, , , ,

The Risks of Putting Too Much Money Into an Annuity

These private income contracts do have potential flaws.

It may not be good to have all your eggs in an annuity basket. Or even a majority of your eggs, financially speaking.

Fundamentally, an annuity contract means handing over your money to an insurer. In turn, the insurer pays out an income stream to you from that lump sum (or from the years of purchase payments you have made). The insurance company holds the money; you do not. From one standpoint, this arrangement has some merit; it relieves you of the burden of having to manage that money. From another standpoint, it has a few drawbacks.1,2

Annuities are often illiquid. If you run into a situation where you need cash in retirement (a major home repair, a legal settlement, big medical expenses), it may not be prudent to withdraw cash from your annuity. If you have not owned the annuity for some time, you may have to pay a hefty withdrawal penalty to access the money. From the insurer’s point of view, you are violating a contract. Should you have buyer’s remorse and decide you want out of your annuity contract soon after its inception, you will probably face a surrender charge. If you back out after the initial year of the contract, the surrender charge is commonly about 7% of your account value; it usually declines by a percentage point for each subsequent year you have spent in the annuity contract before surrendering.2

Annuities come with high annual fees. A yearly management fee of 1.25% or more is not uncommon. Then there are mortality and expense (M&E) fees, fees for add-ons and guarantees, and up-front charges. If you have a variable annuity, throw in investment management fees as well. These fees for variable annuities may effectively eat away at their annual returns.2

Annuity joint-and-survivor income provisions may not be as beneficial as they seem. Many annuities feature this payment structure, whereby the income payments continue to a surviving spouse after the death of one spouse. The downside of this arrangement: from the start, the income payments are less than what they ordinarily would be. If you are the annuity holder and you think your spouse may pass away before you do or are already confident that your spouse will be in a good financial position after your death, then a joint-and-survivor annuity payment structure may be nice, but not really necessary.3

If you do not yet own an annuity, consider that you may not need one. The federal government basically gives you the equivalent of a deferred annuity: Social Security. Like an annuity, Social Security provides you with a reliable income stream – and your Social Security income is adjusted for inflation.4

Think of an annuity as one potential piece of a retirement strategy. See it as a component or a supplement of that strategy, not the core.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tinyurl.com/y9mukmp3 [2/28/18]

2 – annuitieshq.com/articles/annuities-good-bad-depends-actually/ [7/28/17]

3 – forbes.com/sites/forbesfinancecouncil/2018/03/29/five-reasons-not-to-buy-an-annuity/ [3/29/18]

4 – ssa.gov/oact/cola/latestCOLA.html [4/6/18]

, , ,

Tax Efficiency in Retirement

How much attention do you pay to this factor?

Will you pay higher taxes in retirement? Do you have a lot of money in a 401(k) or a traditional IRA? If so, you may receive significant retirement income. Those income distributions, however, will be taxed at the usual rate. If you have saved and invested well, you may end up retiring at your current marginal tax rate or even a higher one. The jump in income alone resulting from a Required Minimum Distribution could push you into a higher tax bracket.

While retirees with lower incomes may rely on Social Security as their prime income source, they may pay comparatively less income tax than you will in retirement; some, or even all, of their Social Security benefits may not be counted as taxable income.1

Given these possibilities, affluent investors might do well to study the tax efficiency of their portfolios; not all investments will prove to be tax-efficient. Both pre-tax and after-tax investments have potential advantages.

What’s a pre-tax investment? Traditional IRAs and 401(k)s are classic examples of pre-tax investments. You can put off paying taxes on the contributions you make to these accounts and the earnings these accounts generate. When you take money out of these accounts, you are looking at taxes on the withdrawal. Pre-tax investments are also called tax-deferred investments, as the invested assets can benefit from tax-deferred growth.2

What’s an after-tax investment? A Roth IRA is a classic example. When you put money into a Roth IRA, the contribution is not tax-deductible. As a trade-off, you don’t pay taxes on the withdrawals from that Roth IRA (so long as you have had your Roth IRA at least five years and you are at least 59½ years old). Thanks to these tax-free withdrawals, your total taxable retirement income is not as high as it would be otherwise.2

Should you have both a traditional IRA and a Roth IRA? It may seem redundant, but it could help you manage your marginal tax rate. It gives you an option to vary the amount and source of your IRA distributions considering whether tax rates have increased or decreased.

