In many households, discussing money is taboo. Some think it is crass, some think it is a burden and sometimes self-esteem is associated with money. Kids pick up on how you feel and think about money. We need to have some frank, and positive discussions with our kids. No matter what your economic status is, we worry about money. I believe in facing fears head-on so the worry can be lessened.
Wealthy people may not lose sleep over paying everyday bills, but they do have concerns about passing on wealth prudently, a reversal in the stock markets wiping them out, or making bad choices in professional help. These may not seem like problems to some, but they are real problems that prevent people from talking to their kids about how to manage their money, and how to make sure that their future families, and communities are cared for upon their passing.
The uses of money is often not discussed either. How much do you save regularly? How do you establish credit? What is the difference between saving and investing? Basic money knowledge can lead to confidence and self-esteem when it comes to managing your money.
If the topic of money was taboo in your household, you can change the money story for your family. Have real conversations with your kids. Think of money as your tool – we control our tools, they do not control us.
Many people have all of their basic estate planning issues taken care of, but have you spoken to your kids about any of it? Most people have not. Most people think it is crass or depressing to discuss these issues. Take it from me, it is not, and it is necessary. Your heirs need to know your final wishes and where to find all of your information. Here are a few of the most common problems that occur when a loved one passes on:
What happens to their IRA?
As a non-spouse, you cannot rollover an IRA. You must open an Inherited IRA if you chose not to cash the whole account out and pay tax upon receiving the IRA. Once you open the Inherited IRA, you must then start taking out annual withdrawals based on your life expectancy. These withdrawals will be taxable. If you inherit a Roth IRA, the same rules apply.
What is step-up in basis?
We often use the term “cost basis”, but many people do not know what that means. Further, when you inherit non-retirement assets, you receive a step-up in basis. Here is an example of how it works:
If you paid $250,000 for your home, but it is worth $500,000 when you pass, the $500,000 value is what the home steps-up to for sale and estate tax purposes. This rule applies for mutual fund investments also.
Who knows where all of this financial stuff is?
Contact information for all of your financial professionals should be stashed in the same place as you would keep your final papers. If you would like a Financial Organizer to help you put all of this information together, please contact me at firstname.lastname@example.org.
Most of my clients are surprised to find that their tax bill does not go down in retirement. Often, their tax bill can be higher than in their working years. Let’s take a look at some of the retirement incomes that carry a tax surprise.
While we know that while saving into qualified plans during our working years, many retirees underestimate what percentage of tax they will have to pay on the withdrawals. Roth accounts are the exception, assuming that your funds have been on deposit for five years or more.
Once upon a time Social Security benefits were tax-free, but that all ended with the signing of the Social Security amendments in 1983. Currently, depending on your “provisional income,” up to 85% of your Social Security benefits are subject to federal income taxes. To determine your provisional income, take your modified adjusted gross income, add half of your Social Security benefits and add all of your tax-exempt interest.
If your income is between $32,000 and $44,000 ($25,000 to $34,000 for singles), then up to 50% of your Social Security benefits can be taxed.
If your income is more than $44,000 ($34,000 for singles), then up to 85% of your Social Security benefits are taxable.
Most pensions are funded with pretax income, and that means the full amount of your pension income would be taxable. Payments from private and government pensions are usually taxable at your ordinary income rate, assuming you made no after-tax contributions to the plan.
Plan carefully, as taxes never seem to go away.
So, we have gotten over the shock of our sudden wealth, and have bought those items we just could not live without. Now back to reality. Here are a few pointers on how to hang on to your sudden wealth:
Build a great team for yourself.
Chances are good that you are not a financial expert and now is when you really need people who are. First you need to find someone like me, a Certified Financial Planner Professional, who works for a fee. Why fee based? We put you and your needs first, and offer unbiased services. Next, you need to find a CPA because your tax picture is going to change. Lastly, you will need to hire an Estate Planning Attorney so that your final wishes will be granted with the least amount of stress for those left.
Address your debts.
