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Should I pay down my debt or invest?

Should I pay down my debt or invest?

See 1-minute video: Should I pay down my debt or invest?

Debt itself is not bad. We often use debt to buy a car, buy a home, or pay for college. Debt is a problem when you have too much debt especially high interest rate debt found with credit cards. So, when looking at your debt, do you have a lot of debt relative to your income? Is the interest rate on the debt relatively high? If you answer yes to either of these, then reducing your debt may be the better path.

If your debt is under control, and you have no credit card or high interest rate debt, then the answer may be to invest the money. But before you invest for the long-term, make sure you have an emergency fund to cover likely unexpected costs. It can be expensive to pay down debt or invest and then have to change course because you lacked enough in an emergency fund.

There may tax benefits depending upon your situation. You might be giving up a tax deduction if you pay down a debt. Similarly, you might not get a deduction if you pay the debt and do not invest in a retirement plan that provides a tax deduction.

Paying down debt and investing both have risks and rewards and it is best to look at the big picture before acting.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney.

 

Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

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What you might lose in a lawsuit.

What you might lose in a lawsuit.

See also 1-minute video: What you might lose in a lawsuit.

For good or bad, our society has become more litigious. One day you may be on the receiving end of a lawsuit. What is at stake? Nearly every financial asset if the damages sought are high enough.

You can not prevent a lawsuit, but you can take legal measures to reduce the potential loss. The time to set these measures is before the incident causing the lawsuit ever occurs.

One measure is insurance. Insurance transfers the risk to another up to the limit or the coverage and the extent of the coverage. Often a liability  policy can further insulate you than just the ordinary home owner’s or automobile coverage might provide.

Another measure available to married couples is to title asset as tenancy by the entireties. This is ordinarily limited to one’s home, but in some states it may be recognized for other assets.

Another measure is to place the assets in a trust for which you are not the beneficiary. You might have an extra amount of assets you would like passed to an offspring or sibling, but do not want it exposed to lawsuit award. Transferring the asset to a properly written trust may serve that purpose. It is a technical area and you should seek legal counsel to use this tool.

These are but a few strategies available. Which is best for you takes a review of you risks and assets and deciding whether it is cost effective to use any of these.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney.

 

 

Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Social Security Retirement Benefit Strategies

Social Security Retirement Benefit Strategies

(Watch 1-minute video: How To Strategize for Your Social Security Benefits?)

Planning on when to start drawing social security retirement benefits is a complicated issue. There are too many possibilities to cover them all in a short article, but we can touch some major issues.

One issue is when to start taking benefits. You can take them as early as age 62 based upon your earnings during your work career. But taking them can have several drawbacks. First, your benefits will be permanently reduced by as much as 25% relative to waiting to your normal retirement age. If you live a long time, this could mean a loss of thousands of dollars. Also, if you draw the benefit and still keep your job, your benefits are often reduced until you stop working.

One benefit of waiting until your full retirement age, which is now about age 66 for those about to retire, is that benefits are not reduced if still working. Also, if you delay further, the benefit amount rises each month you wait until age 70. This means if you are long-lived, you will get thousands more that if you start to draw money at your normal retirement age.

Underlying the above discussion is your anticipated life expectancy. You can go on line and gather information for Americans, but your case is individual. You may have a family history of those living into their nineties or only into their mid 70s. Whatever your estimate can color your decision on whether to delay or take the retirement benefit early.

Another issue is whether you can afford to quit working. Social Security retirement benefits were never intended to, and rarely do, provide for the retirement you seek.

The issues are compound when you are married as each spouse, depending on their work history, may be entitled to benefits. Without doing considerable analysis, which to take first and when is impossible to determine. No rule fits everyone. But commonly, if you can afford it, waiting is better. But again individual cases can be different.  

Another factor is taxation of the benefits. Depending upon your family income level, a portion of the benefits can be taxed. Obviously if the benefit is taxed, you will have less spendable money for your family.

For a married couple, the decision as to when to draw retirement benefits may affect the spouses benefit in event of death of the recipient of the benefits. While we can not control the timing of a spouse’s death, we do need to consider the possibility and ramifications.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney.

 

Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

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Which Retirement Plan to Choose

Which retirement plan to choose? See also 1-minute video: Which retirement plan should I choose?

There are two basic types: those offered through your employer and those you can open on an individual basis. Both types are designed to help you accumulate the wealth you will need to fund your retirement.

First, those offered by your employer. These plans typically have various investment choices that are like mutual funds selected by the employer or plan sponsor. Contributions a usually tax-deductible and the money grows tax deferred, but withdrawals are subject to standard income taxes rules at the time of withdrawal. Often times the employer offers a match for a portion of the amount contributed up to a limit. These plans may allow contributions up to $24,000 depending upon your income and age. There are special rules as to when you can withdraw the money and rules for when you must withdraw assets. The rules are stricter than those that apply to IRAs.

Second, are those you can establish yourself. There are two basic types: Traditional IRA and a ROTH IRA. They both accept post-tax dollars as contributions, however, in some cases the contributions to the Traditional IRA can be tax deductible. The current maximum contribution is $6,500 per year per person. They both allow the assets inside to grow without tax liability. Depending upon with whom  you open the account, there may be access to thousands of different types of assets ranging from stocks, bonds, certificates of deposits, mutual funds, exchange traded funds, and others. The Traditional IRA requires distributions near age 70 ½ and these distributions are subject to standard income taxes at the time of withdrawal. The ROTH IRA assets can be held until death and no taxes are applied to the withdrawals.

Many times it is worth using as many types as legally possible within your current budget needs. Look to them to build your retirement nest-egg.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney.

 

Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

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ROTH IRA - Better than sliced bread.

Roth IRA – Better than Sliced Bread (See 1-minute video: Roth IRA, Contribute or Convert.)

The tax code as few taxpayer friendly provisions, but the creation of the ROTH IRA is the exception. A ROTH IRA is a type of account into which a taxpayer can contribute after-tax dollars and then never pay taxes on the growth or withdraws. Yep, no more taxes.

Not having to pay taxes can be a huge advantage especially when the growth is extended over many years. It also permits you to better control your income program in retirement.

There are only two ways to get money into these accounts.  The most common way is a direct contribution from savings/checking account. But do note that the amount you can contribute varies whether under or over 50 years of age. And there is a maximum regardless of age which changes from time-to-time. Further, you can not contribute more than you earn such as from a job. Earnings from investment do not count.

The second method is to convert assets already in an IRA or qualified retirement plan from work to a ROTH IRA. There are no limits on how much can be converted. That’s the good news. The sad news is that to make the conversion, every dollar converted is considered income and subject to income taxes. So, it might be smart to convert a portion each year rather than all at once to avoid bumping you into a higher tax bracket.

Investigate the ROTH IRA, and it may be better than sliced better for you.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FA Client articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney.

 

Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

 

 

 

 

 

                                                                       

 

 

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5 Mistakes to Avoid in Retirement

1-minute video: 5 Mistakes to Avoid in Retirement

 

5 Mistakes to Avoid in Retirement

Retirement offers many enjoyable opportunities. However, if you are not careful, many may never come to pass.

Mistake #1 Retiring with insufficient funds. We all started with nothing – or less. And we see lots of money in our accounts we can hardly conceive of how we might not have enough. But the truth is many people just do not do the number crunching to see if their nest egg can last. Unretiring is no fun and embarrassing Do the math or get someone who can.

Mistake #2 Spending too much too soon. Commonly people have many pent-up aspirations that they want to do right away. Many take money and doing them in quick succession can quickly deplete a significant nest-egg. Yes, retirement is a time to do the things you could never do while working but there is likely a balance between what you want to do and what you can afford. Find the balance.

Mistake #3 Healthcare costs. Healthcare cost have no where to go but up. Do you have enough budgeted? Many mistakenly believe Medicare will cover many cost. In fact there are many gaps in coverage relative to what you might have had while working. Investigate what you will get from Medicare and decide how you will handle the gaps if they arise.

Mistake #4 Taking Social Security Benefits too early. Social security was never designed and will never fund a comfortable retirement. And the dollars you get are greatly reduced from what you might expect if you take you benefits before your normal retirement age as Social Security defines it. For most, that age is 66 or older. Using your own assets and delaying retirement might be an alternative.

Mistake #5 Fail to make a estate plan. Estate planning deals, in part, with the disposition of your assets when you die. If you think you have trouble organizing them now, imagine how difficult it will be for your heirs when you are not around. Another area estate planning covers are health care decisions. You are one day likely going to need another person to help you make decisions and the time to make tentative decisions on life or death issues is now. Also, you need to find someone in whom you can place your trust in those final days.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FA Client articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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What is your risk tolerance?

1-minute video: What is your risk tolerance?

 

What is your risk tolerance?