Smart moves can help you reduce your taxable income & taxable estate. If you’re making a charitable gift, giving appreciated securities that you have held for at least a year may be better than giving cash. In addition to a potential tax deduction for the fair market value of the asset in the year of the donation, the charity can sell the stock later without triggering capital gains for it or you.3

The annual gift tax exclusion gives you a way to remove assets from your taxable estate. In 2018, you may give up to $15,000 to as many individuals as you wish without paying federal gift tax, so long as your total gifts keep you within the lifetime estate and gift tax exemption. If you have 11 grandkids, you could give them $15,000 each – that’s $165,000 out of your estate. The drawback is that you relinquish control over those dollars or assets.4

Are you striving for greater tax efficiency? In retirement, it is especially important – and worth a discussion. A few financial adjustments could help you lessen your tax liabilities.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

,

Six Things to Know About Appealing Financial Aid Awards

A college’s first offer doesn’t always have to be the final one.

This is the time of year when college-bound high school seniors are receiving their financial aid packages. The results may be disappointing to some parents.

The good news is, a college’s first offer doesn’t always have to be the final one. It is possible to appeal disappointing awards. This is true, by the way, for need-based financial aid awards, as well as merit scholarship awards.

Parents will boost their chances of being successful if they understand why appeals are possible and what’s involved in the process.

Here are six things that parents need to know about squeezing more money out of a college.

  1. At most colleges, it’s a buyer’s market.

You wouldn’t know it from media reports, but the majority of private and public colleges and universities struggle each year to meet their freshmen enrollment goals.

Gallup documents just how difficult it is when it conducts a yearly survey of admissions directors at public and private colleges and universities. In its most recent survey, 66 percent of admission administrators said they fell short of attracting enough students for the 2017-2018 school year.

If asked, schools that aren’t filling their freshmen seats are more likely to sweeten an applicant’s offer.

  1. Know what schools aren’t panicking.

The most elite private colleges, which enjoy the luxury of being deluged with applicants from highly qualified students, are in a separate category from most of their higher-end peers. The public research universities, which tend to be the most popular schools in their states, are also less likely to worry. In this category are institutions such as the University of Michigan, UCLA, University of California, Berkeley, University of Texas and University of Virginia.

  1. Share competing offers.

Families can often boost their chances for better awards if they have competing offers that are superior. Here is an example from a mom whom I heard from last month. Her daughter received a $29,000 yearly award from Susquehanna University and a $25,000 merit scholarship from Juniata College, which are peer institutions in Pennsylvania. If her daughter decides to attend Juniata, the mom will ask that school to match Susquehanna’s award.

When parents contact schools, admission offices will often ask families to scan or fax competing awards to them.

  1. Parents need to look for an important number.

To evaluate the generosity of an award letter, parents must know what their expected family contribution is. An EFC represents what a household would be expected to pay, at a minimum, for one year of college.

The aid formula generates the dollar figure after evaluating the financial information that parents share in their financial aid application. If the EFC, for instance, is $33,700, that means the formula is indicating that this is how much a family would be expected to pay at a minimum for one year of college.

Colleges should be including this important figure on their financial aid letters, but it is often missing. If parents can’t find this number, they need to ask the school for it. Without it, they wouldn’t be able to determine if the award is a good one or not.

When parents possess their EFC, they can subtract it from the cost of the school to determine what their official need is.

Here is an example:

$65,000 (price tag) minus $33,700 (EFC) equals $31,300 (family’s financial need).

In this scenario, the school would ideally provide the student with $31,300 in need-based financial assistance with most of it being in the form of grants. This would be the best outcome that a family could hope for.

Let’s say, however, that the college only provides this student a $5,000 grant. That would be a miserly offer and certainly worth appealing.

  1. Be careful what you say.

College admission officers really dislike it when parents use the word “negotiate” when asking for a better award, says David Levy, the former director of admissions at the California Institute of Technology.

Sure, what parents are doing is essentially negotiating, but somehow it’s distasteful when the word is used. Parents should be diplomatic when requesting greater assistance.

  1. Ask how home equity has impacted an award.

The vast majority of colleges don’t use equity in a primary home when calculating need. These institutions typically just rely on the Free Application for Federal Student Aid, which doesn’t even ask parents if they own a primary home.

Just over 200 colleges, however, use a secondary aid application called the CSS Profile, which does ask about home equity. The Profile is popular with elite brand name schools and selective private institutions.

