David Waldrop, CFP https://www.theastuteadvisor.com/ David Waldrop, The Astute Advisor Sun, 04 Dec 2022 20:31:41 +0000 en-US hourly 1 https://wordpress.org/?v=6.0.3 62633108 Inflation – Why Is The Market Freaking Out? https://www.theastuteadvisor.com/inflation/ https://www.theastuteadvisor.com/inflation/#respond Wed, 11 May 2022 20:03:46 +0000 https://www.theastuteadvisor.com/?p=908 Inflation and other events are impacting the financial markets resulting in increased volatility. I've heard it said that “history doesn't repeat itself, but it rhymes.” If you look back at significant world events and their impact on financial markets, you will see wars, pandemics, natural disasters, and financial crises. What is going on today isn't […]

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Inflation Chart 2022

Inflation Chart 2022

Inflation and other events are impacting the financial markets resulting in increased volatility. I've heard it said that “history doesn't repeat itself, but it rhymes.” If you look back at significant world events and their impact on financial markets, you will see wars, pandemics, natural disasters, and financial crises. What is going on today isn't necessarily new, However, that doesn't minimize the signficance of the events. Let's take a look at these events and determine what, if anything, we should do with our investments.

Inflation & The Federal Reserve

As the economy roared back from the depths of the pandemic and flush with cash from zero interest rates and stimulus, inflation started rearing its head. With the Federal Reserve raising rates, we've seen a steep rise in the 10 year treasury now around 3.0%. Mortgage rates have followed suit with average 30 year rates around 5.5%.

In late February 2020, inflation was the least of our concerns. It became clear Covid-19 would have a disasterous impact on the global economy. Central banks around the world flooded the system with cash by slashing interest rates to zero. Additionally, governments passed aggressive stimulus plans to stave off a severe recession and possibility of a second Great Depression. Yes, the prospects were that grim.

Oil prices collapsed due to the drop in demand. At one point, there was so much supply that oil had to be stored on ships and at other facilities. For a time, suppliers couldn't even sell their oil. They had to pay to have people take delivery of oil. Stop and consider how significant that is. This resulted in a bizarre price event that turned the price of a barrel of oil negative! According to Daniel Yergin, author of The New Map, “on April 20, 2020…the lowest price ever recorded for a barrel of oil – minus $37.63.”

These price distortions didn't last long, and as the global lockdowns began to ease, people got back into their cars. Demand increased and has been increasing ever since.

By late 2021, the booming economic recovery in the U.S. was evident by record low unemployment, record high stock market, and record high real estate values. Our economy and others around the world simply got too hot to handle.

Central banks around the world no longer fear recession or depression, they fear inflation and that's why rates are heading up.

Russia's Invasion of Ukraine

Markets don't like uncertainty and Putin is the ultimate wildcard. While Ukraine is providing stiff resistance and successfully defending their country, some fear Putin could, in desperation, resort to more extreme measures like chemical or nuclear weapons.

In addition to a major war raging in Europe, uprecedented economic sanctions have been levied against Russia. While necessary, these sanctions will have negative impacts on the West. Examples include rising commodity prices for consumers (gas & oil) and lost revenue for Western businesses no longer operating in Russia.

Russian military losses have been substantial. With sanctions, it has become difficult, if not impossible for the Russian military industry to replace military hardware. This is leading some military analysts to conclude Russia can not achieve its military objectives. That's another way to say Russia is likely to lose the war.

At the start of the invasion, analysts were considering the likelihood the Ukranian government would fall and Russia would take over the country. Two months later, those same analysts are considering the possibility of Putin losing power. It may be time to start considering the possibility of political and social unrest in Russia in the coming months and the impact that may have on financial markets.

Inflation And The Covid Surge In China

While Covid numbers have been dropping considerably in the U.S. and the West, China is back to the lockdowns. Chinese authorities have locked down Shanghai and Beijing which will limit exports further impacting supply chains. Not to mention that China has one of the biggest economies on the planet and it's grinding to a halt.

China was hit hard from the initial outbreak in late 2019 and early 2020. They were returning to normal as we were shutting down. However, due to their refusal to use the MRNA vaccines developed in the west, their population is being hit even harder now by the Covid variants.

China has been a huge driver of economic growth. With export levels dropping, this could add some fuel to the inflation fire. At the time of this writing, there is little indication the Covid-19 numbers are improving there. In fact, some economists are reducing their GDP forecasts for China.

While the Chinese economy is usually the main focus, some analysts are keeping an eye on the growing frustration among its citizens. In the U.S., we use the term “lockdown” rather loosely. We never really had lockdowns here. We were free to move around with certain restricts. In China, they literally lock people inside their apartment buidlings by installing fencing so people can't get out. This is happening in China's biggest cities and there are growing reports of discontent among residents of Beijing and Shanghai.

It remains to be seen how far the Chinese authorities are willing to go to maintain their “Zero Covid” policy. It's also unknown how long the Chinese people will put up with it.

Conclusion

There are other factors at play but these are the big ones. Now what should you do about it? Unless you're a day trader, likely nothing. By that I mean, changing your portfolio in the middle of a volatile period like this doesn't make much sense. Having said that, it can be beneficial to reallocate your porfolio to keep things in balance.

As investors, it is important that we don't let short term market moves affect our decision making. I know it's easier said than done, but I've seen it work time and time again over the last 20 years.

I like to remind my clients there is never a flashing green light indicating a safe time to invest. There will always be war, pandemics, or other dangers around the proverbial corner. We should expect there will be tough times and be wise enough to know they don't last forever.

That isn't to say we should put our heads in the sand and pretend everything is ok. At the same time, we need to be realistic about what we can and can not control.