All investments have risk and reward like a coin has two sides. Most people view only recent gains as a measure success of an investment choice to decide whether they should invest similarly again. But that is like Monday-morning quarterbacking in that the return received, after it has happened, is risk free. It does not consider the risk taken to get that return. Further, you can’t buy last year’s return.

So, looking prospectively, an investor needs to calibrate their appetite for risk against the potential reward. The percentage or amount you are willing to sacrifice if the investment goes badly is a measure of your risk tolerance. Every investment has its risks, but an investor should steer clear of those that exceed the loss they are willing to take to get the gain they seek.

However, in a well-diversified portfolio, an investor might buy investments that exceed their tolerance level if counterbalanced by safer, less risky investments. Modern Portfolio Theory is based combining differing risk levels, riskier than you would take if you only bought one investment, to create less risk overall. The result is greater returns for the amount of risk taken.

Risk tolerance varies depending upon your goals and the time horizon for when you need the money. Investing conservatively is likely the best route if the goal is important and soon to occur. However, for retirement savings, not only might it be years before you retire, you may be retired for decades and taking more risk is often necessary to insure you have the money you need when you need it.

The next time you evaluate whether to buy an investment, remember to review the return, but also how much risk was taken to get that return.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Why is Asset Allocation Important to You

1-minute video: Why is Asset Allocation Important?

 

Why asset allocation is important to you.

The asset allocation decision is one of the most important investment decisions you will make. And as your life circumstances change, so will the appropriate asset allocation decision be made again.

The asset allocation decision integrate several important factors: your goals, when you need the money, your individual risk tolerance, your age and health are among issues to consider.

One overarching goal is to get the best return for the least amount of risk. Too often people invest based on a past record and total ignore the risk it took to get those returns. Further, past performance of an investment is no indicator to future performance.

But the appropriate allocation can lessen your risk and raise the chances you will have the money you want when you need it. Common, basic allocations will include stocks or stock based investments, bonds or bond based investment and cash. There is no perfect mix as no one knows the future, but through analysis you can develop a “good enough” mix of the assets to be used. And from time-to-time you will need to update the allocation due to personal life changes but also due to factors such as the economy, new laws, financial markets to mention a few.

So, take some time to get educated, assess what is important to you and the money that will take and then put effort into developing the “right” asset allocation for you.

 

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Medicare and Retirement

1-minute video: 5 Important Medicare Facts for Pre Retirees

 

Medicare and your Retirement.

Large medical bills is one of the greatest threats to financial security especially in retirement. Fortunately, most Americans qualify for some type of insurance. Here, we cover a few points about Medicare for those 65-years or older.

Medicare is govern run program to help seniors cover medical expense after age 65 and has several important and related parts, Parts A, B, C, and D. To be on Medicare you must enroll or you may be subject to stiff rate increases.

Part A Is free and is a form of hospital insurance. Part B covers outpatient care doctor’s visits, and preventative care. This has a premium that is adjusted with income. Part C covers areas of Parts A or B, but by a private insurer. There is a deductible and then a shared cost above the deductible. Prescription drugs cost are offset in Part D. Part D has income related premiums.

Several insurance companies offer plans that cover the cost gaps not covered by Medicare and it various parts.

One crucial fact is that Medicare does not cover lengthy stays for long-term care (LTC) costs. These cost can be very high, are likely to occur, and a prolonged stay in a nursing home facility can readily devastate a retirement.

This is a tricky area which requires expertise, time, and effort to figure out what meets your needs.

 

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

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Social Security and Retirement Planning

1-minute video: How Can Social Security and Retirement Planning Work Together for Your Benefit?

 

Social Security and Retirement Planning

Social Security retirement benefits have been around for decades. Mistakenly, many have thought it would cover their costs in retirement. Sadly, this is highly unlikely, but it does not mean to ignore the potential benefits.

For most people, the normal social security age is greater than sixty-six years of age. This is age has been creeping upward from sixty-five for years in an attempt to keep the system solvent. Unfortunately, this age adjusting will not be enough, so there will be changes in the future on the benefits or the timing of those benefits.

For many, the current payout is a substantial part of their retirement income plan. Everyone needs to figure-out how they will pay for the difference between the cost of retirement and the shortfall of social security.

One variable is to delay retirement. This has the advantage of delaying the depletion of your asset “nest-egg.” It may also keep you on a medical plan one extra year. If you simultaneously delay retirement and drawing Social Security Benefits, the government actually raises the amount they pay to you by more than 7% each year you delay until age 70.

Drawing social security benefits early is rarely a good idea. First, the payout is lower – forever lower. Second, if you are still working, your benefits might be reduced depending upon how much you make. The more you make at a job, the less Social Security will pay out until you quit working or reach your normal retirement age.

Depending upon your marital status and income level, social security can be tax exempt or nearly fully subject to income tax. It is something to consider.

Social Security retirement benefits are here today and an integral part of millions of American’s retirement plan. However, it will change, and unlikely for the better, so make plans to self-support you retirement in a greater way than former generations.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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When is the Worst Time to Retire

Minute video: Do not let timing ruin your retirement.

 

When is the worst time to retire.

Many people seek the optimal time to retire. Unfortunately, there is also a terrible time to retire.

Here we will cover a few factors to consider when deciding to retire to avoid the “worst” time to retire.

First, if you retire and you will not have medical coverage, this is a clue that it is not the time to retire. This is a huge risk. Without insurance, you are one accident away from insolvency or a severely underwhelming retirement. And if you retire and do get insurance on the open market, you may find the cost essentially unaffordable and cause a catastrophic meltdown of your assets.

Second, you have no real source of income to meet your critical needs. As mentioned in an earlier blog, Social Security retirements are unlikely to be enough. If that is the case, where is the rest coming from? It is incredibly surprising how fast a “nest-egg” can be depleted.

Investment returns go sour. Investments that can vary in value are subject to the risk that they will perform badly at the wrong time. So, while your investment nest egg loses value, you will compound the loss by drawing living expenses. This a double whammy from which your portfolio may never recover.

Imagine retiring in January 2000. Within 10 years the account could easily be down 50% in an all equity portfolio - and that does not include any withdraws along the way. If in your estimates you barely had enough to retire in 2000, then you surely are sunk in this scenario. So, the time to think twice about retirement is when the market is high.  Or if you elect to retire, make sure you planned on a low rate of return.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

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When is the Best time to Retire

1-minute video: When is the best time to retire?

 

When is the best time to retire?

The answer to this question is incredibly complex. Here we touch upon a few of the key issues.

One issue is how much and when will you spend in retirement. On the surface this may be a simple calculation, but when you factor in taxes, inflation, lifestyle choices, and potential health issues, it becomes less clear.

Another is issues is from where will you get the income to cover the expenses. If you have a pension, these figures may be fairly easily to calculated. Typically, pensions will not cover all of your needs especially later in life. So, you need to calculate how much you can expect your investments to generate in income whether in interest, dividends, or due to the sale of an assets. This is where this issue gets complicate since no knows just how well an investment will perform.

Mentioned above is health care cost. This is a growing issue as more Americans are living longer than before. Depending upon your current age, your life expectancy may exceed thirty years from the time you retire. That may mean you might work fewer years than you are retired. And many of you who are readying this article may live a decade beyond your life expectancy. Retiring too early can be a huge, irrecoverable risk.

Lifestyle issues can alter when you retire. Some people can simplify their lives by downsizing and abandoning the trappings of modern living. Others may want to enjoy the remaining active years they have. Either path will influence when you can retire.

Simply put, the decision to retire is one of the most complex, stress creating decisions you may ever make. There are the objective issues and the subjective issue that impinge on your choice. Make a good one.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Simple Method to Better Investment Results

1-minute video: How Dollar Cost Averaging Can Help You Make Smart Investments?

 

Simple Method to Better Investment Results

When investing in mutual funds or stocks, there are many issues to consider. Here we describe a simple method to boost long-term investment results with mutual funds that a novice or an expert investor in Columbia or Jefferson City, Missouri can use.

The fancy name for the method is Dollar-cost averaging and here is how it works. The investor contributes the same amount to their investment portfolio at regular intervals: weekly, monthly, quarterly, etc. This is a very common practice with a retirement account such as a 401(k), but can be done manually with an account not part of a 401(k). When the contributions are made, purchases of funds are made regardless of the price. As you might expect, as the price of the fund drops, it actually buys more share of the fund. As the price goes higher, the constant dollar contribution buys fewer shares. In this way, the simple process is following the old adage, “buy low, sell high” in that you are buying the most number of shares with your contribution at lower prices and fewer shares when the price is high. The investor is not actually selling shares in this method, but is not buying as many shares at high prices. As the market bounces up and down, the investor will accumulate more shares at cheaper prices to later be sold in retirement. When retirement arrives you will have a larger number of shares which translates into more wealth depending upon the price at retirement. It is a simple, automatic process for increasing the chance of buy when prices are low and fewer shares when prices are high.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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What does a Living Trust do?