How Profile institutions assess home equity varies widely. A minority of these schools won’t consider it at all, while others use the entire home equity in their calculations. Still others will cap the amount of home equity they use.

Schools that do consider home equity will assess it at 5 percent. So if a family has $250,000 in home equity, the household’s EFC will increase by $12,500. Put another way, the student’s chances for need-based financial aid will decrease by $12,500. That’s a big hit for a family simply living in their home.

Some schools, however, privately share that they are open to families appealing the home equity aid penalty. It’s important that you tell your clients that.

LPL Tracking 1-722123

 

, , ,

Fed Move Suggests Economy Is On Track”

The first quarter of 2018 is wrapping up, and it’s time to spring forward and look ahead to what we could expect in the coming months. After a large market drop kicking off the month of February, March has been relatively calm for stocks so far. The biggest event of the month was the Federal Reserve (Fed) meeting held on March 21—the first with new Fed Chair Powell at the helm.

As anticipated by the markets, the Fed raised the fed funds rate by 0.25% (25 basis points), bringing its target interest rate to 1.50–1.75%. The Fed also upgraded its outlook on economic growth and kept its inflation projection unchanged.

So what does this latest step forward mean for markets overall? Although sometimes markets react negatively to rate hikes, these increases tend to signal the Fed’s confidence in the U.S. economy. The Fed’s dual mandate seeks to balance the often-competing goals of maximum employment and low, stable inflation. With the economy growing above potential and job growth steady, the Fed’s attention has been increasingly focused on finding a rate hike path that does not lead to any bubbles in markets or cause the economy to overheat.

One of the contributing factors to the market decline in early February was the January employment report, which showed a surprise uptick in wage growth. As a result, this increased concerns regarding inflation and whether a faster path of rate hikes was on the horizon. Since then, fears of escalating inflationary pressures may have faded somewhat, although price pressures could continue to build in the coming months. LPL Research continues to believe the Fed will need to see a sustained pace of higher inflation, and potentially a wage growth number as high as 4% annually, before becoming significantly more aggressive.

In addition to the Fed and inflation, there are a number of factors that could have meaningful implications down the line, including:

  • Economic growth: Market participants generally expect the U.S. economy to get a boost from the new tax law, which supports both consumer spending and business spending.
  • Earnings: Corporate America produced the best earnings growth in several years during the fourth quarter of 2017, while 2018 has seen the biggest upward revision to S&P 500 Index earnings to start a year since these data have been collected.
  • Trade policy: LPL Research believes trade policy is among the biggest risks facing stocks right now. The recently announced tariffs may have limited immediate economic impact, but the big concern is China’s intellectual property trade practices.

Although there may never be a dull moment when watching the markets and economy in this day and age, the latest action by the Fed was taken in stride. However, it is important to acknowledge the possibility for further volatility, given geopolitics and trade protectionism. Overall, LPL Research’s outlook remains positive for the remainder of 2018, as continued economic and earnings growth may help offset trade tensions.

If you have any questions, I encourage you to contact me.

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Economic forecasts set forth may not develop as predicted.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC. Tracking #1-712538

, , ,

The Pros & Cons of Roth IRA Conversions

What are the potential benefits? What are the drawbacks?

 

If you own a traditional IRA, perhaps you have thought about converting it to a Roth IRA. Going Roth makes sense for some traditional IRA owners, but not all.

Why go Roth? There is an assumption behind every Roth IRA conversion – a belief that income tax rates will be higher in future years than they are today. If you think that will happen, then you may be compelled to go Roth. After all, once you are age 59½ and have had your Roth IRA open for at least five years (five calendar years, that is), withdrawals of the earnings from your Roth IRA are exempt from federal income taxes. You can withdraw your Roth IRA contributions tax free and penalty free at any time.1,2

Additionally, you never have to make mandatory withdrawals from a Roth IRA, and if your income permits, you can make contributions to a Roth IRA as long as you live.2

For 2018, the income limits are $135,000 for single filers and $199,000 for joint filers, with phase-out ranges respectively starting at $120,000 and $189,000. (These numbers represent modified adjusted gross income.)2

While you may make too much to contribute to a Roth IRA, you have the option of converting a traditional IRA to a Roth. Imagine never having to draw down your IRA each year. Imagine having a reservoir of tax-free income for retirement (provided you follow Internal Revenue Service rules). Imagine the possibility of those assets passing to your heirs without being taxed. Sounds great, right? It certainly does – but the question is: can you handle the taxes that would result from a Roth conversion?1,3     

Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side.