Inflation won't last forever. Russia's war against Ukraine will end. The pandemic will run its course.

Investing with confidence and having the right expections will go a long way toward helping you achieve your goals.

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David Waldrop Named One of Investopedia’s Top 100 Most Influential Advisors of 2021 https://www.theastuteadvisor.com/david-waldrop-investopedia-top-100/ https://www.theastuteadvisor.com/david-waldrop-investopedia-top-100/#respond Mon, 12 Jul 2021 17:13:24 +0000 https://www.theastuteadvisor.com/?p=847   Letter from Caleb Silver, Editor in Chief at Investopedia.com, Dear David, We’d like to congratulate you on being named one of the top advisors in the United States on the Investopedia 100 list of the Most Influential Advisors for 2021. This is the fifth year of our awards, which recognizes financial advisors who use […]

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Investopedia Top 100 Most Influential Advisors for 2021

Investopedia Top 100 Most Influential Advisors for 2021

 

Letter from Caleb Silver, Editor in Chief at Investopedia.com,

Dear David,

We’d like to congratulate you on being named one of the top advisors in the United States on the Investopedia 100 list of the Most Influential Advisors for 2021. This is the fifth year of our awards, which recognizes financial advisors who use their media platforms to promote and amplify financial education, and improve the practice of financial planning and advice.

Today we released the full list of the Investopedia 100 on Investopedia, as well as a press release and a social media campaign to celebrate you and your fellow advisors on our list. We hope that you will share the good news with your colleagues and followers and congratulate others who have also made the list this year. You can find digital assets here to include on your website or platforms of choice that celebrate your recognition (simply right-click to download). Please feel free to use them as you wish and contact us with any questions at investopedia100@investopedia.com.

At Investopedia, we strive to promote important conversations among investors and financial professionals of all levels, everywhere. 2021 has proven that financial advisors are more important now, than ever. Your wisdom and expertise are badly needed across all communities that have been impacted by this post-pandemic recovery, especially those with a lack of access to financial services and advice.

Financial education is a never-ending journey that requires constant exploration, examination and discourse. The Investopedia 100 is our salute to advisors like you, who are the guides of that journey and contribute industry insights to the many Americans who need them more than ever.

On behalf of Investopedia and our millions of readers, we thank you and congratulate you.

 

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Bitcoin – Should You Get In? https://www.theastuteadvisor.com/bitcoin-should-you-get-in/ https://www.theastuteadvisor.com/bitcoin-should-you-get-in/#respond Wed, 26 May 2021 19:46:15 +0000 https://www.theastuteadvisor.com/?p=837 Bitcoin and cryptocurrencies are receiving significant attention lately. I've noticed an increase in emails and calls from clients about this subject. Below is a summary of the key issues related to Bitcoin and cryptocurrencies. Firstly, I'll provide background information. After that, we'll address whether you should get in. What is Bitcoin? Bitcoin is one of […]

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Bitcoin - Should You Get In?

Bitcoin – Should You Get In?

Bitcoin and cryptocurrencies are receiving significant attention lately. I've noticed an increase in emails and calls from clients about this subject. Below is a summary of the key issues related to Bitcoin and cryptocurrencies. Firstly, I'll provide background information. After that, we'll address whether you should get in.

What is Bitcoin?

Bitcoin is one of approximately 4,000 cryptocurrencies in existence. It was the first cryptocurrency and consequently, it is the most popular in the crypto space. Cryptocurrency is a digital asset. Encryption secures the digital assets on the networks on which they reside. Blockchain technology is a key component of cryptocurrencies. Therefore, transactions validate on the network without middlemen. Intead of central banks, large computer networks hold the cryptocurrency. As a result, cryptocurrency is outside the authority of central banks and governments.

Despite the word coin, it only exists electronically on computer networks. Like traditional currencies, you have to exchange dollars to Bitcoin. Sites like CoinBase, Binance, and Kraken will handle the exchange. Bitcoin mining involves fast computers using large amounts of electricity. Miners receive cryptocurrency when the computers can solve increasingly complicated math problems.

Most people don't have the expertise and resources to succesfully mine. Instead, many people trade dollars for Bitcoin and hope for the price to rise. Increasingly, there are more businesses accepting payment every day. Moreover, many large financial institutions are beginning to create funds that invest in a wide variety of cryptocurrency. For example, instead of a mutual fund investing in stocks, it will invest in cryptocurrency.

Is It Right For Me?

Hype makes it difficult to stay focused. Sticking to the fundamentals when allocating our funds is key. Therefore, we need to examine the following. Firstly, determine your investment objective. In other words, are you looking for growth or income from your portfolio? Or, is your goal to preserve your capital and improve tax efficiency? Secondly, you need to evaluate your tolerance for risk. That is to say, how comfortable are you seeing the value of your investment fluctuate? Lastly, identifying your time horizon is a must. For example, when will you need the funds? In short, specifying your investment objective, risk tolerance, and time horizon is the first step before making an investment of any kind. This is critical when planning your retirement.

Resisting the hype around any investment can be difficult. After all, everyone at work is talking about it. Every article you see online says you have to have it. Most importantly, email newsletters predicting financial armageddon seem to be endless. If you can step back and tune out the noise, you'll be in a better position to make sound investment decisions.

Improve Portfolio Diversification

Adding an alternative asset to a portfolio can improve diversification. For example, we can achieve diversification by investing in various stocks and bonds via mutual funds or ETFs. Rather than investing in one stock and one bond, you can increase diversification by investing in several stocks and bonds. To clarify, diversication is the process of not putting all of your eggs into one basket. If you add another asset class (cryptocurrencies), you are creating more baskets for your eggs. Having said that, alternatives shouldn't account for more than 10% of your total portfolio.

