4 Tax Breaks Recently Made Permanent

Congress recently passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, which makes several previous temporary tax breaks permanent.  These tax breaks have provided valuable benefits to taxpayers and have caused planning headaches every year as people waited to find out if they would be extended or lapse.  Fortunately, those planning headaches will subside as these tax breaks are now permanent.

1. Qualified Charitable Distributions – The qualified charitable distribution rule allows a taxpayer who is over age 70.5 to donate their required minimum distribution (RMD) directly to charity and avoid having to claim the distribution as income.  The taxpayer does not get a tax deduction for the donation because they weren’t forced to include the distribution as taxable income. In most cases, the ability to avoid claiming the RMD as income provides a larger tax benefit than the alternative, which is including the RMD as taxable income and then writing off the donation as a deduction.  This is especially advantageous for taxpayers who use the standard deduction on their tax return.

2.  State and Local Sales Tax Deduction – Most states have an income tax and taxpayers who itemize their deductions on their Federal tax return can deduct the state income taxes they pay.  What about states that don’t charge an income tax like Florida or Texas? The state and local sales tax deduction allows a taxpayer to deduct whichever is higher; state income taxes or state sales taxes.  This is very beneficial if your state doesn’t charge an income tax. 

3. American Opportunity Tax Credit – This tax break allows taxpayers to receive a credit of up to $2,500/year for up to four years for college tuition and expenses.  It replaced the Hope Scholarship Credit and has provided greater tax relief to more people. The American Opportunity Tax Credit was scheduled to lapse at the end of 2017 but has been made permanent to the relief of parents with children in college or approaching college.

4.  Enhanced Child Tax Credit – The child tax credit provides a $1,000 credit for every qualified child in a taxpayer’s household as long as their income is below $110,000 for a married couple ($75,000 for an individual). For those with low incomes, the credit was refundable in the amount of 15% of their earned income over the threshold, which was set at $3,000 until 2017.  The PATH Act makes the $3,000 threshold permanent.

Steven Elwell, CFP®, December 24, 2015

Learn more about my services at www.sbvfinancial.com

5 Steps to Help You Avoid Retirement-Planning Pitfalls

As with most transitions, the key to smoothly moving into retirement is preparation. As you make the shift from accumulating wealth to spending down your savings, it can be hard to juggle the many moving pieces of your strategy. But pre-retirees must be careful to avoid common saving and investing pitfalls that can derail their plans. To help ensure a successful retirement, follow these five steps.

1. Know what you spend

Knowing how much money you will need each year to facilitate the lifestyle you want is essential to your financial independence in retirement. And it’s critical to figure this out before retiring, yet many fail to do so.

Without knowing what you need, how can you ever know if you have enough saved to retire? Making this mistake could mean running out of money or facing a dramatic decline in your standard of living early in retirement.

The solution is to track what you spend before retiring and adjust for any changes you expect to make in retirement, such as more frequent travel or paying off your mortgage.

2. Look up your life expectancy

According to the Social Security Administration, the average 65-year-old man will live to age 84, while the average 65-year-old woman will live to age 86. Medical advances continue to extend life expectancies, yet despite the statistics, too many pre-retirees believe they won’t live past age 75.

Living a long life is wonderful for many reasons, but it can mean outlasting your assets if you don’t plan properly. If a 65-year-old couple needs $50,000 per year in retirement and lives 10 years longer than they planned for, that’s an additional half a million dollars—and that doesn’t even account for inflation.

To make sure your retirement savings last as long as you do, it’s better to be conservative when estimating how long you’ll live — to err on the side of assuming you’ll live longer. This is why I often create financial plans for clients assuming they’ll live to age 95 or longer.

3. Plan for long-term care costs

The average yearly cost for a private room in a nursing home in New York in 2012 was $125,736 according to the Department of Health and Human Services. That cost is expected to rise to $197,328 by 2022. Just a few years in a nursing home could easily derail even the best-laid retirement plans. And HHS estimates that 70% of people turning age 65 will eventually need some form of long-term care.