Link to 1-minute video: What's the Difference Between a Will and a Living Trust?

 

What does a Living Trust do?

There are two basic types of trust, revocable and irrevocable, and each has more specialized type trusts that might be encountered. Here we talk about the “Living Trust.”

A Living Trust is created, usually with the help of a local attorney, to control the disposition for your assets while you are alive and after your death. It is a document with written instructions on how the assets are to be used especially when you are not able to make a decision for yourself regardless whether your inability to decide is permanent or only temporary. The document identifies the trustee – that is the person who makes the decisions – and beneficiary - the person for whom the decisions should benefit. Essentially the trust becomes your legal alter ego.

Before you worry about giving everything away to a trust and losing control to someone else, understand the Living Trust can name you as the trustee and beneficiary. So, while the asset are not technically in your name you retain control. As an aside, since you retain control, there are no tax advantages to these types of trust.

Once the trust is establish and the assets placed in the trust, you live your life as you normally would except when you draw cash from the bank, sell something held in the trust, or write a check off the trust account, it comes from the trust.

When you die, the trust lives. The instructions of the trust describe what is to be done with the assets and who will control the disposition, if any, of assets. If married, a surviving spouse can be the trustee and beneficiary so the assets stay in the family.

The Living Trust bypasses the cost, hassle, and time delay of having to go through a court procedure called probate – a great benefit for larger estates and for those you leave behind.

 

One benefit of creating a trust is that you actually must put into writing what you want to happen – it can cause you to focus on what is really important to you.

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Saving for College Costs

1 minute video: What's the Best Way to Set Aside Funds for Future College Costs?

 

Saving for College Costs.

One way to plan for your children's college education is through a 529 plan which is an education savings plan operated by a state or educational institution. The name 529 comes from section 529 of the Internal Revenue Code which created these types of savings plans in 1996. Although contributions are not deductible on your federal tax return, your investment receives tax-deferred treatment and qualified distributions to pay for the beneficiary's college costs. Qualified withdrawals come out federally tax-free, non-qualified withdrawals are subject to federal and state income tax and a 10% penalty.

College savings plans offered by each state differ significantly in features and benefits. The optimal plan for each investor depends on his or her individual objectives and circumstances. In comparing plans, each investor should consider each plans investment options, fees, and state tax implications. State tax deductions vary by the state of issuance. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager, but you have some control over how your investment is managed. You may be able to change to a different option in a 529 savings program every year although plan restrictions may apply.

Everyone is eligible to take advantage of a 529 plan and the amounts you can contribute are substantial. The availability of tax or other benefits may be conditioned on are subject to enrollment, maintenance, administrative, and management fees, and expenses per beneficiary. Plans can vary greatly and care should be given to fully understand your 529 plan before you invest

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but text is drawn the Video: from the video and text is for information use only and is based on information believed to be true. Much of the text information is readily available, but most of the material is from the above video produced by FAclient. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Can inflation hurt you?

1-minute video: Impact of Inflation in retirement

 

Can inflation hurt you?

Inflation is a rise in price over time. Commonly you will read about the Consumer Price Index (CPI) which provides the direction of prices of the component items upon which the index is based. Not everything you might buy in a week or month is in the list, but the idea is to get a representative sample of many important items.

Lately, news stories have talked about the rise in inflation. A rise in prices, or CPI, in isolation does not tell you much especially if not compared to something meaningful to you. For many years this rate has been low by historical standards, but now it is beginning to rise. Along with this rise is a rise in interest rates, both long-term and short term rates, which effects the rate borrowers pay for goods and services they pay for with debt whether a car, house or even a credit card debit that is not fully paid at month’s end.

So, can inflation hurt you? Yes, it might if your income fails to grow as fast as inflation. Hypothetically, if a grocery item you always consume costs $3.50 today and inflation is 4%, then in eighteen years you will need $7.00 to buy the same item. If you are on a fixed pension, you have a problem. The cost has doubled, but your income has not.

You can not control inflation, but you can control in what investments you place your money. For most people, some portion will need to be in assets which, in the long-term, rise in value faster than inflation. That way, when the item doubles in price, hopefully your investments will have more than doubled in value. Finding the right mix of investments for your situation will take time, effort, and expertise. The right mix is different for everyone and changes through time.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Roth IRAs are for minors too.

1-minute video: Is Tax Planning missing in your Retirement Planning?

 

Roth IRAs are for minors too.

 

We all know that having money grow without being taxed is great. In part, that is why we contribute to retirement plans at work and our IRAs.

 

As an adult, you may be ineligible for the powerful ROTH IRA if you earn too much money. But a minor child or college-aged child working a summer job or through the year can contribute to a ROTH IRA.

 

They can only contribute as much as they earn – gifts, investment or interest income does not count. The most they can contribute is currently limited to $5,500.

 

Imagine how much they would have by age 65 if a 17 year old contributed $2,000 a year each year to the age of 22 when the child the finishes college. If that money earned a modest return of 8%, with six $2,000 payments and no other contributions, the account will exceed $400,000 by age 65 AND be tax free when withdrawn.

 

Sounds fantastic doesn’t it. But how do you get them to deposit the money. Well, how about a match program. For every dollar they put in, you gift them money – kind of like what a tax deduction or company match does for you when you contribute to a standard retirement plan.

 

 

You surely can dream of your own creative ways to entice them to make the contribution. You never know unless you raise the issue with them.

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Investment Diversification

 

1-minute viedo: Protect Your Portfolio With Diversification

 

Investment Diversification

 

Diversification is designed to gain the greatest return for the least amount of risk. Of course, no one knows the future otherwise you would not need diversification. For if you knew the future, you could invest in one type of investment and gain the most. However, we do know the future, so we use a strategy of diversification in hopes of capturing most of the upside growth while minimizing the downside hazards.

The best diversification is still not the same for everyone because everyone’s life and hoped for future is different. These and other factors taken together are used to construct a portfolio that is diversified.  

You can build a basic, diversified portfolio using four general areas in which you can invest using index funds, exchange trade funds, mutual funds.

1. Domestic funds: Typically, this is the most aggressive part of a portfolio, likely providing the greatest potential for reward. Historically, stock market investments have outpaced most other kinds of holdings. Nevertheless, the market is volatile and periodically experiences downward spirals, so to take advantage of the potential long-term outperformance of stocks you have to stick to your plan over the long haul. It's the value of stocks when you decide to sell, not what they may be worth during the time you hold them that truly counts.

2. Domestic bonds: Bonds can serve as a counterweight to stocks because the prices of the two kinds of investments sometimes move in opposite directions. Again, there are no guarantees that this will happen or that holding both kinds of assets will have the desired effect. If safety is a primary concern, you might increase your investment in U.S. Treasury bonds or high-quality corporate bonds, which tend to offer less volatility, though with somewhat lower returns. In other cases, you might opt for high-yield bonds with their higher returns and greater exposure to risk.

3. Short-term investments: Conservative investments such as money market funds and certificates of deposit (CDs) generally offer stability and help preserve your principal. Most CDs are backed by the Federal Deposit Insurance Corporation within generous limits. A main attraction of money market funds, which aren't federally insured, is their liquidity, but you do risk losing principal.

4. International investments: Foreign holdings in stocks and bonds can round out a portfolio. With international stocks, both your potential returns and possible risks may be higher than they would be with domestic stocks. International bonds, too, offer the opportunity for more reward at a greater risk.

There are many one ways to divide up the investments and weighing of the investment of each type to suit your personal needs. But hopefully these area will get you started.

This article was written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.

© 2018. All Rights Reserved.

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Instant Trouble with Your IRA

 

1-minute video: How to Avoid an IRA Rollover Mistake?

 

Instant trouble with your IRA

When you reach retirement, you may not need you IRA money, but it may be smart to combine it with other retirement assets. Here we will assume combining the assets is the smart move, but you can create instant stress if you do it incorrectly.

A rollover to an IRA postpones current tax on the funds you transfer and keeps the money growing tax-deferred when properly executed.

Note: for this discussion the term “new IRA” refers to the IRA that is getting the money. It may actually be an IRA you have had for many years, but it seems less confusing to describe it as the new IRA.

Mistakes you need to avoid.