Is Bitcoin A Hedge Against Inflation?

Bitcoin

Bitcoin

As more and more dollars flood the financial system, there are growing concerns about inflation. Some have claimed the American Rescue Plan Act of 2021 will lead to inflation. If the inflation rate gets above 4% and the Federal Reserve can't control it, the value of the dollar will drop. In other words, it will take more dollars to purchase goods and services. If that occurs without a corresponding rise in income, that will have a negative effect on consumers and hurt the broader economy.

As investors, we must remember that a certain level of inflation is actually a good thing. Without it, the value of assets wouldn't rise. Inflation becomes problematic when it gets out of control. The last time that happened was in the late 1970s. In addition, the last round of monetary stimulus (Quantative Easing) by the Federal Reserve was from 2009 through 2014. Inflation hawks made claim after claim it would lead to out of control inflation and the dollar would become worthless. That never happened. I'm not suggesting we ignore or dismiss the possibility of inflation becoming a problem. Just be cautious of those who claim it's a foregone conclusion.

Many claim Bitcoin and other cryptocurrencies are a hedge against inflation. I believe the jury is still out on that one. Cryptocurrency hasn't been around long enough to be tested in an inflationary environment. I acknowledge that crypto isn't subject government manipulation in the form of money printing like traditional currencies. However, that alone doesn't make it an inflation hedge.

Cybersecurity and Fraud Concerns

Unlike traditional financial institutions, there isn't much regulation. Some might see that as a positive. However, if a firm handling your Bitcoin goes bankrupt or fails, your assets could go down with it. What if your crypto goes missing in a security breach? Where do you go to file a claim? Unfortunately, you're likely on your own. Most traditional financial firms have certain protections in place for consumers. For example, Federal Deposit Insurance Corporation or FDIC protects your deposits if your bank fails. Securities Investor Protection Corporation or SIPC protects your investments if your brokerage firm fails. To be sure, this protects you if the broker fails or goes bankrupt. It does not protect you if your investment drops in value or becomes worthless.

Proceed With Caution

There is no doubt that the gaining popularity of Bitcoin and other cryptocurrencies present opportunities. I don't believe it's appropriate to be dismissive or fearful of these new currencies. Likewise, blindly investing money without careful study and planning is a recipe for disaster. Investing isn't gambling. Investing isn't speculation. You have worked hard for your money. Make investments based on your goals and your situation. Do your best to resist the fear of missing out. Try to tune out the noise and doom and gloom about the country's finances. Above all, never invest on emotion.

Do you have questions the Bitcoin and investing?

Schedule a call with me via this link!

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American Rescue Plan Act of 2021 – Covid Relief Bill https://www.theastuteadvisor.com/american-rescue-plan-act-of-2021-covid-relief-bill/ https://www.theastuteadvisor.com/american-rescue-plan-act-of-2021-covid-relief-bill/#comments Thu, 11 Mar 2021 15:24:06 +0000 https://www.theastuteadvisor.com/?p=819 The American Rescue Plan Act of 2021 (Covid Relief Bill) is now the law of the land. President Biden signed the bill into law on Thursday, March 11, 2021. The United States House of Representatives passed the bill after the Senate made changes to the original bill. Congress passed The American Rescue Plan Act of […]

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American Rescue Plan Act of 2021

The American Rescue Plan Act of 2021 (Covid Relief Bill) is now the law of the land. President Biden signed the bill into law on Thursday, March 11, 2021. The United States House of Representatives passed the bill after the Senate made changes to the original bill. Congress passed The American Rescue Plan Act of 2021 utlizing a process called reconciliation. As a result, the law passed with only a simple majority and could not be fillabustered. Notably, the Senate passed this major piece of legislation along party lines. Democrats voted 50 in favor. Republicans voted 49 against. One Republican was absent.

The financial markets seem to be voicing their approval. The Dow, S&P 500, and Nasdaq have been approaching all time highs in recent days. However, with financial and real estate markets surging, some economists have warned of the potential for inflation. Others are less concerned and believe a little inflation is just was the economy needs.

Unemployment Benefits

Federal unemployment benefits will be $300 per week and extend through September 6, 2021. Therefore, if your household income is under $150,000, the first $10,200 in benefit payments will be nontaxable. If you're married filing jointly the first $20,400 would be exempt from federal income tax. It's important to note that this federal unemployment payment is in addition to state benefits.

Cash Payments To Individuals And Families

Direct payments are on the way. Individuals will receive $1,400 from the IRS. The income limit for individual filers is $75,000 and $150,000 for those married and filing jointly. In addition, for each dependent claimed on your taxes, there is another $1,400.

Child Tax Credit

The American Rescue Plan Act of 2021 also expands the child tax credit. For example, the credit increased temporarily to $3,000 for children age 6 through 17. For those under 6, the amount is $3,600. The amount is reduced for those beyond the income threshholds of $75,000 for individuals and $150,000 for married filing jointly.

Paycheck Protection Program (PPP)

This law continues and expands upon a program from The CARES Act (Coronavirus Stimulus Plan) which was passed last year. However, this bill provides additional funds and allows more types of employers to apply. This program allows employers effected by the pandemic to continue paying their employees while business is shut down or otherwise significantly reduced.

American Rescue Plan Act of 2021

Of course, there is significantly more included in this new law. In addition to addressing the economic crisis, it also serves to tackle the broader health crisis. Click here for a more detailed look at the The American Rescue Plan Act of 2021.

Do you have questions the Covid Relief Bill?

Schedule a call with me via this link!