A Roth IRA conversion is a taxable event. The I.R.S. regards it as a payout from a traditional IRA prior to that money entering a Roth IRA, and the payout represents taxable income. That taxable income stemming from the conversion could send you into a higher income tax bracket in the year when the conversion occurs.2

If you are nearing retirement age, going Roth may not be worth it. If you convert a large traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion. Model scenarios considering “what ifs” should be mapped out.

In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.

On the other hand, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.

If you aren’t sure which argument to believe, it may be reassuring to know that you can go Roth without converting your whole IRA.

You could do a multi-year conversion. Is your traditional IRA sizable? You could spread the Roth conversion over two or more years. This could potentially help you avoid higher income taxes on some of the income from the conversion.2

Roth IRA conversions can no longer be recharacterized. Prior to 2018, you could file a form with your Roth IRA custodian or trustee to undo a Roth IRA conversion. The recent federal tax reforms took away that option. (Roth IRA conversions made during 2017 may still be recharacterized as late as October 15, 2018.)2

You could also choose to “have it both ways.” As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.

If you do go Roth, your heirs might receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. If I.R.S. rules are followed, Roth IRA heirs may end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, distributions of inherited assets from a traditional IRA are routinely taxed.3

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – cnbc.com/2017/07/05/three-retirement-savings-strategies-to-use-if-you-plan-to-retire-early.html [7/5/17]
2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [3/26/18]
3 – time.com/money/4642690/roth-ira-conversion-heirs-estate-planning/ [1/27/17]

, , ,

The Major 2018 Federal Tax Changes

Comparing the old rules with the new.

The Tax Cuts and Jobs Act made dramatic changes to federal tax law. It is worth reviewing some of these changes as 2019 approaches and households and businesses refine their income tax strategies.

Income tax brackets have changed. The old 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% brackets have been restructured to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These new percentages are slated to apply through 2025. Here are the thresholds for these brackets in 2018.1,2

Bracket          Single Filers                      Married Filing Jointly            Married Filing                 Head of Household

                                                                    or Qualifying Widower        Separately                      

 

10%                $0 – $9,525                        $0 – $19,050                           $0 – $9,525                     $0 – $13,600

12%                $9,525 – $38,700              $19,050 – $77,400                 $9,525 – $38,700           $13,600 – $51,800

22%                $38,700 – $82,500           $77,400 – $165,000               $38,700 – $82,500         $51,800 – $82,500

24%                $82,500 – $157,500         $165,000 – $315,000             $82,500 – $157,500       $82,500 – $157,500

32%                $157,500 – $200,000       $315,000 – $400,000             $157,500 – $200,000    $157,000 – $200,000

35%                $200,000 – $500,000       $400,000 – $600,000             $200,000 – $300,000    $200,000 – $500,000

37%                $500,000 and up              $600,000 and up                    $300,000 and up            $500,000 and up

 

The standard deduction has nearly doubled. This compensates for the disappearance of the personal exemption, and it may reduce a taxpayer’s incentive to itemize. The new standard deductions, per filing status:

*Single filer: $12,000 (instead of $6,500)

*Married couples filing separately: $12,000 (instead of $6,500)

*Head of household: $18,000 (instead of $9,350)

*Married couples filing jointly & surviving spouses: $24,000 (instead of $13,000)

The additional standard deduction remains in place. Single filers who are blind, disabled, or aged 65 or older can claim an additional standard deduction of $1,600 this year. Married joint filers are allowed to claim additional standard deductions of $1,300 each for a total additional standard deduction of $2,600 for 2018.2,3

The state and local tax (SALT) deduction now has a $10,000 ceiling. If you live in a state that levies no income tax, or a state with high income tax, this is not a good development. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or b) state and local income taxes or sales taxes per year. Taxes paid or accumulated as a result of business or trade activity are exempt from the $10,000 limit. Incidentally, the SALT deduction limit is just $5,000 for married taxpayers filing separately.1,4 

The estate tax exemption is twice what it was. Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%.2,4

More taxpayers may find themselves exempt from Alternative Minimum Tax (AMT). The Alternative Minimum Tax was never intended to apply to the middle class – but because it went decades without inflation adjustments, it sometimes did. Thanks to the tax reforms, the AMT exemption amounts are now permanently subject to inflation indexing.