  1. Not meeting the transfer deadlines. When moving money from one IRA to another, you actually have 60 days within which to make the transfer. Some people see the IRA as a source of ready cash, spend some, and then forget to get the whole amount back into the new IRA. Now they have a problem because instead of moving the money without any tax consequences, they now may owe taxes on the whole amount and all in one year. Yikes. This could really bump you into a higher tax bracket and needlessly incur higher taxes. Procrastination is not a good practice when it comes to transferring IRAs.
  2. Failing to transfer into the new IRA what you took from the original IRA or retirement plan at work. From work retirement plans, if you take possession of the proceeds, the firm for whom you worked will deduct federal and perhaps state taxes. This means when it comes time to get your old IRA balance into your new IRA, you will need to add in the amount they withheld. Failure to do so means the shortfall is taxable income and there may be penalties too.
  3. All or none. The law allows partial transfers. So, if you do not want to move all of it for some reason, you have that choice with IRAs. With retirement plans at work they may have special limitation on partial transfers, so you need to check with them on the precise rules.Moving part of the money may facilitate cash flow or tax planning.
  4. Moving the money to the wrong IRA. Transfers can only be made you accounts you own individually. You can not move the money to a spouse’s or child’s account. Again, this transfer is a taxable transfer when it does not go to your own account.
  5. One per year. You can only take possession in the process once in a year. After the first one, the others are taxable distributions.

Let us help you make a safe, tax-free rollover or transfer to an IRA.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

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Reasons not to combine IRAs

Link to 1-minute video about: How to Avoid an IRA Rollover Mistake? 

 

Reasons not to combine IRAs

 

You can not directly combine unlike kinds of IRAs. That is a big no-no.

Yes, there are means to convert a Traditional IRAs to ROTH IRAs, but that is not the same as lumping them together in one step. To ultimately get the Traditional IRA assets into a ROTH IRA requires using a process called ROTH IRA Conversion. Before trying this, though, recognize there may be tax consequences that out way the benefits of the ROTH IRA.

 

Except in a limited circumstance, you can not combine the IRAs of the same type with that of another individual. To legally combine IRAs from another person, unfortunately, a spouse must die and the surviving spouse must make arrangements by a deadline to move the proceeds into the surviving spouses IRA. There are some complicated issues on whether to combine the IRAs or not and most involve taxes.

 

Another reason not to combine retirement assets from work, 401(k) or 403(b), is the special protection afforded these accounts from creditors. Once the money is moved from the work plan to an IRA, the protection may disappear or be lessened.

For estate planning reasons you may wish to keep the accounts separate. If you have both the Traditional and ROTH IRAs, you have flexibility that is lost if not retained separately. You may want one type to go to certain beneficiaries and another type to other beneficiaries, but this flexibility is lost when an owner combines their IRAs or a Traditional IRA is converted to a ROTH IRA.

 

For cash flow reasons, you may wish to not to covert Traditional IRAs into ROTH IRAs. You see, withdrawals from Traditional IRA’s may create, and usually do, create a tax liability. In contrast, the ROTH IRA will not have a tax liability no matter how much you take out. So, in some tax years you may need the money, but not the tax liability, so drawing from the ROTH is the answer. Each person’s case is unique and strict calculations must be done before drawing money to decide which account source is best. Only someone competent in these issues can give you a good answer.

 

Another reason not to take possession of your work retirement money to later place the assets into an IRA is finding money to match the withholding. The workplace administrator will withhold 20% before you get your check, but to avoid taxes you will need to reinvest in the new IRA the original amount before withholding which means you need to add your own assets so the amount deposited in the IRA matches the amount your received plus the amount withheld.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

 

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Good Reasons to Consolidate your IRAs

 

Link to When Does a Roth Conversion Make Sense?

 

Good Reasons to Consolidate your IRAs.

 

Generally, merging together like-type IRAs, Traditional IRAs with Traditional IRAs or ROTH IRAs with ROTH IRA is a common practice to reduce the burden of tracking multiple accounts. It surely cuts down on the paperwork and accounting problems multiple accounts create.

 

Another reason to combine like-IRAs is to more easily execute an investment plan.

 

Also, sometimes accounts might be too small to invest to support your holistic strategy. But by combining it with another or others, it can get working in your favor. It some cases you can reduce the total amount of fees levied against your multiple accounts – who does not want to save on fees.

 

The last benefit I’ll mention is that when you ultimately must draw money from your Traditional IRA, and some special ROTH IRAs, the calculation, administration of the withdrawals can be cumbersome and prone to mistakes with multiple accounts. The penalty is 50% of the error amount not drawn – Ouch. In consultation with your advisor, generally combining account normally makes good sense. Make life simpler consider combining like-type IRAs.

 

This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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How to prepare for higher interest rates

Link to 1-minute video: How Do You Create a Simple Retirement Income Plan?

 

Rising Interest Rates

Lately, you may have noticed more articles in print, online, or tv about the quick rise in key rates in the last 18-months. No one knows whether they will continue appreciably further up, level off for a while, or even head back down. However, many feel rates will climb before they sink, so what can you do?

  • Build a CD “ladder.” As interest rates rise, newer certificates of deposit will offer higher yields, and if you invest in CDs with a range of maturities, in particular less than two years, you’ll be poised to act when rates move higher. You can reinvest the proceeds of CDs that mature into new CDs with better yields.
  • Adjust bond fund allocations. Bonds function very much like CDs when it comes to their price. As rates go up, their prices generally fall. Placing more assets in shorter duration or maturity bonds or bond funds with allow the assets to reinvest in ever rising bond rates. Long-term bond funds are still worthy of purchase, but when rates are rising, skewing your holdings towards short duration or maturity bond funds may be superior while rates are climbing.
  • Dividend paying Stocks. Currently many companies are increasing their dividend payout and this means greater return for your money from dividends. Companies who do not raise dividends may be looked as less favorably as their interest-like return is not keeping up with the market or inflation.
  • Revise personal debt. If rates are going higher, lock in fixed rates. Further, pay debt that is going to raise its interest charges.

Interest rates present complex challenges. Please call and make an appointment so we can help you get into position for rising rates.

Note: Past performance of an investment or strategy is no guarantee of future returns.

This video and text is for information use only and is based on information believed to be true. Much of the information included is readily available online, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888, This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

 

 

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How to be tax efficient with your investments.

Reducing the taxing effect on your investments is a sure way to increase your rate of return without taking more risk,

1-minute video on how to be tax efficient with your investments.

 

This video is for information use only and is based on information believed to be true. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at This email address is being protected from spambots. You need JavaScript enabled to view it. , 573-874-3888, if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.

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Lending Money to a Family Member

 

 

Lending Money to a Family Member

Sometime in your life you may be asked to lend money to a family member – offspring or sibling. There are a few issues to consider. First, can you afford to loan the money and not get it back? Presumably whoever is borrowing the money could not get it elsewhere. If they have tried a bank and were turned down, perhaps the bank has a keener eye for success than you which suggests lending might not be a profitable idea and you may not get your money back.

But banks have been wrong before and you may wish to take a chance anyway. Now comes the issue of interest – what rate will you charge.

As long as the loan is for $10,000 or less, there won't be a problem. However, if the borrowed amount is larger and you do not charge the going rate of interest, the IRS will "impute" interest for you, based on its own assumptions. You'll end up being treated as if you had charged/earned interest, even though you hadn't, and you'll owe tax on that "phantom income" that you didn't receive.

If lending to an offspring, special rules may apply. If the loan is for $100,000 or less, the interest you will be considered to have received annually for tax purposes is limited to the amount of your child's net investment income for the year. And if that amount doesn't exceed $1,000, you can avoid taxable interest income on the intra-family loan. But the IRS may still intercede if it suspects that you're trying to dodge the tax liability.

How do you figure out what the "going rate" for interest is? It depends on several factors, including the type of loan, its length, and the interest rates in your local area. You might be able to charge slightly less than a local bank, but you can't go overboard.

What happens if you do not get paid back? The IRS could determine that the "loan" was always meant to be a gift. To avoid that problem, it's best to have an attorney draft a formal loan document. It should include the usual terms that would be found in a bank loan. For instance, the document will usually indicate:

·         The amount of the loan;

·         The time allowed for repayment;

·         The interest rate structure;

·         A description of the collateral securing the loan.

Finally, have the loan document witnessed and notarized. This is the best proof you can have if the IRS ever challenges the deal. Also, keep records showing repayments to demonstrate that the arrangement is a bona fide loan.

This article was written by Steven Erickson based upon material prepared by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.

 

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Benefits of ETFs

 ETFs Can Provide Some Genuine Benefits To Investors

 

ETFs may sound like aliens from the "Star Wars" movies. But they're actually an increasingly popular investment in Missouri and across the nation that offers several potential benefits to investors. The acronym stands for exchange-traded fund. And if you don't already have ETFs in your portfolio, you might want to consider adding some to the mix to provide diversification at a low cost.

ETFs are securities that normally track an index, such as the well-known Standard & Poor's (S&P) 500. They are traded on a public stock exchange, so prices fluctuate throughout each trading day. Because of this liquidity, and the fact that fees associated with the investment are typically reasonable, more investors are opting for ETFs.