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2023 Retirement Plan Limits https://www.theastuteadvisor.com/2023-retirement-plan-limits-2-2/ https://www.theastuteadvisor.com/2023-retirement-plan-limits-2-2/#respond Tue, 10 Nov 2020 16:08:58 +0000 https://www.theastuteadvisor.com/?p=734 2023 Retirement Plan Limits have been released by the IRS. If there's any constant with retirement planning, it's change. Keeping up with these changes is key to ensuring maximum benefit from your retirement plan. At long last, there are finally changes to IRA and Roth IRA contribution limits for 2023. Additionally, 401(k), 403(b), 457 along […]

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2023 Retirement Plan Limits

2023 Retirement Plan Limits

2023 Retirement Plan Limits have been released by the IRS. If there's any constant with retirement planning, it's change. Keeping up with these changes is key to ensuring maximum benefit from your retirement plan.

At long last, there are finally changes to IRA and Roth IRA contribution limits for 2023. Additionally, 401(k), 403(b), 457 along with SEP and SIMPLE IRAs allow greater contributions than in 2022.

It's important to note that there are other limits and considerations when planning for retirement. The chart below is a summary and not a comprehensive list of all limitations. Be sure to consult a financial professional for advice on your unique situation.

2023 Retirement Plan Limits

2023 Retirement Plan Limits

2023 Retirement Plan Limits

*Source: IRS.gov

There are other limits that may be applicable depending on your situation. As a result, you should consider potential limits on income and whether you are able to deduct contributions.  For example, there are income limitations for Roth IRAs. I recommend reviewing my article ROTH IRA – 5 THINGS RETIREMENT SAVERS MUST KNOW.

The limits applicable to 401(k), 403(b), and 457 plans listed above do not include contributions made by your employer. Consequently, employer matching and profit sharing will be in addition to your elective deferral contributions. For more detailed information, you can view the IRS site here: COLA Increases for Dollar Limitations on Benefits and Contributions

Remember, when planning for retirement, pay attention to which portions are tax-deferred versus tax-free. Roth 401(k) plans are increasing in popularity. As a result, there is added confusion about how future withdrawals will be taxed.

Catch-Up contributions refer to those who are 50 years old. If you turn 50 at any point during the calendar year, you may be eligible to make additional (catch-up) contributions beyond the regular limit.

Do you have questions retirement planning?

Schedule a call with me via this link!

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HSA Plans – What You Need To Know https://www.theastuteadvisor.com/hsa-plans/ https://www.theastuteadvisor.com/hsa-plans/#comments Mon, 03 Aug 2020 16:18:48 +0000 http://www.theastuteadvisor.com/?p=479 HSA plans, short for Health Savings Account, should not be ignored. These were created in 2003 to provide special tax treatment for those with high-deductible health insurance plans. However, not everyone is eligible for a Health Savings Account. If you are, you should really give it a solid look. According to the HealthCare.gov site, “the […]

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HSA Plans - What You Need To Know

HSA Plans – What You Need To Know

HSA plans, short for Health Savings Account, should not be ignored. These were created in 2003 to provide special tax treatment for those with high-deductible health insurance plans. However, not everyone is eligible for a Health Savings Account. If you are, you should really give it a solid look.

According to the HealthCare.gov site, “the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and coinsurance) can’t be more than $7,050 for an individual or $14,000 for a family.” This type of plan usually requires more out of pocket costs than traditional plans.

HSA Plan And Eligibility

  1.  You need to be covered by a high-deductible health plan (HDHP). If you're not sure, contact the insurer to find out.
  2.  You can't have other health insurance coverage. This does not apply to insurance like disability, dental, vision, or long-term care.
  3.  You can't be enrolled in Medicare.
  4.  You can't be claimed as a dependent by anyone else.

HSA Plan Benefits

Tax benefits like no other: These accounts provide a powerful incentive for use due to unique tax benefits. Contributions made to an HSA are tax deductible. If an employer makes contributions on your behalf, those contributions are excluded from your taxable income. If you make the contributions, they are a deduction. Interest and other earnings on your investment are tax exempt. As a result, no 1099s at the end of the year are needed like a traditional investment account. Lastly, withdrawals made to cover qualified healthcare expenses can be made tax free!

Unused balances can be spent in future years: There is no “use it or lose it” feature with HSAs. Other healthcare related accounts can require that all balances be spent by the end of the year. If you don't, that money disappears. This isn't the case with HSAs. Therefore, account balances are carried over for use in the future whether it be next year, in ten years, or beyond.

There is no income limitation: Some taxpayers are excluded from participating in certain tax advantaged accounts. For example, Roth IRAs offer the attractive option of funds that can used tax free in retirement. However, this is only an option for those with modified adjusted gross income (MAGI) under $153,000 for single filers and $228,00 for married filers (2023). Individuals and couples who couldn't qualify for a Roth IRA based on income, might be eligible for the tax free benefits of an HSA.

Health Savings Account Taxation

IRAs, Traditional 401(k), and 403(b) allow for tax deductible contributions which reduce current year tax liability. While investment earnings aren't taxed, the future withdrawals of principal and earnings are. This method of taxation often catches a lot of people by surprise upon retirement. Think about replacing your annual income with withdrawals that are fully taxable as ordinary income. Most people are shocked by the amount of taxes owed each year. Consider a $10,000 distribution and while being in the 20% bracket. That means you end up netting $8,000. The other $2,000 evaporates into thin air!

Roth IRAs and Roth 401(k) do not allow for a tax deduction. Contributions are known as “after tax” so they do not reduce current tax liability. Investment earnings and future withdrawals are not taxed. This is why Roth IRAs are often referred to as “tax free” retirement accounts. I suggest taking a look at another article I wrote called Tax-Deferred vs Tax-Free Investment Accounts for more detail on this.