There are ways to plan for this potential expense, including buying long-term care insurance or setting enough money aside to self-insure. One strategy that won’t work is relying on Medicare to cover the cost. The program pays for only a limited amount of care.

4. Reconsider your risk

I recently met a client who was in reasonably good shape to retire but had 25% of her savings in a single stock. That particular company had experienced a rough couple of years while the S&P 500 saw strong gains. Sadly, she had missed out on a great run in the stock market by not diversifying, and she took an unnecessary risk.

The stock market is a fickle animal and shouldn’t be underestimated. Things can move quickly in both directions, so it’s important to have an appropriate strategy as you enter retirement. As you transition from saving to spending, you have less room for error with investments. Pre-retirees should re-evaluate their investment strategy and consider the risks they are taking.

5. Anticipate inflation (hint: stay in stocks)

The crash of 2008 left many investors shellshocked. I’ve come across several people who are approaching retirement with almost all of their money in cash. They tell me that they’ve done the math and that their savings are more than adequate. But there’s one glaring problem: They haven’t accounted for the effects of inflation. Since many people will be in retirement for more than 20 years, inflation must be a consideration.

According to the U.S. Inflation Calculator, it would take nearly $70,000 today to replicate living expenses of $50,000 for someone who retired in 2000. While inflation may be just 1%-2% a year now, there is no way to predict what it might be in the future. The best way to protect yourself is to keep at least some portion of your portfolio invested in stocks, which have proven to be one of the best guards against inflation over long periods of time.

*This article was originally published on NerdWallet.com

Learn more about my services at www.sbvfinancial.com 

4 Ways to Take Advantage of a Down Market

The S&P 500 is down 12.5% from its 52-week high as of 8/25.  The Global Dow is down closer to 14%.  The drop has been quick and broad.  This has caused many investors to be nervous and fearful of a larger decline similar to 2008. 

Time will tell if this turns in to something worse, but most investors should keep a long-term view and stick with their game plan.  Those who have a sound financial plan know they are investing towards a goal; the day-to-day, month-to-month changes in the market do not affect their plan.

Keeping that in mind, many people will ask: what should I do?  There are some things investors should consider while the market is temporarily down.  Here is my short list:

1. Tax Loss Harvesting – Those who have non-retirement brokerage accounts have the opportunity to sell an investment that has lost money and write off that loss on their tax return.  Here is an example:

You pay $10,000 for shares of XYZ mutual fund

The value of your shares drops to $7,000

If you sell the shares, you realize a $3,000 loss on your investment

You can take the $7,000 of proceeds from the sale of XYZ and reinvest in another mutual fund that is similar but not identical (to avoid wash sale rules).  Reinvesting in something similar allows you to recoup your loss if that asset class recovers. 

The losses you realize will help offset any capital gains you have realized in the same tax year.  If you have no capital gains, you are allowed to claim up to $3,000 in losses on your tax return to offset your ordinary income. Assuming you were in the 25% marginal tax bracket, this offset against ordinary income would save you $750. Lastly, if you have more than $3,000 in losses, the remaining balance carries forward to offset taxes in future years.  Obviously, tax loss harvesting is a powerful strategy.

2.  Roth Conversions – Few people realize that a large stock market decline is a great time to consider converting a traditional IRA to a Roth IRA.  There will be taxes owed at the time of conversion, so make sure you have the cash available outside of the retirement accounts to pay the bill. Here is how a conversion may be wise during a decline:

Your IRA worth $20,000 drops 30% to $14,000 due to stock market decline

You convert the IRA to a Roth IRA while it is worth $14,000. This is the amount that you will owe income taxes on.

If the market recovers 50% after the conversion, the $14,000 Roth IRA grows to $21,000.  The $7,000 of growth is all income tax free!

3.  Rebalancing – Your portfolio mix may get out of line when the market moves downward sharply.  Imagine you had a target portfolio of 50% stocks and 50% fixed income.  If the stock market drops 15% and the bond market goes up 2%, you now have an overall mix of approximately 45% stocks and 55% fixed income.

Naturally, if you were to rebalance, you would sell some of the fixed income and buy some of the stocks to get back to the 50/50 mix.  Assuming a stock market recovery, you effectively would be buying stocks low and selling fixed income high.  I’ve seen this disciplined strategy pay big dividends for investors over the long-term.