Technically, the ETF owns underlying assets—such as stocks, bonds, commodities, or foreign currencies—and this ownership is divided into shares for investors. Therefore, you own the ETF's investments indirectly and your shares represent their market value. Also, any ETF may have dozens or hundreds of underlying securities thereby giving you exposure to many securities rather than just one bond or one stock. Another advantage is the ETFs provide tax advantages in that the typical ETF does not trade its component share as often as standard mutual funds.

What's more, ETFs let you diversify across a wide range of underlying investments, while providing investors with other advantages such as being able to buy short or on margin. And taxable gains aren't passed through to shareholders, although you will be taxed on any gains under the usual rules when you sell an ETF. Lastly, the composition of the ETF changes little year-to-year which means what you buy remains much what it was while you own it. This is unlike a mutual fund that may alter its components considerably even in one year.

We can help you determine whether this investment "creature" is suitable for your situation.

Article rewritten by Steven Erickson from an article provided by Advisor Products.

 

 

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How dollar-cost-averaging can be great for investing

1-minute video on dollar-cost-averaging.

 

 

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1-minute video on Year-end Tax Tips

 

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Investment Risks

How You Can Manage Risk Aversion

 

During the early part of 2017, the stock market was rolling merrily along, with the Dow Jones Industrial Average (DJIA) breaking through the 20,000-point barrier for the first time. Whether the "Trump bump" will fast is anyone's guess, but and some prognosticators are forecasting eventual doom and gloom. In all likelihood, the stock market will continue to experience ups and downs, just like it has throughout its history. The question is what risks are you taking.

Regardless of whether the market is going up or down, or staying relatively stable, your portfolio should reflect your personal aversion to risk. Primarily, there are three types of risk to address in this overall philosophy:

1. Risk of loss of principal: This is the risk of losing the money you initially invested. Say you buy a stock for $1,000 that jumps to $1,200 before it falls back to $900. If you sell the stock at that point, you will have lost $100 of principal.

2. Risk of loss of purchasing power: You may be willing to limp along with modest returns, but you're losing money if the inflation rate exceeds your rate of return. For instance, if you acquire a bank CD paying a 2% annual rate and inflation rises to 3.5%, you're losing 1.5% in the purchasing power of that investment.

3. Risk of outliving your savings: Is your investment plan overly conservative? Remember that the stock market historically has outperformed most comparable investments over long periods, although there are no absolute guarantees. Therefore, you're likely to fare better with a well-devised investment plan than you would if you stuffed your money under a mattress. Otherwise, you might outlive your savings, especially given recent increases in life expectancies.

Risk assessment surveys can provide some insights. Typically, an analysis will reveal that you tend to be either a conservative, moderate, or aggressive investor, within certain ranges. Your portfolio should reflect this characterization.

If you are not able to endure the swings in the market, you may want to fine-tune your investments accordingly, taking into account asset allocation and diversification methods. Again, these strategies do not offer any guarantees, nor do they protect against losses in declining markets, but they remain fundamentally sound.

Other potential ideas are to weight your portfolio more heavily to bonds than you did in your younger days. The technique of "bond laddering," with bonds maturing at different dates, is a variation on this theme. Similarly, conservative investors may emphasize dividend-paying stocks and blue chips, as well as mutual funds and exchange traded funds (ETFs) offering diversification.

Every situation is different. Reach out to us to address your specific concerns.

Material in this article was written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice. © 2017. All Rights Reserved.

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Tax savings ideas for 2017

FINANCIAL BRIEFS

17 Midyear Tax Moves You Still Can Make In '17

Trump has provided an outline for tax reform, but nothing has happened yet. In the meantime, take advantage of tax breaks currently on the books, including these 17 items:

1. Capital losses: If you realized capital gains from securities sales earlier this year, you can start harvesting losses. Your losses will go to offset capital gains you realize in 2017 plus up to $3,000 of highly taxed ordinary income.

2. Capital gains: Long-term capital gains that aren't offset by losses will be taxed at a maximum rate of only 15% (20% if you're in the top ordinary income tax bracket). But some upper-income investors also may owe a 3.8% tax on investment income.

3. 401(k) contributions: Reduce your tax liability by boosting contributions to a 401(k) plan. For 2017, the maximum deferral is $18,000 ($24,000 if age 50 or over). Not only do you avoid tax on the contributions, the money in your account compounds on a tax-deferred basis.

4. Roth conversions: This may be a good time to convert funds in a traditional IRA to a Roth. Future Roth IRA distributions are tax-free if they meet certain conditions. And though you'll owe income tax on the amount you convert, transferring the funds over several years could reduce the overall tax bite.

5. Higher education: Is your child going to college in the fall? Generally, you can claim one of two higher education tax credits, subject to phaseouts based on income. A tuition deduction, also off-limits to most high-income families, expired after 2016 but could be revived.

6. Monetary gifts: If you give money to charities this year—by check, credit card, or online—the donation generally is deductible in 2017. But you must observe strict record keeping requirements for charitable gifts of $250 or more.

7. Wash sales: If you acquire substantially identical securities within 30 days of taking a loss on a sale, you can't deduct the loss. Avoid this "wash sale" rule by waiting at least 31 days to buy back the same securities—or you might buy the securities first and wait at least 31 days before selling the original shares.

8. Dividend-paying stocks: Most stock dividends are taxed at the same preferential tax rates as long-term capital gains. To qualify for this tax break, you must hold the shares for at least 61 days.

9. Installment sales: Generally, you can defer tax on the sale of real estate or other property if you receive payments over two years or longer. Besides stretching out tax payments, you might reduce the effective tax rate if you stay below the thresholds for higher capital gains rates and the 3.8% tax.

10. Hiring your child: Does your child need a summer job? If you hire the child to work at your business, the wages are deductible by the business and taxable to your child at his or her low tax rate.

11. Qualified small business stock: If you invest in qualified small business stock (QSBS) of a fledgling company (perhaps your own) and hold it for at least five years before selling it, you can exclude 100% of any gain.

12. Vacation homes: When you rent out your vacation home, you can write off specified rental activity costs, plus depreciation, but be careful: If your personal use of the rental home exceeds the greater of 14 days or 10% of the days the home is rented out, deductions are limited to the amount of your rental income.

13. Dependency exemptions: Generally, you can claim a $4,050 dependency exemption for a child graduating from college this spring if you provide more than 50% of the child's annual support. Figure out the amount needed to clear the half-support mark.

14. Charitable gifts of property:Give furniture and clothing in good condition to charity. You normally can deduct the fair market value of property donated to a qualified organization, within certain limits.

15. Dependent care credit: If you pay expenses for the care of your under-age-13 child this year while you (and your spouse, if married) work, you may qualify for the dependent care credit. Note that the cost of summer day camp qualifies, but not overnight camp.

16. Like-kind exchanges: If you swap investment or business real estate you own for like-kind property, the exchange is tax-free, except to the extent you receive any "boot" (e.g., additional money) in the deal. Caution: The IRS imposes timing requirements for this tax break.

17. Estimated taxes: Check to see if you're withholding enough income tax from your paychecks. Make necessary adjustments to avoid owing an "estimated tax penalty" in 2017.

 

This article adapted from an article written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.

© 2017. All Rights Reserved.

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Inherited IRA

FINANCIAL BRIEFS

When To Disclaim An Inherited IRA

Should you ever pass up a chance to get more money? It depends. Suppose you're in line to inherit IRA assets. When it makes sense, you might use a "qualified disclaimer" so that the assets bypass you on the way to someone else.

A disclaimer is a legal document that lets you waive your right to receive money or property from an estate. If you execute a disclaimer, it's as if you never inherited the assets. Instead, they go directly to the next people in line to receive them. In the case of an IRA, the assets typically wind up with the account's contingent beneficiaries.

Why would you do this? There are two main reasons:

1. Assuming you don't need the money, you might prefer that the assets go directly to the younger generation, usually your own kids or grandkids. You were going to give the assets to them eventually anyway, right? A disclaimer shortens the process while lengthening the time over which the beneficiaries must take required minimum distributions (RMDs) from the account. RMDs are based on the life expectancies of the beneficiaries, so the younger they are, the longer the wealth can be preserved.

2. A disclaimer may reduce a family's overall tax liability. The RMDs from IRAs generally are taxed at ordinary income rates, which go as high as 39.6%. Younger children and grandchildren are likely to pay tax at a much lower rate.

For a disclaimer to work, it has to be an irrevocable, unqualified refusal to accept property, and it must meet the following requirements:

  • It must be in writing with a declaration and signature of the person who is making the disclaimer.
  • It must identify the property (or the partial interest in the property) that is being disclaimed.
  • It must be delivered to the party or entity responsible for transferring the assets (for example, an IRA custodian or trustee).
  • The disclaimer has to be executed less than nine months after the property was transferred (or within nine months of when the disclaiming person reaches age 21, if that's sooner).
  • As a result of the disclaimer, the assets must pass to the new recipients without any direction from the person making the disclaimer. You can't decide to give the money to someone other than the legal beneficiaries next in line.

