings is approximately $145,000.

Careful Planning: The Usual Key to Success

As you might expect, even if a cash balance plan sounds right for you, there are plenty of caveats to consider, including ensuring that you and your plan remain compliant with IRS tax regulations as well as the Department of Labor’s fiduciary rules. We recommend consulting with professional tax and financial specialists to determine how the details apply to you.

* Case illustrations are reprinted with permission from Dedicated Defined Benefit Services. They assume combined federal and state tax rate of 38%. Cases are based on specific assumptions and used for illustration only.

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.