AMT exemption amounts have risen considerably in 2018:

*Single filer or head of household: $70,300 (was $54,300 in 2017)

*Married couples filing separately: $54,700 (was $42,250 in 2017)

*Married couples filing jointly & surviving spouses: $109,400 (was $84,500 in 2017)

These increases are certainly sizable, yet they pale in proportion to the increase in the phase-out thresholds. They are now at $500,000 for individuals and $1 million for joint filers as opposed to respective, prior thresholds of $120,700 and $160,900.2

The Child Tax Credit is now $2,000. This year, as much as $1,400 of it is refundable. Phase-out thresholds for the credit have risen substantially. They are now set at the following modified adjusted gross income (MAGI) levels:

*Single filer or head of household: $200,000 (was $75,000 in 2017)

*Married couples filing separately: $400,000 (was $110,000 in 2017)2

Some itemized deductions are history. The list of disappeared deductions is long and includes the following tax breaks:

*Home equity loan interest deduction

*Moving expenses deduction

*Casualty and theft losses deduction (for most taxpayers)

*Unreimbursed employee expenses deduction

*Subsidized employee parking and transit deduction

*Tax preparation fees deduction

*Investment fees and expenses deduction

*IRA trustee fees (if paid separately)

*Convenience fees for debit and credit card use for federal tax payments

*Home office deduction

*Unreimbursed travel and mileage deduction

Under the conditions set by the reforms, many of these deductions could be absent through 2025.5,6

Many small businesses have the ability to deduct 20% of their earnings. Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income*, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.)4,7

Not every pass-through business entity will qualify for this tax break in full, though. Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business* may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers.  Above these business income thresholds, the deduction for a business other than a specified service business* is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger.4,7

* See H.R. 1 – The Tax Cuts and Jobs Act, Part II—Deduction for Qualified Business Income of Pass-Thru Entities

We now have a 21% flat tax for corporations. Last year, the corporate tax rate was marginally structured with a maximum rate of 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new 21% flat rate aligns U.S. corporate taxation with the corporate tax treatment in numerous other countries. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%.2,4

The Section 179 deduction and the bonus depreciation allowance have doubled. Business owners who want to deduct the whole cost of an asset in its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so a company in 2018 can now write off 100% of qualified property costs through 2022 rather than through a longer period. Please note that bonus depreciation now applies for used equipment as well as new equipment.1,7

Like-kind exchanges are now restricted to real property. Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property are permitted.7

This may be the final year for the individual health insurance requirement. The Affordable Care Act instituted tax penalties for individual taxpayers who went without health coverage. As a condition of the 2018 tax reforms, no taxpayer will be penalized for a lack of health insurance next year. Adults who do not have qualifying health coverage will face an unchanged I.R.S. individual penalty of $695 this year.1,8

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions [12/22/17]

2 – fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx [12/30/17]

3 – cnbc.com/2017/12/22/the-gop-tax-overhaul-kept-this-1300-tax-break-for-seniors.html [12/26/17]

4 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]

5 – tinyurl.com/ycqrqwy7/ [12/26/17]

6 – forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ [12/20/17]

7 – americanagriculturist.com/farm-policy/10-agricultural-improvements-new-tax-reform-bill [11/14/17]

8 – irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged [10/19/17]

, , , ,

A Setback for the Fiduciary Rule

A Court of Appeals ruling could set the stage for a Supreme Court opinion.

The fiduciary rule is now a retirement planning standard – at least in 47 states. A recent appeals court ruling has dealt a blow to this new financial industry regulation, which has been applauded by investors and financial professionals alike.1

You probably have heard of this rule; if not, here is a brief explanation. The fiduciary rule is the recent directive from the Department of Labor requiring financial professionals who serve as retirement plan advisors to adopt a fiduciary standard. In other words, the advisor must regularly put the client’s interest first in the client-advisor relationship.1

In Louisiana, Mississippi, and Texas, the fiduciary rule has been struck down. The Fifth Circuit Court of Appeals decided 2-1 in March to vacate the fiduciary rule in those states. As of May 7, it will no longer apply within their borders. If the DoL appeals the court’s decision on or before that date, that means limbo.1,2

This ruling opened a legal door, and some financial industry analysts think that a Supreme Court ruling may be ahead.1,3

The 2-1 decision reflects the fact that the full court was not present, so the DoL could simply ask for a rehearing before the full court instead of an appeal. The DoL also has a legal plus on its side: no other court has reviewed the fiduciary rule and concluded that it amounts to the DoL overstepping its bounds under the Employee Retirement Income Security Act (ERISA).1,3