 

This process can be technically complicated, so you'll need to work with an attorney to provide the proper language for a disclaimer, which must take into account whatever is required under state law. Also, take great care in completing any beneficiary designation forms furnished by an institution.

 

This article was written by a professional financial journalist for Erickson Financial Solutions, LLC Columbia, Missouri and is not intended as legal or investment advice.

© 2017. All Rights Reserved.

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Best Social Security Benefits

Time Your Social Security Benefits For Top Results

What's the payoff for working most of your life and paying Social Security tax into the system? When your time to retire finally comes, you'll be eligible to receive Social Security benefits based on your work history and when you choose to begin receiving benefits. If you're married, you may have additional options for Social Security, even if one spouse has worked little or not at all.

A particular couple's optimal strategy depends on your age, the age of your spouse, and your health status, among other factors.

Your basic options for receiving benefits are to start early, begin benefits at your full retirement age (FRA), or to delay benefits until later.

  • You can begin receiving Social Security retirement benefits as early as age 62, but if you do, you'll lock in smaller benefits than you would have gotten if you'd waited longer. If you retire at age 62, your benefit will be about 25% lower than if you waited until FRA.
  • If you wait until FRA (also called "normal retirement age") to apply for benefits, there's no reduction. Your FRA depends on the year in which you were born. For most post-World War II Baby Boomers, the age is 66. However, FRA increases gradually and tops out at age 67 for those born after 1960.
  • Finally, if you postpone your benefits until after FRA, you'll receive an increased monthly payment. For each year you wait, you'll get about 8% more, until you reach age 70. (Waiting past 70 doesn't increase your benefit amount.)

 

These basic rules apply to individuals. If you're married, you can claim benefits based on your own work record or you can get 50% of the benefit your spouse is entitled to, if that's higher.

Because Social Security benefits are guaranteed for life, starting early with a smaller benefit still could deliver significant income over your remaining years. Yet you may collect more overall if you start later or if you live for a long time. According to the Social Security Administration (SSA) the average life expectancy of someone at age 65 is now 84.3 years for a male and 86.6 years for a female.

What should a married couple do? Every situation is somewhat different, but consider these three common scenarios:

Scenario 1. Adam and Eve are close in age and income. Because they're both in good health and enjoy their jobs, they plan on working past FRA. They also have enough savings, plus their work income, to sustain them easily until age 70. Currently, Adam has a life expectancy of age 88, while Eve's is age 90. If they elect early benefits at age 62, they would be entitled to an estimated lifetime benefit of almost $1.25 million. But if they wait until age 70 to apply for benefits and then live as long as expected, they could receive close to $125,000 more.

Scenario 2. In our next example, Romeo and Juliet have shorter life expectancies due to health issues. Currently, Romeo has a life expectancy of age 78 and Juliet has a life expectancy of age 76. If they claim benefits at FRA, it's estimated that the couple will receive almost $100,000 more than if they delayed benefits until age 70, based on their life expectancies.

Scenario 3. Jack and Jill are both in their early sixties. Jill is in better health than Jack. If they start benefits at age 62, let's say Jack would get $1,500 a month and Jill $750 per month. Those amounts would rise to $2,000 monthly for Jack and $1,000 for Jill if they claim benefits at FRA. However, by delaying benefits until age 70, Jack will receive about $2,650 a month. What's more, if Jill outlives Jack as expected, she is entitled to benefits based on 50% of Jack's higher monthly amount. Depending on how long Jill lives, her total benefits easily could increase by $50,000 or even more.

One of these scenarios might be similar to your situation, but you'll need to factor in your own variables—including how long you want to or need to work, as well as other financial and personal considerations and your health status—as you consider the best times for you and your spouse to begin receiving Social Security benefits.

 

This article was written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.

 

© 2017. All Rights Reserved.

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Tax Scams to Avoid in 2017

IRS Reveals The "Dirty Dozen" Tax Scams For '17

The IRS has released its annual list of the "Dirty Dozen" tax scams to watch out for in 2017. Here's a recap of the IRS' summary of the top 12:

1. Phishing: A scammer may pose as a representative of an organization you know and trust, perhaps sending mass emails under another person's name or purporting to be a bank, credit card company, tax software provider, or government agency. The goal is to get you to provide personal information.

2. Phone Scams: Crooks may make aggressive phone calls when impersonating an IRS agent. The person might threaten you with police arrest, deportation, license revocation, or some other action—which legitimate agency employees wouldn't do.

3. Identity Theft: Watch out for identity theft, especially during tax-filing season, when someone might steal your Social Security number and use it to file a tax return, claiming a fraudulent refund.

4. Return Preparer Fraud: The vast majority of tax professionals provide honest, high-quality service. But some dishonest preparers perpetrate refund fraud, identity theft, and other scams.

5. Fake Charities: Look out for groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally known organizations. Take a few extra minutes to ensure your hard-earned money goes to legitimate and currently eligible charities. Visit IRS.gov to check out their status.

6. Inflated Refund Claims: Promoters may offer exorbitant refunds. Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records, or charges fees based on a percentage of the refund. Fraudsters rely on flyers, advertisements, phony storefronts—even word of mouth via community groups—to find victims.

7. Excessive Claims for Business Credits: The fuel tax credit—which isn't available to most taxpayers and usually is limited to off-highway business use, including farming—often is claimed improperly. Taxpayers also should avoid misuse of the research credit. Claims for that credit may be disqualified for failure to participate in or to substantiate qualified research activities or to satisfy tax law requirements.

8. Falsely Padding Deductions on Returns: Avoid the temptation to falsely inflate deductions or expenses on returns to pay less than what you owe or to get a bigger refund. Think twice before overstating deductions such as charitable contributions and business expenses or improperly claiming credits such as the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC).

9. Falsifying Income to Claim Credits: Avoid the temptation to inflate deductions or expenses on your return to underpay taxes and possibly receive a larger refund. Overstating deductions for charitable contributions and business expenses or claiming invalid personal credits could lead to large bills for back taxes, interest, or even criminal prosecution.

10. Abusive Tax Shelters:Abusive tax schemes have evolved from illegal domestic and foreign trust arrangements into even more sophisticated strategies. These scams often take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit or debit cards issued from offshore financial institutions.

11. Frivolous Tax Arguments: The IRS also describes common frivolous tax arguments made by those who refuse to comply with federal tax laws. Frequently, taxpayers refuse to pay taxes on religious or moral grounds by invoking their First Amendment rights. Those efforts inevitably fail, and the penalty for filing a frivolous tax return is $5,000.

12. Offshore Tax Avoidance: A recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows why it's a bad bet to hide money and income offshore. Taxpayers are served best by coming in voluntarily and taking advantage of the IRS Offshore Voluntary Disclosure Program to catch up on their tax responsibilities.

 

This article was written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.

 

© 2017. All Rights Reserved.

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Investment Fundamentals

When financial advisors explain the reasons to invest in, or not invest in, particular stocks, they often refer to the "fundamentals" of the companies in question. Media pundits also may cite "fundamentals" in their stock prognostications. And corporate officers may brag about their companies' "fundamentals."

But what does it all mean? They're generally referring to fundamental analysis, a traditional school of thought in looking at companies' basic numbers as a way to evaluate profitability.

Unlike technical analysis of a company, which focuses on the recent trading and pricing history of the company's stock, fundamental analysis paints a broad picture of a company. This process identifies the fundamental value of the shares and leads to decisions to buy or sell the stock.

With technical analysis, you're trying to spot patterns that will help predict whether the fortunes of a company will rise or fall. In contrast, fundamental analysis involves profit margins, management decisions, growth potential, balance sheets, a company's role in a specific industry or sector, and political and other events, domestically and globally, that might affect its performance.

But fundamental analysis isn't limited to figuring out which stocks to buy and when to buy them. It is also about analyzing the timing of possible sales or purchases.

For example, when the stock market is booming, as it was at the start of 2017, investors are quick to jump on the bandwagon, while during times of stock market decline, the same investors often flee in a panic. That's what happened in 2008 and 2009, when the economy contracted and share prices fell by more than half. Of course, there are times when it makes sense to sell stocks, but it is best not to base such decisions on fear.

A better idea is to take a closer look at the fundamentals. In doing so, you might ask—and get answers to—these questions after a market decline has pushed down the price of a particular holding:

  • Is the business model still solid?
  • Have profit margins remained consistent?
  • Is the company financially sound?
  • Is the company likely to thrive over time?

 

If the answers are "yes," you may be well-served to retain your shares in the company for the long term. However, if the firm appears to be heading in the wrong direction, has shrinking profit margins, and sports a business model that is out of touch with changes in the industry, you probably should sell sooner rather than later.