HSA Plans allow for a tax deductible contribution that reduces current tax liability. In addition, the investment earnings and future withdrawals are tax free. This is like getting the best of both worlds. You get the tax deduction of an IRA and tax free withdrawals of a Roth IRA.

Health Savings Account - Tax Comparison

Health Savings Account – Tax Comparison

Health Savings Account Contribution Limits

Contributions, for those with individual coverage, are limited to $3,850 ($4,850 for those 55 or older) in 2023. Those with family coverage can contribute up to $7,750 ($8,750 for those 55 or older). It is important to remember that these limits apply to employer and employee contributions combined. Therefore, you should be careful not to over fund the account. On the other hand, this is less of a concern if no employer contributions are involved.

Another consideration is that you can make contributions up until you file your taxes. This is similar to the way IRAs and Roth IRAs are funded. For example, as long as you are eligible to make a contribution to an HSA, you can fund the account by April 15 (or whichever day tax day falls on that year) for the prior tax year. While this created flexibility on one hand, it can create confusion on the other.

Make sure you know what year your contribution is funding. Many people have recurring monthly contributions so you need to be careful that you don't inadvertently over fund the HSA. For example, consider that you have $200 per month on auto deposit in January through April. If those deposits are coded as “prior year contributions,” and you already maxed out your contribution limit by December, you run the risk of over funding.

IRA Rollovers To HSA Plans

If you are eligible to participate in an HSA plan, you are allowed to rollover from an IRA. A common attribute of rollover transactions is the ability to do so tax and penalty free. One key distinction with rolling IRA funds to an HSA is that you can only do it once. In addition, you can only rollover up to the maximum contribution for that year.

Despite this, rolling funds from and IRA into an HSA might still be a wise financial move. As mentioned earlier, IRAs will ultimately be taxed when you withdraw in the future. HSA plans, on the other hand, allow tax free withdrawals. Consider the following scenario.

A 45 year old (filing jointly) rolls over $7,100 from an IRA into a Health Savings Account. If those funds aren't spent on out of pocket medical expenses, over the next 20 years, it could reasonably grow to $18,838 (assuming 5% return). Now, at age 65, withdrawals can be made tax free. Stated another way, it could save $3,767 in taxes (assuming 20% tax rate).

In conclusion, HSA plans are powerful financial planning tools. With the ability to allow account balances to rollover to future years and its unmatched tax benefits, Health Savings Accounts should not be ignored.

Do you have questions about how an HSA Plan works?

Schedule a call with me via this link!

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Estate Planning – It’s Not Just For The Rich https://www.theastuteadvisor.com/estate-planning/ https://www.theastuteadvisor.com/estate-planning/#respond Thu, 09 Jul 2020 17:39:56 +0000 http://www.theastuteadvisor.com/?p=210 Estate planning is much more than setting up a trust. The broadest description of estate planning is the process of preparing to dispose of your assets when you pass away. At least, that’s the textbook definition. Understandably, that gives many people the impression that estate planning is for the rich or those taking required minimum […]

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Estate Planning - It's Not Just For The Rich

Estate Planning – It's Not Just For The Rich

Estate planning is much more than setting up a trust. The broadest description of estate planning is the process of preparing to dispose of your assets when you pass away. At least, that’s the textbook definition. Understandably, that gives many people the impression that estate planning is for the rich or those taking required minimum distributions or RMDs. The reality is that estate planning should begin as a young family and evolve over time as your lives change. However, there is much more to it.

A properly developed estate plan will help avoid the probate process (public settling of an estate through the court system). Most people don't like the idea of their private financial lives being made public via the courts. Even worse, relying on the court system to determine who should take care of your minor children. Simply having a will isn’t enough to avoid the probate process.

I often see curious looks on my younger clients faces when I ask them if they have done any estate planning. There seems to be this reaction like, “why would we need that, we're not rich.” When some folks hear the term estate planning, they seem to envision mansions and fancy cars and don't consider that it's something they need. There simply isn't the awareness out there as to how critical estate planning can be.

Estate Planning – When is the right time to start?

Parents with young children:

Making sure the needs of the children are met if something happens to the parents while the children are minors is very important. Most estate plans provide for one or more trusts to take care of the minors’ finances and a nomination of a guardian to handle the minors’ personal affairs. These include issues like where the children will live and go to school and healthcare decisions. The appointment of the nominee as the guardian is ultimately up to a court to decide. However, the parents’ nominee is given preference over others. This can help give surviving family members some much-needed insight into the wishes of the parents.

Young, single adults who still rely on parents financial support:

Young adults who still rely on parents for their health insurance, tuition, rent, and spending money can benefit from an Advance Health Care Directive and Durable Power of Attorney Finances, which will enable Mom and Dad to coordinate their student’s health care and assist with banking activities.

Purchase of a home:

In California, if the gross value of your estate is more than $150,000, the estate will have to go through the probate process. This process is expensive and time consuming. These assets won't pass to the next generation until the probate process is complete. Since essentially every home in California has a gross value over $150,000, establishing a revocable living trust is key. Funding the trust with a home and other appropriate assets will allow the estate to pass to the intended beneficiaries without the need for probate.

So whether you are a young college student, new parent, or first-time home buyer (or, of course, nearing retirement), it is a good idea to talk to an estate planning attorney about how a comprehensive estate plan can benefit you now.

Life Insurance And Retirement Accounts

It is important to note that retirement accounts and life insurance will mostly pass to beneficiaries avoiding the probate process. As a result, it will be important to make sure your beneficiaries are properly designated. Be sure to review all of your retirement accounts and life insurance beneficiary designations. Each spouse should consider designating the other as 100% primary beneficiary.