Many financial services companies and financial professionals are hoping for resolution soon, for they have already altered their business practices and compensation models to align with the fiduciary rule. Having made that commitment, they could lose face by turning legally away from it to any degree. They might keep upholding the fiduciary standard whether the rule stands or falls.1,2

If the fiduciary rule does fall, you can at least say that the industry rose to meet its standard. Whether the highest court in the land is called upon to determine the validity of the rule or not, whether the rule ends up standing or not, it definitely prompted a paradigm shift in the way retirement plan advisors and retirement planners thought about their roles – and that shift may be permanent.1

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – thestreet.com/story/14527631/1/court-ruling-puts-fiduciary-rule-and-retirement-investors-in-limbo.html [3/20/18]

2 – tinyurl.com/ycgk3vmf [3/27/18]

3 – employeebenefitadviser.com/opinion/rip-fiduciary-rule-not-so-fast [3/6/18]

 

,

Tax Efficiency in Retirement

How much attention do you pay to this factor?

Will you pay higher taxes in retirement? Do you have a lot of money in a 401(k) or a traditional IRA? If so, you may receive significant retirement income. Those income distributions, however, will be taxed at the usual rate. If you have saved and invested well, you may end up retiring at your current marginal tax rate or even a higher one. The jump in income alone resulting from a Required Minimum Distribution could push you into a higher tax bracket.

While retirees with lower incomes may rely on Social Security as their prime income source, they may pay comparatively less income tax than you will in retirement – because up to half of their Social Security benefits won’t be counted as taxable income.1

Given these possibilities, affluent investors might do well to study the tax efficiency of their portfolios; not all investments will prove to be tax-efficient. Both pre-tax and after-tax investments have potential advantages.

What’s a pre-tax investment? Traditional IRAs and 401(k)s are classic examples of pre-tax investments. You can put off paying taxes on the contributions you make to these accounts and the earnings these accounts generate. When you take money out of these accounts, you are looking at taxes on the withdrawal. Pre-tax investments are also called tax-deferred investments, as the invested assets can benefit from tax-deferred growth.2

What’s an after-tax investment? A Roth IRA is a classic example. When you put money into a Roth IRA, the contribution is not tax-deductible. As a trade-off, you don’t pay taxes on the withdrawals from that Roth IRA (so long as you have had your Roth IRA at least five years and you are at least 59½ years old). Thanks to these tax-free withdrawals, your total taxable retirement income is not as high as it would be otherwise.2

Should you have both a traditional IRA and a Roth IRA? It may seem redundant, but it could help you manage your marginal tax rate. It gives you an option to vary the amount and source of your IRA distributions considering whether tax rates have increased or decreased.

Smart moves can help you reduce your taxable income & taxable estate. If you’re making a charitable gift, giving appreciated securities that you have held for at least a year may be better than giving cash. In addition to a potential tax deduction for the fair market value of the asset in the year of the donation, the charity can sell the stock later without triggering capital gains for it or you.3

The annual gift tax exclusion gives you a way to remove assets from your taxable estate. In 2018, you may give up to $15,000 to as many individuals as you wish without paying federal gift tax, so long as your total gifts keep you within the lifetime estate and gift tax exemption. If you have 11 grandkids, you could give them $15,000 each – that’s $165,000 out of your estate. The drawback is that you relinquish control over those dollars or assets.4

Are you striving for greater tax efficiency? In retirement, it is especially important – and worth a discussion. A few financial adjustments could help you lessen your tax liabilities.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

, ,

Staying Focused

The month of April has opened with some volatile market swings, accompanied by speculation of an escalating trade war. It’s during times like this that we need to take a step back, avoid getting caught up in the headlines, and look at the big picture of the economic and market environment. In this case, that means focusing on the fundamentals of positive economic growth, a strong earnings outlook, and still low interest rates. These are the factors that may ultimately lead to this market’s recovery and get us back into positive territory.

We’ve been experiencing volatility in the markets since early February of this year, driven first by wage inflation fears (which have since been discounted), and now the big stories are trade concerns and regulatory risk in technology. Concerning trade, the war of words between China and the United States has escalated, but it’s important to note that nothing has been put into effect yet. There is room for negotiation, and a compromise may be reached before these proposed tariffs are put in place. That said, uncertainty about the outcome is weighing on the markets.