Of course, you don't have to pour through financial reports and other documents to guide your decisions. If you invest in mutual funds, their professional managers are doing this work for you, analyzing company fundamentals to help them decide what to buy or sell to maximize their funds' performance. And we routinely help clients investigate stock fundamentals as they shape their portfolios. Please give us a call if you'd like to discuss your current and potential holdings.

For more information, contact a fiduciary, fee-only adviser in Columbia or Jefferson City Missouri.

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Timely Tax Angles To Dividends

Timely Tax Angles To Dividends

Not all payouts to shareholders are "qualified dividends," but those that are get favorable treatment in which they're normally taxed at less than your rate for ordinary income.

But the tax rules for qualified dividends may go out the window if proposed tax reforms are enacted. The big question is whether you would fare worse under the new rules—or better.

Under current law, most dividends issued by domestic companies are qualified when paid out to shareholders and the owners of mutual funds. In some cases, qualified dividends also may come from foreign corporations, if their shares include publicly traded American Depositary Receipts (ADRs) or shares that are otherwise readily available on an established U.S. securities market.

The maximum tax rate on qualified dividends is only 15% for most investors. If you're in the top ordinary income tax bracket of 39.6%, the tax rate is 20%. Even better, though, investors in the two lowest ordinary income brackets of 10% and 15% benefit from a maximum 0% rate on qualified dividends.

To qualify for these reduced tax rates, shareholders of common stock and mutual funds must own the shares for more than 60 days, including the ex-dividend date (the annual date on which dividends are paid out). The holding period is 90 days for preferred stock. This can affect the timing of transactions if the ex-dividend date is approaching.

Other dividends, including most dividends issued by foreign corporations, are taxed at ordinary income rates. Therefore, if you received $1,000 in foreign dividends in 2016 and you're in the top tax bracket of 39.6%, you must pay $396 in tax on the dividends on your 2016 tax return. But even then, you may be eligible for a foreign credit or deduction that can offset tax paid on foreign dividends dollar for dollar.

So how does potential tax reform figure in the mix? Under campaign proposals from President Trump, the favorable tax rates for qualified dividends would be repealed, but investors would benefit from overall tax cuts. The seven-bracket structure would be scaled back to just three tax brackets with a top tax rate of 33%. It's not yet clear what changes will be enacted, however, or how particular taxpayers might fare.

The best approach is to continue to monitor developments. We will pass along vital information.

This article was written by a professional financial journalist for Erickson Financial Solutions, LLC of Columbia and Jefferson City and is not intended as legal or investment advice.

 

© 2017. All Rights Reserved.

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17 Midyear Tax Saver Strategies

 

17 Midyear Tax Moves You Still Can Make In '17

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Winds of tax reform are blowing in Washington, but nothing has happened yet. In the meantime, take advantage of tax breaks currently on the books, including these 17 items:

1. Capital losses: If you realized capital gains from securities sales earlier this year, you can start harvesting losses. Your losses will go to offset capital gains you realize in 2017 plus up to $3,000 of highly taxed ordinary income.

2. Capital gains: Long-term capital gains that aren't offset by losses will be taxed at a maximum rate of only 15% (20% if you're in the top ordinary income tax bracket). But some upper-income investors also may owe a 3.8% tax on investment income.

3. 401(k) contributions: Reduce your tax liability by boosting contributions to a 401(k) plan. For 2017, the maximum deferral is $18,000 ($24,000 if age 50 or over). Not only do you avoid tax on the contributions, the money in your account compounds on a tax-deferred basis.

4. Roth conversions: This may be a good time to convert funds in a traditional IRA to a Roth. Future Roth IRA distributions are tax-free if they meet certain conditions. And though you'll owe income tax on the amount you convert, transferring the funds over several years could reduce the overall tax bite.

5. Higher education: Is your child going to college in the fall? Generally, you can claim one of two higher education tax credits, subject to phaseouts based on income. A tuition deduction, also off-limits to most high-income families, expired after 2016 but could be revived.

6. Monetary gifts: If you give money to charities this year—by check, credit card, or online—the donation generally is deductible in 2017. But you must observe strict recordkeeping requirements for charitable gifts of $250 or more.

7. Wash sales: If you acquire substantially identical securities within 30 days of taking a loss on a sale, you can't deduct the loss. Avoid this "wash sale" rule by waiting at least 31 days to buy back the same securities—or you might buy the securities first and wait at least 31 days before selling the original shares.

8. Dividend-paying stocks: Most stock dividends are taxed at the same preferential tax rates as long-term capital gains. To qualify for this tax break, you must hold the shares for at least 61 days.

9. Installment sales: Generally, you can defer tax on the sale of real estate or other property if you receive payments over two years or longer. Besides stretching out tax payments, you might reduce the effective tax rate if you stay below the thresholds for higher capital gains rates and the 3.8% tax.

10. Hiring your child: Does your child need a summer job? If you hire the child to work at your business, the wages are deductible by the business and taxable to your child at his or her low tax rate.

11. Qualified small business stock: If you invest in qualified small business stock (QSBS) of a fledgling company (perhaps your own) and hold it for at least five years before selling it, you can exclude 100% of any gain.

12. Vacation homes: When you rent out your vacation home, you can write off specified rental activity costs, plus depreciation, but be careful: If your personal use of the rental home exceeds the greater of 14 days or 10% of the days the home is rented out, deductions are limited to the amount of your rental income.

13. Dependency exemptions: Generally, you can claim a $4,050 dependency exemption for a child graduating from college this spring if you provide more than 50% of the child's annual support. Figure out the amount needed to clear the half-support mark.

14. Charitable gifts of property:Give furniture and clothing in good condition to charity. You normally can deduct the fair market value of property donated to a qualified organization, within certain limits.

15. Dependent care credit: If you pay expenses for the care of your under-age-13 child this year while you (and your spouse, if married) work, you may qualify for the dependent care credit. Note that the cost of summer day camp qualifies, but not overnight camp.

16. Like-kind exchanges: If you swap investment or business real estate you own for like-kind property, the exchange is tax-free, except to the extent you receive any "boot" (e.g., additional money) in the deal. Caution: The IRS imposes timing requirements for this tax break.

17. Estimated taxes: Check to see if you're withholding enough income tax from your paychecks. Make necessary adjustments to avoid owing an "estimated tax penalty" in 2017.

This article was written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.

© 2017. All Rights Reserved

 

 

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Tax Savings Action List for 2016

 

 

  

16 Of The Best Tax Moves For The Summer Of '16

 

Now that the Protecting Americans from Tax Hikes (PATH) Act has removed some of the uncertainty, tax planning during the summer of 2016 should be a breeze. Here are 16 tax-saving opportunities that may be available to you midway through the year:

1. Capital losses: If you cashed in stock winners earlier in the year, you can start filling up the loss side of the ledger. Your capital losses will completely offset capital gains that you realize in 2016, plus up to $3,000 of highly taxed ordinary income.

2. Capital gains: Meanwhile, if you sell securities and earn what qualify as long-term capital gains, the maximum tax rate is only 15% or 20% if you're in the top ordinary income tax bracket. But some upper-income investors also may have to pay a surtax of 3.8% on investment income.

3. Higher education: Is your child going to college in the fall? Lay the groundwork for tax breaks. You may be able to claim a higher education tax credit or a tuition deduction, though these tax advantages are phased out at relatively modest income levels. The PATH Act restores the tuition deduction and makes the American Opportunity tax credit permanent.

4. Wash sales: If you acquire substantially identical securities within 30 days of selling an investment at a loss, you can't deduct the loss. But this "wash sale" rule can be avoided by waiting at least 31 days to buy back the same securities. Or you could buy the additional securities first and wait at least 31 days before selling your original shares.

5. Dividend-paying stocks: Most stock dividends are taxed at the same preferential tax rates as long-term capital gains. To qualify for this tax break, you must hold the shares for at least 61 days.

6. Installment sales: Generally, you can defer tax on the sale of real estate or other property if you receive payments over two years or longer. Besides stretching out tax payments over time, you might reduce the effective tax rate if you stay below the thresholds for higher capital gains rates and the 3.8% surtax.

7. Hiring your child: Does your child need a summer job? If you hire the child to work at your business, your business can deduct the wages, which will be taxable to your child at his or her low tax rate.

8. 401(k) contributions: Reduce your tax liability by increasing contributions to a 401(k) plan at work. For 2016, the maximum deferral is $18,000 ($24,000 if you're 50 or older). Not only do you avoid tax on the contributions, the money in your account compounds tax-deferred until you withdraw it, probably during retirement.

9. Qualified small business stock: Invest in qualified small business stock (QSBS) of a fledgling company (perhaps your own). The PATH Act restores a 100% tax exclusion for sales of QSBS if you hold the stock at least five years before selling it.