As a fall back, consider adding the trust as a contingent beneficiary once a trust is established. Special care should be taken if naming minors as beneficiaries or contingent beneficiaries. Consulting an estate planning attorney is critical. Not all situations are the same. For more detail on beneficiary designations, I suggest the following article: IRA Beneficiary Designations – What You Need To Know.

What Assets Are Included In A Trust?

Assets you will title under the trust often include: Home and rental properties, non-retirement investment accounts, bank accounts. Estate planning attorneys will help file the appropriate documents for recording with your county.

The type of trust established is referred to the following names (they all refer to the same thing): Family Trust, Living Trust, Revocable Trust, Inter-Vivos Trust. Your trust will likely be referred to as The Doe Family Trust with John Doe and Jane Doe as Trustees.

Estate Planning Legal Documents

In addition to establishing a trust, you will also be creating other legal documents to indicate when and how either of you take control of the others health and financial decisions. This includes specifying who should be the guardian of minor children if something were to happen to both of you.

Estate Planning: It's Not Just For The Rich

The following taken together will often constitute estate planning:
1. Last Will and Testament
2. Revocable Living Trust
3. Financial Power of Attorney
4. Advance Health Care Directive
5. Life Insurance
6. Retirement Accounts
7. Trust Assets
8. Miscellaneous Personal Property

Most would agree that estate planning is a prudent task. Unfortunately, many people put this process on the back burner. It's understandable. Estate planning is designed to address unfortunate events. Illness and death are not the most pleasant things to discuss. In addition, it's another thing that we pay for, but can't see or touch. This is similar to life insurance. It isn't easy paying for something that may never be used. Having said all of that, estate planning is one of the most important financial responsibilities we have. Those who take the steps to be prepared will likely sleep a little better at night.

SPECIAL NOTE: None of the information contained in this post is considered legal advice. Before making any decisions related to your own legal affairs, be sure to consult an attorney.

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Coronavirus Stimulus Plan – The CARES Act https://www.theastuteadvisor.com/coronavirus-stimulus-plan-the-cares-act/ https://www.theastuteadvisor.com/coronavirus-stimulus-plan-the-cares-act/#comments Fri, 27 Mar 2020 04:19:06 +0000 https://www.theastuteadvisor.com/?p=778 The coronavirus stimulus plan known as the “CARES Act” is here and it's huge. It passed in the Senate 96-0, was approved in the House, and signed by the President. The cost of the plan is over $2 trillion. That's in addition to what the Federal Reserve is doing via monetary policy. To put that […]

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Coronavirus Stimulus Plan - The CARES Act

Coronavirus Stimulus Plan – The CARES Act

The coronavirus stimulus plan known as the “CARES Act” is here and it's huge. It passed in the Senate 96-0, was approved in the House, and signed by the President. The cost of the plan is over $2 trillion. That's in addition to what the Federal Reserve is doing via monetary policy. To put that $2 trillion into perspective, the TARP program used during the financial crisis in The Great Recession was $700 billion. While it's hard to imagine, the coronavirus stimulus plan represents roughly 10% of our entire Gross Domestic Product (GDP).

The financial markets reaction to this crisis has been swift and severe. From February 12, 2020 through March 23, 2020 the Dow Jones Industrial Average lost nearly 11,000 points. In percentage terms, that's a 37% decline in about 5 weeks. A decline like that is rare and extremely painful for most investors. With news that the coronavirus stimulus plan is all but a done deal, the stock market is up nearly 20% in 3 days.

The SECURE Act was passed in December 2019 and dramatically changed the laws affecting retirement investing. Now, with the CARES Act, navigating tax, financial, and investing rules will be much harder. Read on for some important changes that could affect you.

Unemployment Benefits

The coronavirus stimulus plan will significantly increase federal unemployment benefits. The unemployed will receive an additional $600 per week up to four months. This is in addition to state unemployment benefits. There is also a plan to create a pandemic unemployment assistance program for those who aren't typically covered by state and federal unemployment benefits. This will provide assistance to independent contractors, gig workers, and the self-employed.

Cash Payments To Individuals And Families

If your adjusted gross income (AGI) is less than $99,000 for individuals and less than $198,000 for joint filers, you should expect some payment from Uncle Sam. If your AGI is above those amounts, you are out of luck. For individuals earning up to $75,000 there is a $1,200 payment and $500 per child. For joint filers, the amount is $2,400 with $500 per child. If you don't receive your IRS rebates via electronic bank transfer, you might have to wait a bit longer to receive your coronavirus stimulus plan funds via check.

Coronavirus Stimulus Plan & Retirement Funds

Individuals using retirement funds for coronavirus purposes will be exempt from the 10% early withdrawal penalty. This is important because a majority of Americans don't have emergency funds. As a result, a retirement account is sometimes the only place one can turn to cover unforeseen expenses. This waiver of the 10% early withdrawal penalty will be retroactive to January 1, 2020.

Payroll Tax Deferral

If you are an employee and were hoping for a cut or reduction in your Social Security and Medicare taxes, you will likely be disappointed. These taxes are also known as FICA and you see them on every paycheck stub. For a short period during the Great Recession, these payroll taxes were reduced in an effort to put more money in people's pockets. Not this time. This legislation only provides for a deferral of the 6.2% tax for employers and the self-employed. The coronavirus stimulus plan allows for the deferred taxes to be paid back over a two year period from 2021 to 2022.

Relief For Student Loan Borrowers

The Department of Education has provided for suspension of loan payments through September 30. The outstanding balance will accrue no interest and no penalties will be applied. This will provide significant relief for those burdened with large student loan payments

Coronavirus Stimulus Plan – The CARES Act

It is nearly impossible to call market tops and bottoms. The recent move up in stocks is welcomed news, but investors should prepare for more volatility. During the financial crisis from 2008 to 2009, it took several months to find a bottom. There's no way to know if the market sell-off is over. In fact, it's more likely that it's not. While a $2 trillion bailout is a good start, we are certainly not out of the woods. It's impossible to know just how much damage will be done to our economy due to this pandemic. We are still in the early stages of the pandemic as well. More bailouts in the future are possible.