Before you spend any more than you have, look at your current debt and pay off what you can. If you still reap a tax benefit from your home mortgage, you may not want to pay that off. Look at how you have spent money in the past to make sure you do not accumulate un-necessary debt in the future.
Remember your values.
Before spending think about your value system. How do you want to spend your time and money going forward? Your values will keep you the person you anre and want to be remembered as.
In my 35 years in business, I have seen people come into wealth from many different sources. Many people inherit wealth, some have lottery winnings and others settlements. But what is wealth? To some, it is an extra $5000, to others, there are many more zeros after that. It does not matter as sudden wealth can be hard to survive for many people.
Receiving a lot of money can be confusing and stressful. Some people may treat you differently or you may feel different about your “new” life. Take a breath and remind yourself you are the same person as before. Money cannot change you – only you can change you.
I always advise people to sit on the new wealth for a while. Deposit your funds in a savings account while you gather your thoughts.
What is your wish list? While you are taking a step back, write down those wish list items. Determine if those items are worth spending some of your new found wealth on or not.
Later this week, I will have more pointers for handling your sudden wealth.
2017 was a banner year for the markets and the statement above is one said to me recently by two clients. I cannot take total credit for their capital gains being as large as they were in 2017, but I will take some. My clients are having to re-adjust the withholding tax applied to the areas of income they are receiving due to the increase in capital gains credited to them. Will you have to also?
One client said he was “crying with two loaves of bread in his arms.” Things could be worse.
As you work on your 2017 tax returns, see if you need to adjust your withholding tax for a possible repeat of the markets in 2018.
Many of us have completed, or are close to completing, our 2017 tax returns. As we finish this fun task, thoughts turn to 2018. Many of my clients want to know with the new tax laws, if the amount they can contribute to their retirement plans has changed. Let’s take a look at the contribution limits for 2018:
Traditional or Roth IRA accounts: $5,500 or if you are over age 50, the limit is $6500.
SEP IRA: 25% of your compensation up to a max of $55,000. This is an increase.
401(k): $18,500, this is an increase. The over age 50 increase is still an additional $6000.
Simple IRA: $12,500 or if you are over age 50, you can contribute an additional $3,000.
Don’t sell yourself short, contribute the maximum that you can comfortably contribute. Use all of the time you have on your side.
At a recent meeting with a client, I was asked if I noticed that she lost $20k. I asked what she was looking at, she said her February statement. My next comment to her was, ”I didn’t sell anything, did you?” My explanation for this comment was, her market value went down because the markets had a bad month in February. We did not sell anything, therefore, nothing has been lost. True, her market value went down, but also true was that by the time of our meeting, her value was back up $10k.
As we always say, “We are not trying to time the markets. It is time in the markets that matter.”
As we all get our tax information together, we often wonder how long we need to keep these statements, tax returns, receipts, and every other piece of paper we have hung on to forever. here is a list of what to keep and what you can shred:
KEEP OR SHRED-CFG (2)
Many people think assumptions are a big part of my business, but in reality, the facts are what matter most. There are a number of assumptions people have in mind when thinking about retirement planning and these assumptions can often de-rail a retirement plan. Let’s look at a few common assumptions:
“I can earn income for as long as I wish to.”
Many things that are out of our control can change this assumption such as:
A change in your company may down-size you out of a job.
A family member’s health decline may require your help
Your own health may change in an adverse way.
“Inflation will always stay low.”
As we are seeing right now, rates can increase. Monetary policy from the Federal Reserve is constantly under scrutiny and ever changing. We have been hearing of the potential for multiple rate increases this year. A portfolio review will be necessary to see what impact interest rate increases will have on your retirement.
“I will always be healthy.”
As I mentioned in the first assumption, health issues have a way of de-railing the best laid plans. An illness, accident, or injury happening to yourself or a loved one can take a lot of time and money. You may have Long Term Care Insurance to cover yourself and your spouse, but what about a parent, child, or grandchild that is in need? Take it from me, a prolonged illness from a parent takes a financial, physical, and emotional toll that can be greater than you can imagine.
Please, don’t get caught on the wrong side of an assumption.