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A Retirement Wealth Gap Adds a New Indignity to Old Age

Many middle-class Americans are financially unprepared for retirement—and that is leading to an array of social tensions

This is an interesting article, and a potential “need-to-know” for those planning to move when they retire. According to this Wall Street Journal article, an unexpected problem could surface when you move from your pre-retirement “work” home into your ideal retirement home… in a community occupied by long-time residence.

As you make your new house a home, you and other transfers to the community may want to “upgrade” the community and improve services. While you might find the cost of these enhancements to be of high value, it is possible that the long-time residence will not see the same opportunity. In fact, you could be in for a fight. Not because long time residence don’t want changes to their community. But because they simply cannot afford these enhancements. For many, their hand-to-mouth retirement lifestyle cannot absorb anything beyond the fixed costs already difficult to manage. So, it is really a conflict of economics.

There are no take-aways from this article, no lesson except to be aware of a potential problem. My assessment is, it is a good idea to get to know the profile, or psychographics, of the neighborhood you are thinking about retiring to. Are you moving into a community or city with residence who generally share your economic profile? In the case of the article, the residence are tied together by a retirement community association. More likely for most a retirement community does not apply. But this same conflict can surface in communities where you are likely to be dependent on a majority vote or the resources needed to accomplish the same objective.

~ Rich Arzaga, CFP®

By Jennifer Levitz | Photographs by Rachel Bujalski

SANTA ROSA, Calif.—On a Saturday morning in retirement paradise, Ken Heyman stepped out to his front porch and found a brown paper bag. Inside was the chopped-off head of a rat.

Mr. Heyman was acting president of the homeowners’ association at Oakmont Village, an enclave in Northern California’s wine country for people age 55 and over. For months, the community had battled over the unlikeliest of topics: pickleball, a game that is a mix of tennis, badminton and ping pong. Some residents wanted to build a pickleball court complex that would cost at least $300,000. Others didn’t, saying they didn’t want to see their dues go up.

Residents shouted at each other at town-hall gatherings. One confrontation got so heated that a resident called the police. The governing board appointed a security guard to keep order at meetings.

Photo: Oakmont residents play pickleball—a game that’s like a gentler version of tennis, played with a paddle and a plastic ball with holes on a badminton-sized court. 

For many, of course, the issue wasn’t really about pickleball. It was about a divide that had opened between wealthier residents who moved to the village more recently and the less well-off, who said clubhouse updates, new fees and expensive amenities would be budget-busters.

Mr. Heyman’s predecessor as president was a leader of the anti-pickleball faction. She felt she had been chased out of office by pickleball partisans. On the paper bag was a note.

“You’re next,” it read, according to a police report.

Around 10,000 baby boomers are turning 65 every day, and the same number will continue doing so for years. Some are on solid financial ground after a lifetime of planning and the fortune of well-timed home purchases and stock investments.

Most of the rest are unprepared. Fifty-four percent of households with middle incomes—ranging from around $48,000 to $95,000 a year—don’t have enough saved to maintain their quality of living in retirement, according to the Boston College Center for Retirement Research. Some of those who saved were hit by unforeseen health-care costs. Others took on debt for education. Yet more made investment mistakes or lost their savings in the 2008 financial crisis.

Those wildly different circumstances are leading to hard-to-resolve social tensions, which are playing out every day at retirement communities across the country. In Oakmont, the issue was pickleball.

Founded in 1963, Oakmont Village was long an option for the middle class that benefited from California’s rising real-estate values. They could move into attached duplexes or triplexes or wood-sided single-family ranch-style homes and enjoy three swimming pools, a lawn-bowling green, honor-system lending library and the 130-plus clubs and activities.

Living near one another is an increasingly popular option for retirees. The population of the U.S.’s 442 federally designated “retirement destination counties” rose 2% last year, compared with the national average of 0.7%, according to Census Bureau figures. Retirement communities often provide social connections that can fray when people leave the workplace, live alone or have families spread across the country.

Steve Spanier, the current president of Oakmont’s homeowners’ board, said the mountain-view community started “moving more upscale” in recent years when retiring baby boomers in San Francisco and Silicon Valley discovered it on weekend wine-tasting trips to Sonoma County. Coming from places where real-estate prices are especially high, they began buying and gutting homes. The community has about 4,700 residents.

The community now splits neatly into two camps. Some believe it should only “fix things that break,” he says. “Then there are people like the people who are starting to move in. They have a lot of money and want to live the lifestyle to which they’ve become accustomed and they want to do it here,” he says. “People are having more trouble getting along.”

The October wildfires that tore through Northern California’s wine country last year fleetingly eased the divisions, says Mr. Spanier. The fires forced Oakmonters to temporarily evacuate and destroyed two of the village’s roughly 3,200 homes. The fitness center sold “Oakmont Strong” T-shirts, and the mood mellowed for a bit.

“It got better for a period of time,” he says, “then that feeling of unity created by the fire left.”