Click here for a more detailed look at the coronavirus stimulus plan or CARES Act. The law is 883 pages and not likely a page turner.

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IRA Early Withdrawal Penalty – How To Avoid It https://www.theastuteadvisor.com/avoiding-the-ira-early-withdrawal-penalty/ https://www.theastuteadvisor.com/avoiding-the-ira-early-withdrawal-penalty/#respond Thu, 09 Jan 2020 19:58:43 +0000 http://www.theastuteadvisor.com/?p=263 The IRA early withdrawal penalty is not always top of mind for IRA owners. Retirement accounts have special advantages when compared to traditional investment accounts. For example, with an IRA, the account owner incurs no annual tax liability resulting from interest, dividends, and capital gains. As long as there are no withdrawals (distributions) from the […]

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IRA Early Withdrawal Penalty - How To Avoid It

IRA Early Withdrawal Penalty – How To Avoid It

The IRA early withdrawal penalty is not always top of mind for IRA owners. Retirement accounts have special advantages when compared to traditional investment accounts. For example, with an IRA, the account owner incurs no annual tax liability resulting from interest, dividends, and capital gains. As long as there are no withdrawals (distributions) from the IRA, the account owner receives no 1099 tax form.

This tax deferral allows the earnings within the account to grow free from annual taxes until you actually need the funds in retirement. Special tax treatment of IRAs provides an incentive to invest for retirement.

IRA withdrawals are taxable income. However, if you're under age 59 1/2 and you take a withdrawal from an IRA, you should plan on paying the dreaded 10% early distribution penalty. This is in addition to your ordinary income taxes.

For example, let's assume you're 45 and your tax rate is 24%. If you take $10,000 from your IRA, you would owe income tax of $2,400 and an additional penalty for early distribution of $1,000. As a result, this early withdrawal of $10,000 cost you $3,400 and that doesn't even include taxes your state may impose.

Fortunately, there are some exceptions to this 10% penalty which can help soften the blow of taking an early distribution. Please note, this article is general in nature. Be sure to consult a tax professional to determine whether you're eligible for these exceptions.

Medical expenses

This applies when unreimbursed medical expenses are in excess of 10% of your adjusted gross income or AGI. You must pay the expenses in the same calendar year as the IRA distribution.

Medical insurance

If you've lost your job and have received unemployment compensation for 12 consecutive weeks, amounts you pay for medical insurance for yourself, your spouse, and your dependents can be exempt from the 10% penalty.

Disabled

The IRA early withdrawal penalty will not apply if you become disabled and the disability is expected to be long or permanent. It is important to note that proving permanent disability can be extremely challenging.

Distributions to a beneficiary due to an IRA owner's death

Your IRA won't be subject to a penalty for early distribution if you pass away and your beneficiary receives the funds. Additionally, your beneficiaries will be subject to new distribution rules set forth in The SECURE Act beginning in 2020. If you inherited an IRA from anyone other than your spouse prior to 2020, take note. Required Minimum Distributions (RMDs) are required during your lifetime. These RMDs begin not matter your age. While the RMDs are not subject to early withdrawal penalties, they are included in your taxable income

Substantially equal payments

You may elect to receive “substantially equal” payments based on your life expectancy. This is sometimes referred to as taking payments in the form of an annuity. You must keep the schedule of payments for at least 5 years or until you attain age 59 1/2. Proceed with caution.

Higher education expenses

These expenses must be considered “qualified higher education expenses” and the education must be for you, your spouse, children or grandchildren. Remember, these withdrawals are NOT tax free. Distributions are still taxable.

Qualified reservist distributions

Distributions taken during active duty may avoid the 10% penalty for members of the military reserves.

Qualified first-time home buyer

If you buy, build, or rebuild a first home, up to $10,000 may be exempt from the 10% early distribution penalty.

Avoiding The IRA Early Withdrawal Penalty

Can I take money out of my IRA while working?

The short answer to this question is “yes.” You can take withdrawals from your IRA at any time. But there is catch. Assuming all of the contributions you made were tax deductible, the withdrawals would be taxable as ordinary income.

If you are under age 59 ½ you would likely be subject to the IRA early withdrawal penalty from the IRS. When added together, the taxes and penalties can take a huge bite out of your IRA.

There is also a way the IRS allows you to take substantially equal periodic payments which can qualify as an exception to the early withdrawal rules. Just because you can take money out of an IRA, doesn’t mean you should. IRAs are an easy place to look for funds. It’s almost too easy to withdraw from an IRA. The result leads to less than optimal financial decisions.

How can you borrow from a Roth IRA?

Contrary to popular belief, there is no “borrowing” from Roth IRAs or Traditional IRAs. There are only distributions. “Borrowing” from a Roth IRA or Traditional IRA is a misconception likely due to the ability to borrow from some 401k plans. This is accomplished via a 401k loan. I published an article and video about 401k loans called 401k Loan – 3 Reasons Not To Borrow that goes into more detail.

With regard to Roth IRA distributions, there are ways to access the funds, but it’s not borrowing. Borrowing implies that you can pay it back. You can’t pay back distributions taken from Roth IRAs or Traditional IRAs. IRA distributions paid back within 60 days are an exception. However, that is a totally different subject. The 60 day rule is commonly misunderstood.