4.  Cash to Invest – I often see clients who build up large cash positions in the bank because they don’t spend all the money they earn.  As the bank account grows larger, they eventually consider investing some of their excess cash.  If you have excess cash, now would be a great time to put it to work.  While no one can predict if this recent decline will get worse before it gets better, one thing for sure is that prices are more than 10% off their recent highs. 

Most of us look for discounts when we shop for things like cars or clothes.  Unfortunately, very few people think the same way about the stock market.  It has been said many times that stocks are one of the few things people don’t want to buy on sale.  Framing the decision to invest your cash when the market is down as an opportunity will go a long way towards building your financial future.

Steven Elwell, CFP®, August 26, 2015

Learn more about my services at www.sbvfinancial.com

Retiring? 4 Reason to Delay Social Security

As you near retirement, you face many important financial decisions. How much can you afford to spend each year while making sure you don’t run out of money? When should you start taking your pension, if you get one? Which account should you pull money from first?

One of the biggest decisions is when to start drawing Social Security. According to theCenter for Retirement Research at Boston College, about 42% of men and 47% of women start taking benefits at age 62, which is the earliest you can do so. The earlier you start taking benefits, the less you’ll receive every month. The longer you wait, the larger your monthly benefit will be.

Some people don’t really have any choice and must start benefits immediately. But those who do have a choice should consider the potential benefits of waiting. Here are four reasons to think about delaying your Social Security.

1. People are living longer than ever

According to Social Security’s life expectancy calculator, the average man reaching age 62 will live to almost 84, while the average woman reaching 62 will live to 86. This means half of 62-year-olds can expect to live even longer than those ages! With continued advances in medical technology, life expectancy will probably continue to increase. This is good news for longevity — but not so good news for finances. You’ll need your money to last as long as you do. One way to help make that happen is to delay Social Security to receive a higher benefit, which can take stress off your savings. A higher benefit also means your annual cost of living adjustment (COLA) will result in more money in real terms. Here’s an example from a year with a 2% COLA:

$1,000/month benefit x 2% COLA = $20/month increase$1,800/month benefit x 2% COLA = $36/month increase

Because you’d be starting from a higher base, your benefit would increase by $432 in such a year rather than $240. The extra $192 is excellent protection against inflation.

2. Benefits grow 8% each year you wait

For each year you delay starting Social Security between 62 and 70, your monthly benefit increases by about 8%. In today’s low-interest-rate environment, it is impossible to find an 8% guaranteed return. Any investment professional worth his salt will tell you the stock market cannot guarantee that type of return every year.

As a real-life example, I have one client whose benefit amount at age 62 is $1,736 a month. If that person waits until age 70, the benefit increases to $3,259 a month. That’s an 87.7% increase — close to twice as much! Waiting till age 70 will, of course, mean missing out on eight years’ worth of benefits, but going back to my first point, if you live long enough, you will more than make up the difference. The client in the example would do so before reaching 80.

3. Big IRA/401(k) tax savings possible

Once you’ve decided to delay Social Security, the natural question is: Where do you get income while waiting for your benefits to start? Since most people in this situation will not have any other source of taxable income, this provides an amazing opportunity to take money out of an IRA or 401(k) at low or zero tax rates.

This is the grand slam of tax planning. Imagine putting money in your 401(k) to avoid a current tax rate of 25% or more, allowing it to grow for decades tax-deferred and then taking it out in retirement without owing any taxes. I’ve had clients be able to do this with proper planning, and it’s a wonderful result. If you don’t need the money immediately, consider converting it to a Roth IRA. You take advantage of low or zero tax rates, and then your money can grow tax-free from then on.

4. Spousal benefits can pay you to wait

 A big financial benefit of marriage is the ability to collect benefits based on your spouse’s Social Security record rather than your own. It can be a complicated decision, but basically you can collect a benefit equal to 50% of your spouse’s full retirement age (FRA) benefit once you hit your own full retirement age — 65 to 67, depending on when you were born. You can collect this benefit and continue to delay your own benefit until age 70, at which time you switch to your own higher monthly payment. You can claim a spousal benefit before reaching your FRA, but Social Security will only give you the higher of your own benefit or the spousal benefit, and you will lose the ability to defer your own benefit.