However, it’s important to remember that volatility and the process of the stock market bottoming out is often not a one-time sell-off. For example, looking back to late 2015, we experienced a market decline in August but—despite a temporary rebound—volatility continued and the decline did not hit bottom until February 2016. So essentially, this period of volatility extended from August 2015 until February 2016. The important takeaway here is that this volatility could continue for a period of time and it doesn’t necessarily mean we’re entering a bear market.

In fact, having begun 2018 expecting a degree of volatility, LPL Research continues to maintain its forecast for positive stock returns for the year.* They also remain confident in their expectation that a “return of the business cycle”—driven by fundamentals and fiscal stimulus—will lead to continued growth and stock market gains.

The following factors may be supportive of positive market returns:

  • Increased fiscal stimulus thanks to tax cuts and increased government spending
  • Estimated double-digit earnings growth throughout 2018*
  • Still low interest rates, relative to historical averages

The bottom line is that wavering market sentiment can last over a period of weeks (or months). And although you should never be dismissive of risk, the fundamentals may win out. Back in 2015, there were low interest rates but economic growth was slowing and earnings were weakening. Now, we have strong profits and coordinated global growth to support the recovery process.

Market declines and alarming headlines are always going to grab our attention. But that’s when I encourage you to remain focused on the underlying factors that have a longer-term impact on the markets and economy. These factors suggest that the market has the potential to weather this bout of volatility, and we may see positive stock market returns for the year.

If you have any questions, I encourage you to contact me.

Important Information

*LPL Research’s S&P 500 Index total return forecast of 8–10% (including dividends), is supported by a largely stable price-to-earnings (PE) ratio of 19 and LPL Research’s earnings growth forecast of 8–10%. Earnings gains are supported by LPL Research’s expectations of better economic growth, with potential added benefit from lower corporate tax rates.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC. Tracking #1-716923

,

Did You Receive a Corrected Form 1098?

You might get to deduct the mortgage interest premiums you paid in 2017 after all.

Recently, you may have received a corrected Internal Revenue Service Form 1098 from your mortgage lender. The correction probably spells good news for you.

When the Bipartisan Budget Act of 2018 became law in February, certain tax provisions that expired at the end of 2016 were retroactively renewed for the 2017 tax year. Among them: the tax break that allows homeowners to write off mortgage insurance premiums, or MIP.1

You may be able to deduct MIP once more and save hundreds of dollars. If you are carrying a $200,000 home loan and you are in the 25% income tax bracket, you could save about $425 in federal taxes, thanks to the comeback of this deduction. You might even be able to deduct prepaid mortgage interest and points – check with a tax professional to see.1,2

Your adjusted gross income may limit the amount of MIP you can write off. When it exceeds $100,000, the deduction enters a phase-out range. The top end of the phase-out range is $110,000; above that, the deduction for MIP disappears. Property value limits also apply.1,3

The MIP deduction must pertain to a “qualified home.” That means a home that was your principal residence during 2017. (Even if you spent the bulk of 2017 in a vacation home, that vacation home could qualify.)1,3

The I.R.S. told lenders to send corrected 1098s to borrowers by March 15. Your corrected 1098 shows you the MIP amount you paid in 2017, unlike the previous version. If you do not yet have a corrected Form 1098, contact your lender. (Lenders have been directed to file corrected 1098s with the reportable amounts by this year’s federal tax deadline.)4

Have you already filed your 2017 federal taxes, and do you expect a refund? If your answer to both of those questions is “yes,” you will have to wait until you receive your federal tax refund before you can amend your 2017 federal tax return. (It can be amended any time during 2018.)5

If you received a corrected Form 1098, talk to a tax professional. Whether you have filed your taxes yet or not, you should follow up on this development.

«representativename» may be reached at «representativephone» or «representativeemail».

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

«RepresentativeDisclosure»

Citations.
1 – quickenloans.com/blog/changes-store-mortgage-insurance-premiums-1098-2017 [2/23/18]
2 – marketplace.org/2018/02/12/economy/tax-bill-2017/low-income-and-middle-class-homeowners-might-see-their-tax-refunds [2/12/18]
3 – chicagotribune.com/classified/realestate/ct-re-0225-kenneth-harney-20180220-story.html [2/22/18]
4 – bankingjournal.aba.com/2018/02/irs-issues-information-reporting-guidance-for-mortgage-insurance-premiums/ [2/23/18]
5 – tinyurl.com/yb7duvah [2/24/18]