10. Roth IRA conversions: You can convert some or all of the funds in a traditional IRA to a Roth. In return for paying income tax on the converted amount, future Roth IRA distributions will be tax-free if they meet certain conditions. To minimize the current tax impact, you could stagger taxable conversions over several years.

11. Vacation homes: You can write off certain rental activity costs, plus depreciation, but be careful: If you use the rental home for more than 14 days or for 10% of the days the home is rented out, whichever is greater, your deductions are limited to the amount of your rental income.

12. Dependency exemptions: You probably still can claim a $4,000 dependency exemption for a child graduating from college in 2016 if you provide more than 50% of the child's annual support. Figure out the amount needed to put you over the half-support mark.

13. Charitable gifts of property: Don't toss out old furniture and clothing; give items in good condition to charity. Generally, you can deduct the fair market value of property donated to a qualified organization, within certain limits.


14. Conservation easements:
 A special tax provision allows you to claim deductions for donating conservation easements involving property you own. Under the PATH Act, you can deduct up to 50% of your adjusted gross income (AGI) this year (100% for farmers and ranchers) instead of the usual 30%-of-AGI limit.

15. Day camps: If your under-age-13 children attend a day camp while you (and your spouse, if married) work this summer, you may qualify for the dependent child care credit. However, the cost of overnight camp isn't eligible.

16. Estimated taxes: Check to see whether you're withholding enough income tax from your paychecks and adjust the amount if necessary to avoid owing an "estimated tax penalty" in 2016.

This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.

© 2016, all rights reserved.

 

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Study These Six Higher Education Tax Breaks

Study These Six Higher Education Tax Breaks

Paying for college can be daunting, but federal tax rules provide some relief. With enhancements from the Protecting Americans from Tax Hikes (PATH) Act of 2015, you may benefit from one or more of these six tax provisions: 

1. Section 529 Plans, available from all 50 states and the District of Columbia, encourage families to set aside savings for future education expenses. Most states set contribution limits at $300,000 or more. Generally, the investment grows without current taxes and distributions to pay for most college expenses — including tuition, fees, books, supplies, equipment, and room and board for full-time students — are completely tax-free. 

You can choose a 529 plan from any state, and although college-savers often choose to save in the plan of their home state, you might be better off establishing a plan elsewhere. Still, more than half of the states offer state tax deductions or credits for Section 529 plan contributions by residents. That could be a compelling reason to stay home when choosing a plan.

2. The American Opportunity Tax Credit (AOTC) became a permanent tax break when the PATH Act became law in December 2015. The maximum annual credit is $2,500. You can get separate credits for each qualified student in your family. For example, if you have three kids in school this year, your maximum credit is $7,500. Also, under another recent tax law change, you now can claim the AOTC for up to four years of school for each child, up from two years previously. 

However, the AOTC phases out between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers and $160,000 to $180,000 for joint filers. Once you exceed the upper limit, you can't claim the AOTC.

3. The Lifetime Learning Credit (LLC) also is a permanent part of the tax code, but the maximum credit of $2,000 applies per taxpayer rather than per student. So even if you have three kids in school at the same time, the maximum credit is still $2,000. 

And eligibility for the LLC also phases out, at levels lower than the AOTC. The range in 2016 is between $55,000 and $65,000 of MAGI for single filers and from $111,000 to $131,000 for joint filers.

4. Tuition deductions also permit some parents to claim deductions for tuition and related fees paid to colleges and universities. This tax provision, extended through 2016 by the PATH Act, provides a deduction of either $4,000 or $2,000, depending on MAGI. For single filers, the $4,000 deduction is available for a MAGI up to $65,000 and $2,000 between $65,000 and $80,000. Joint filers can deduct $4,000 for a MAGI up to $130,000 and $2,000 if a MAGI is between $130,000 and $160,000. Above those limits you don't get a deduction. Taxpayers may claim either higher education credit—the AOTC or the LLC—or the tuition deduction, but not more than one of these three tax breaks.

5. Student loan interest deductions allow you to deduct the annual interest you pay on a student loan, up to a maximum of $2,500. This deduction applies only to the taxpayer who's actually repaying the loan. And the deduction for student loan interest is phased out based between $65,800 and $80,000 of MAGI for single filers and between $130,000 and $160,000 of MAGI for joint filers.

6. Coverdell Education Savings Accounts (CESAs) allow annual contributions of up to $2,000. This is on the low side, especially when compared to Section 529 plans that let you make six-figure contributions. And the ability to put money into a CESA in the first place is phased out between $95,000 and $115,000 of MAGI for single filers and between $190,000 and $220,000 of MAGI for joint filers. But if you qualify, these accounts, too, shield you from current taxes on earnings and you can withdraw money tax-free to pay for tuition and fees, room and board, uniforms, transportation, books and supplies, academic tutoring, and computers.

One bonus with a CESA: those who qualify to contribute to the accounts can use the money to cover costs from kindergarten through 12th grade as well as for college. 

These tax breaks may offer parents help in saving for the high cost of higher education. We can help you sort through your options and navigate the arcane rules to find the best path in your situation.

 

This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.

 

© 2016, all rights reserved.

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Four Retirement Planning Rules of Thumb to Bend

I found this article that I thought you would find interesting. 

Four Retirement Planning Rules Of Thumb To Bend

The online Merriam-Webster dictionary offers two definitions for "rule of thumb":

  • A method or procedure based on experience and common sense,
  • A general principle regarded as roughly correct but not intended to be scientifically accurate.

 

In other words, although rules of thumb can be useful guidelines, they're not gospel on any particular issue. This is especially important to remember when you're trying to set aside enough money to last comfortably through your retirement years. And while some traditional rules of thumb that have been followed faithfully for decades may serve as starting points, they're not infallible. Consider these four examples:

1. Save one million dollars for retirement. How much will you and your spouse need to live on in retirement? That's the age-old question. In recent years, some people have seized on a million dollars as the magic number to strive for. It's a nice round figure and, after all, can't a millionaire afford an upscale lifestyle in retirement?

But a million dollars doesn't go as far as it used to. Suppose you take an income of 4% of your savings annually—another rule of thumb for using retirement savings (see below). That's just $40,000 a year, and there will be even less if you dig into your nest egg to buy a winter "snowbird" home, for example, or take a few exotic vacations. And people are living longer these days, so you may need money to sustain you for 25 or 30 years, not 20 or less.

Another option that can be used is to set aside an amount roughly equal to eight times your ending salary (or even higher). So, if you're pulling down $200,000 just before retirement, you should have $1.6 million (8 x $200,000) in your coffers. That may be a preferable goal—but even then, a 4% withdrawal will give you only $64,000 a year.

2. Replace 80% of your pre-retirement income. This rule of thumb has been amended to make some concessions for a higher cost of living. Previous estimates often were predicated on replacing 70% or 75% of your salary with savings from retirement plans at work and IRAs, investment earnings, Social Security benefits, and other sources. Again, this rule of thumb may work for some people, but not for everyone, and replacing 80% of a high salary could require very substantial savings. You want to have 80% of that $200,000 in income? That's $160,000 a year, and could require savings of $4 million or more.

Moreover, the 80% rule ignores certain variables, such as health-care needs, lifestyle choices, and family obligations. It may be more helpful to go beyond rules of thumb to estimate what your expenses really may be in retirement and work backward to figure out how much you will have to accumulate and earn annually to meet your objectives.

3. Save at least 10% of your income for retirement. The old belief is that you should pay yourself first before you pay anyone else. This rule of thumb mandates that you set aside at least 10% of your salary each year no matter what is happening in your life. For a simplified example, if you earn $150,000 a year and thus set aside $15,000 a year in a tax-deferred vehicle such as a 401(k) plan, you will have $1,470,081 after 30 years if you earn an annual 7% return. (This example is hypothetical and not indicative of any particular investments.)

There are two problems here. First, there's no guarantee that saving 10% a year will give you what you need in retirement. The second is that it may be difficult to maintain that discipline, especially if you're raising a family during your peak earning years. If your saving lags during those years or if you can't start saving until later in life, the 10% rule is very likely to give you less than you need.

4. Withdraw no more than 4% annually from your nest egg. At first blush, this principle makes perfect sense for anyone planning on a long lifetime in retirement. In theory, if you withdraw 4% a year and earn more—say, 7% or 8%, as a hypothetical example—you should be able to sustain your nest egg throughout retirement as long as inflation remains relatively low.

But there are no guarantees of what interest rate you will earn, and you might have to use more than 4% some years. Furthermore, during a sharp market downturn, taking out even the minimum 4% could put you in a deeper hole that could be hard to dig out of.

Where do you stand? Although these four guidelines can be helpful, a better idea is to work out a comprehensive plan for your future. We would be glad to provide the retirement planning assistance you need.

 

This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.

 

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