Divorced/widowed people eligible, too

Those who are divorced but were married longer than 10 years have a right to claim spousal benefits based on their ex’s record. (This has no effect on their ex’s benefits.) Those who are widowed are allowed to claim survivor’s benefits as early as age 60 with no effect on their own retirement benefit.

I strongly encourage anyone who is divorced or widowed to visit with an expert to help make smart claiming decisions. Social Security agents are not allowed to give advice and may not even be knowledgeable in basic claiming strategies.

Learn more about how I help retirees at www.sbvfinancial.com

*This article was originally published on NerdWallet.com

Big Changes to New York’s 529 Plan

For years one of the biggest knocks against New York’s 529 College Savings Plan was the lack of international stocks and bonds available in the extremely popular age-based investment options.  This was a large omission by Vanguard, the plan’s investment manager, which drove some people to use other state’s 529 plans and forego the New York state tax deduction.

Fortunately, the complaints must have made an impact as Vanguard recently announced that as of July 30^th they will be adding the Vanguard Total International Stock Index Fund and Vanguard Total International Bond Index Fund to the underlying funds used in the age-based options.  You can read more about the changes here.

The age-based options put the investment strategy on autopilot for account owners.  As the beneficiary gets older, the investments become more conservative since they are closer to starting withdrawals from the plan.  These options are popular among investment advisors who recommend the New York Direct 529 plan.

Vanguard also announced it would be replacing the Vanguard Inflation-Protected Securities Fund with the Vanguard Short-Term Inflation-Protected Securities Index Fund in the Income Portfolio.  Both of these moves are wins for those who plan to save for college using New York’s Direct 529 Plan.  The plan remains low-cost at a paltry .16% management fee.

The timing may be a benefit as well since international stocks have lagged U.S. stocks over the past five years and may be poised for a turnaround.  Also, replacing the Inflation-Protected Fund with a Short-Term Inflation Protected Fund may help protect short-term investors against the effect of rising interest rates over the next few years.

Steven Elwell, CFP®

www.sbvfinancial.com

5 Good Times to Convert to a Roth IRA

If you’ve been planning ahead for retirement, you probably have an IRA (or a 401(k) that will eventually be rolled over to an IRA). You probably know that you received a tax deduction when you contributed to that IRA. You probably also know that when you start taking money out of that IRA you will owe income taxes.

But did you know you can convert that IRA to a Roth IRA?

Roth IRAs grow tax-free, and withdrawals are tax-free as long as they are qualified. Once you hit retirement, your Roth IRA account will be your most valuable money because of that tax-free structure.

When you convert a traditional IRA to a Roth, you’ll have to pay some income taxes upfront: Any pretax amount you convert must be included in your taxable income for the year of the conversion. But don’t let this deter you from converting when there are real advantages to doing so. Here are five times to consider converting:

1. When you are in a low tax bracket

I have a client who retired recently, and we have strategically decided to delay starting his Social Security benefits. He will have no income other than interest and dividends in 2016. Since he is married, we expect to be able to convert around $20,000 of his IRA to a Roth IRA, and he will not owe any taxes because personal exemptions and the standard deduction will reduce his taxable income to zero. This is the proverbial tax grand slam in that he received a tax deduction for his IRA contributions, the proceeds grew tax-deferred, and he ultimately avoided paying any federal and state taxes at conversion!

2. When you don’t need the money and plan to leave it to your kids

If you’ve done an adequate job of saving and it’s extremely unlikely you will need all of your savings for retirement, consider a Roth conversion as a gift to your kids. This makes even more sense if your kids (or grandkids) are in a higher tax bracket than you are. You pay the taxes now, and the kids inherit an account that is completely tax-free and continues to grow tax-free over the rest of their lives.