Roth IRA withdrawals (distributions) of principal are tax and penalty free. The reason is that contributions are made with after tax dollars. The IRS has already taken their bite with regard to the principal (what you contributed). The earnings are a different story. While there can be exceptions, early withdrawals can be subject to taxes and penalties that are attributable to earnings (not principal). If you’re looking to take a withdrawal from the Roth IRA due to education, first time home purchase, or to help with a disability, you should definitely read up on the exceptions.

Why is my IRA withdrawal counted as income?

Investing in a Traditional IRA assumes contributions are tax deductible. As a result, withdrawals from Traditional IRAs are 100% taxable as income (contributions and earnings). If you, in fact, deducted the contributions you made, it would be correct that you would be taxed on the full withdrawal. If you didn’t deduct the contributions from your taxable income, you made a “non-deductible” IRA contribution. Therefore, earnings are taxable.

IRA early withdrawal penalty

Taking an early distribution from an IRA is huge financial decision with potentially serious consequences. More detail on this subject can be found at the IRS website. Retirement accounts are not piggy banks. However, life has a way of throwing us curve balls. If you've found yourself in a bind and withdrawing early from your IRA is the only option, proceed with caution. The situations listed above have pitfalls. If you plan on taking an early distribution, be sure to consult your financial professional or tax advisor.

Image courtesy of FreeDigitalPhotos.net

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Top 10 Personal Finance Posts From 2019 https://www.theastuteadvisor.com/top-10-personal-finance-posts-from-2019/ https://www.theastuteadvisor.com/top-10-personal-finance-posts-from-2019/#respond Mon, 30 Dec 2019 15:30:33 +0000 https://www.theastuteadvisor.com/?p=756 What a year it has been! As we say goodbye to 2019, here’s a look back at the Top 10 personal finance posts on The Astute Advisor blog. Hopefully you find some of these articles helpful. I love reading your comments and feedback. Please don’t hesitate to reach out. You can reach me via email […]

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Top 10 Personal Finance Posts From 2019

Top 10 Personal Finance Posts From 2019

What a year it has been! As we say goodbye to 2019, here’s a look back at the Top 10 personal finance posts on The Astute Advisor blog. Hopefully you find some of these articles helpful. I love reading your comments and feedback. Please don’t hesitate to reach out. You can reach me via email through this site or look for me on FacebookLinkedIn, and Twitter.

Top 10 Personal Finance Posts From 2019

THE SECURE ACT AND YOUR RETIREMENT

The SECURE Act (Setting Every Community Up for Retirement Enhancement) is now the law of the land. If there's any constant in retirement planning, it's change. As soon as you make financial plans based on current laws, they change. This legislation, signed into law with only days left in 2019, will have significant changes in 2020. Retirement savers should take note.

IRA BENEFICIARY DESIGNATIONS – WHAT YOU NEED TO KNOW

IRA beneficiary designations specify who should receive your retirement account funds if you are to pass away. But there's much more to it than that. Despite the importance of naming beneficiaries, it is often at the bottom of the to-do list.

REQUIRED MINIMUM DISTRIBUTIONS – THE IRS LOVES IT WHEN YOU TURN 72

The IRS loves it when you turn 72, but you won't get a gift or even a card. The Internal Revenue Service can't wait to get their hands on your hard earned dollars. This might be why the IRS is sometimes referred to as the Infernal Revenue Service. Happy birthday and get ready to pay more taxes thanks to three little letters, RMD.

UTMA ACCOUNTS – WHAT YOU NEED TO KNOW

UTMA accounts provide a way to gift money to minor children. Contributing funds to UTMA accounts constitutes an irrevocable gift. Once you gift the funds, they must be managed for the benefit of the minor and you cannot change the beneficiary. However, there is a lot of flexibility with this type of account.

TAX-DEFERRED VS TAX-FREE INVESTMENT ACCOUNTS

Tax-deferred vs Tax-free is a concept that is key to making good financial planning decisions. Most retirement accounts fall into these two categories. It's critical to know which ones are which. It is also worth noting, this concept applies to more than just retirement accounts. Choosing which investment account to use for health and education planning requires a solid understanding of tax-deferred vs tax-free as well.

The Waldrop Family

The Waldrop Family

CANCELING PMI CAN SAVE YOU THOUSANDS

Canceling PMI can save you thousands. If you own a home and you put less than 20% down, it's likely you have Private Mortgage Insurance, or PMI. This is insurance that you, the borrower, pays to protect your lender if you default on your mortgage. Stated another way, the loan-to-value ratio (LTV) is too high and there isn't enough home equity.

ROTH IRA CONVERSION – THE PRO RATA RULE IS LURKING

A Roth IRA conversion and Roth IRAs in general can be powerful tools in a retirement saver's toolkit. The potential to accumulate a bucket of funds to be used tax free in retirement is very attractive. This is especially true when you realize how much of your 401(k) or Traditional IRAs will be taxed in the future.

HOW 403(B) AND 457 PLANS WORK TOGETHER

If you're a public school teacher in California, there's a lot to consider when saving for retirement. Teachers have more choices than employees in the private sector and the options can be confusing. In addition to some of the nuances involved with CalSTRS and Social Security, many teachers are eligible for 403(b) and 457 plans.

CALSTRS WON’T BE ENOUGH FOR RETIREMENT

CalSTRS won't be enough for your retirement and I know that sounds harsh. While having a pension can bring a sense of comfort, teachers must resist this false sense of security. Relying on your teacher's retirement pension alone might be harmful to your financial health.

ROTH 401K PLANS – 5 THINGS YOU NEED TO KNOW

The ability to save in a Roth 401k has been around since the Pension Protection Act of 2006. This act allowed businesses (plan sponsors) to offer employees the option to defer their after tax salary into an account that will allow for tax free withdrawals in retirement.

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