3. When your investments are temporarily low

In the 2007-2009 recession, the stock market dropped nearly 50% — but it made up the losses within five years. Smart investors who recognized that they have a long time horizon took advantage of that temporary decline. Imagine that your IRA started at $100,000, then dropped to $50,000, and you converted to a Roth IRA at that point, paying income taxes on $50,000. A few years later, the $50,000 in the converted Roth IRA was once again worth $100,000, but now is completely tax-free. You avoided paying income taxes on $50,000!

4. When you believe tax rates will go up

I’m not in the business of guessing where tax rates will go. Some people think, based on who gets elected and who controls Congress, that federal tax rates might go up at some point. If you think that’s true, then converting to a Roth IRA and paying taxes now, rather than higher rates later, might make sense.

5. When you want to reduce the value of your estate for tax purposes

This is a more remote scenario, since the vast majority of estates are exempt from estate tax. But for those with a large enough estate, it may make sense to convert to a Roth IRA during your lifetime. Converting means that you will reduce the value of your estate because you are paying taxes now instead of later. A smaller estate means a lower estate tax bill. Remember that with a traditional IRA, some of that money already “belongs” to the government because it will be paid in taxes upon withdrawal, but all of the money in your IRA will included when calculating the value of your estate. In effect, with a traditional IRA you could be paying estate taxes on the government’s money. Paying taxes on taxes is usually a bad thing.

Learn more about me at www.sbvfinancial.com 

This article was originally published on NerdWallet.com
http://www.nerdwallet.com/blog/finance/advisorvoices/5-good-times-convert-roth-ira/ 

How I Made My Credit Card Company Fund My Roth IRA

Saving is hard.  It feels like we are depriving ourselves from the fun things we work hard for.  For this reason, any tip or trick we can use to help us save or just make saving less painful becomes very useful.  Here is one of my tricks:

First, I have the Citi® Double Cash* credit card that pays me 1% cash back on all purchases and another 1% cash back as I pay off those purchases.  This essentially equates to 2% cash back.  Let’s say in an average month I charge $3,000 worth of bills and purchases then immediately pay off the credit card at the end of the month to avoid any interest charges.  This should provide me with $60/month in cash back rewards for a total of $720/year.

Second, I have a higher interest checking account and Roth IRA at Charles Schwab & Co®*.  Every month I receive my cash back reward I transfer it to my high interest checking account.  From there, I immediately transfer the money to my Roth IRA.  Roth IRAs are funded with after-tax dollars, grow tax-free and any future withdrawals are tax-free as long as you follow the rules (which are easy to follow if you only use this money for retirement as intended).

The result of this strategy over 30 years if the investments earn 7% annually will be $68,012!  Not bad considering all the funding for this account came from cash back rewards paid by the credit card company. 

I would advise against this strategy if you are not disciplined enough to pay off your credit card each month.  At 12% or higher annual interest rate, it doesn’t take much for an ongoing credit card balance to charge more interest than you are receiving in cash back rewards.

*This is not an endorsement of the Citi® Double Cash credit card.  Search around for the best credit card based on your needs, or simply don’t use a credit card and stick to a budget to avoid potential interest charges. This also is not an endorsement of Charles Schwab & Co.®

Steven Elwell, CFP®, May 6, 2015
www.sbvfinancial.com
selwell@sbvfinancial.com

No April Fool’s Joke Here – NY Residents Receive a $1,062,500 Gift on April 1st

In 2014 New York passed a budget that finally addressed an estate tax that was driving people out of state.  The new legislation gradually increases the amount that escapes death taxes.  Here is the breakdown:

Before April 1, 2014                                       $1,000,000

April 1, 2014 – March 31, 2015                      $2,062,500

April 1, 2015 – March 31, 2016                      $3,125,000

April 1, 2016 – March 31, 2017                      $4,187,500

April 1, 2017 – December 31, 2018                $5,250,000

January 1, 2019 and beyond                           Matches the Federal exemption

As of April 1^st, 2015, if your estate is less than $3,125,000 it will not owe taxes to New York.  The Federal estate tax exemption is currently $5,430,000 per person. 

You may think this means there is no need for estate planning anymore, but you couldn’t be more wrong.  Good old New York will tax your entire estate if it’s 105% or more of the exemption amount.  This means if you are anywhere near the limit you had better do some planning!  The limit isn’t as difficult to get to as it seems when you factor in all the assets in your name plus the value of any life insurance you own on yourself.

I recently saw an example of how proper planning could have made a huge difference.  A client’s husband died with over $2 million in assets and left it all to his wife, which means no estate taxes were owed due to the spousal exemption. Unfortunately, now the wife has almost $4 million in her name alone, meaning if she passes away today the entire $4 million will be taxed by New York. This would result in hundreds of thousands of dollars of avoidable estate taxes!

As always, make sure you regularly review your situation as laws and limits continue to change.  A few hours spent each year could save you big money!

Learn more at www.sbvfinancial.com 

Buffalo Named 13th Worst City for Retirees (I Disagree)

WalletHub recently studied 150 cities in America to determine which are the worst for retirees.  In compiling the list, they looked at 25 factors across five categories including affordability, quality of life, health care, jobs and activities.  So how did Buffalo fair so poorly?

As it turns out, they doubled the weight of weather under the quality of life ranking.  Same old, same old – everyone outside of Buffalo assumes it snows two feet a day October-May.  Yes we get a lot of snow, yes it is cold and windy, but it’s not Antarctica.  And the study missed one very important finding when looking at affordability and weather.  Many retirees can afford to head south for the winter because the cost of housing is so low here.  I have clients that leave at the end of December and don’t come back until May!

Buffalo has so many other great things that appeal to retirees:

• Amazing arts & theatre scene, including outdoor performances of Shakespeare
• Emerging waterfront destination
• Two major sports teams, lacrosse and AAA baseball
• Excellent fishing both on the lake and in local streams
•  Many public and private golf courses at reasonable rates
• Fantastic dining at reasonable prices (named top 10 cities for food by National Geographic)
• Expanding craft beer and craft spirits scene
• Close driving proximity to Toronto, Niagara Falls and Pittsburgh
• Short, direct flights to Chicago, Boston and NYC

Buffalo is an excellent choice for retirees to call home. Don’t let a simplistic list deter you from enjoying all that this city offers.

2015's Must Read Predictions for Retirement Investors

Now is the time of the year market pundits make their predictions with convincing arguments about why XYZ stock will soar or why ABC asset class will crash. I find these predictions to be useless.  The pundits end up either being wrong or lucky.  Nobody can accurately predict the markets in the short-term on a consistent basis and if they could they’d be so rich it would be a waste of time to tell anyone how they did it.  In light of that, here are predictions for 2015 that will actually be useful and insightful:

1) Stock and bond markets will fluctuate.  Undoubtedly, there will be a short-term period in 2015 where the market will drop and it will make you feel sick to your stomach.  There also will be a period where stocks go on a strong push upward and you feel great.  Don’t let either of these events distract you from your long-term goals.  Having to deal with these fluctuations is the reason investors who stick it out earn higher returns than cash.

2) Those who panic will have lower returns than those who don’t.  Often, when the stock market drops, investors get nervous and sell to avoid any further declines.  This strategy sounds reasonable except that usually around the time they sell the market turns around.  Even if the market doesn’t immediately recover, these same investors fail to get back in when the rebound happens and miss out on the eventual recovery and beyond.  Realize that selling out in a panic just replaces one stressful decision (should I sell??) with another (should I buy back in??).

3) Your neighbor, co-worker, or in-law will tell you something useless about investing.  There is a lot of noise out there that can cause you to lose focus on your goals and strategy.  It’s inevitable that someone at some point will tell you about the genius move they made buying some stock or how they predicted the last market correction.  Don’t get lost in this, it means nothing to you and your situation.  Remember, people enjoy talking about their successes, but not their failures.  For every genius move made there are probably ten foolish moves.

4) Those who regularly saved 15% or more of their income will be in good shape for retirement.  The statistics on how unprepared people are for retirement are alarming.  One way to improve your retirement prospects and build a reasonable nest egg is to start saving 15% of your gross income as soon as you can and for the rest of your career.  The earlier you start, the better off you will be.