Homes in the resident-owned Oakmont Village fetch between $350,000 for smaller dwellings up to about $1.2 million for ranch-style homes that have been remodeled by wealthy newcomers. A few years ago, million-dollar sales were unheard of.

After retiring in 2015, Iris Harrell sold her part of the remodeling company she founded in Mountain View, Calif., and says she is “never going to have to worry about money.” She and her wife, Ann Benson, sold their home in Silicon Valley for $3.8 million and bought a hillside ranch-style home in Oakmont for about $800,000, she says.

They raised the roof to allow for windows tall enough for a view of the top of nearby Hood Mountain. So they can age at home, they installed an elevator and added 1,300 square feet of space, including a spacious wing that could house a live-in caretaker. Ms. Harrell now calls the wing “the best guest suite in Oakmont.”

“We’re spoiled and we know it, but it just worked out for us,” says the fit 71-year-old.

She became the chairwoman of Oakmont’s building construction committee and set about trying to also refurbish the 55-year-old community.

“You can’t be premier and look like the 1960s,” Ms. Harrell says. “It’s not making the statement we want.”

She says that retirees moving in—“post Google-ites” she calls them—are willing to pay for better amenities and that Oakmont’s future shouldn’t be dictated by the “small minority” who aren’t willing. She suggested those pinched for money should look into a reverse mortgage.

Oakmont resident Gary O’Shaughnessy, who lives in a unit of a triplex down the hill from Ms. Harrell’s house, calls that suggestion “insensitive.”

“That attitude I can’t live with,” he says.

A former school-bus driver for disabled children, Mr. O’Shaughnessy says a diagnosis of Parkinson’s led him to retire in his 60s, earlier than planned.

While he was working, he rented a house in Santa Rosa. He bought his place in Oakmont for $280,000 in 2010 with help from an inheritance from his mother and $50,000 from his own retirement account. He is single and 71 and has $40,000 in savings. His monthly income is around $2,000, from Social Security and a small pension.

He says he typically walks dogs seven days a week to “make ends meet”; his bills include a mortgage, supplemental medical insurance and more than $300 in monthly dues at Oakmont.

Everyone in the resident-owned community pays $67 a month per person to the main Oakmont association, up from $58 last year. Households pay another $220 a month, on average, to various sub-neighborhood associations for services such as water or landscaping.

Mr. O’Shaughnessy started attending meetings and signing petitions as plans, backed by Ms. Harrell and others, proceeded for a roughly $300,000 tournament-quality pickleball complex with tiered spectator seating.

“There was a big fight and it kind of divided the community,” he says. “The people who have money just want to throw it around, but there are a lot of people on fixed incomes.”

A 2015 survey sponsored by the Oakmont association found that 48% of residents said they were very or somewhat concerned about their current financial needs. That figure rose to 57% for those under age 66.

Overall, 52% were “not at all concerned.”

“We are an extremely wealthy community,” resident Vince Taylor, a former software-company owner, said, during an open forum at an association meeting in March 2017. “We shouldn’t be acting like a poverty community.”

Mr. Taylor, who is 81 and retired, says he has more than $1 million in his retirement savings and lives off investment earnings without touching the principal.

His public comments provoked discussion on Nextdoor, an online neighborhood social-networking service. A discussion titled “Disparity of wealth in Oakmont” drew nearly 80 comments.

One Oakmont resident suggested retirees with tight budgets get jobs. Another, Bob Starkey, a 69-year-old renter and retired museum director, wrote that illness had depleted his savings and that he lived with anxiety his car might die.

“Please remember that pensions have become a thing of the past,” wrote Margaret Babin, a retired home-day-care operator who is 62 and is selling her collection of French Quimper pottery on eBay to pay for extras.

“At some events, I feel out of place even though I shouldn’t, because I’m doing OK,” she says, noting that she sees more fancy cars in the community. “The separation seems to be getting wider and wider.”

By early 2017, she and other frustrated residents had organized behind a slate of candidates who aimed to win a majority on the homeowners’ board and halt the pickleball project, which had been approved by Oakmont leaders but not yet built.

On the morning of April 3, a phone call woke up Ms. Babin. “I just couldn’t believe what I was hearing,” she recalls.

One day before the votes would be tallied in the election, a bulldozer was breaking ground on the pickleball complex. Supporters and detractors rushed over. One resident called the Santa Rosa Police Department at 7:24 a.m. to report a “verbal disturbance” at Oakmont.

“There is a heated argument going on at this time,” the police report said. An officer who went to the scene wrote that there were “two warring factions over a pickleball court.”

The next day, the candidates opposing the pickleball complex were victorious. Construction stopped.

“We face some of the same challenges as the rest of our state and our country,” Ellen Leznik, the new president, said at a public association meeting days later. “One such challenge is the disparity of wealth in our membership.”

Some pickleball proponents rose to defend themselves.

“We’re not the mean, vicious and entitled people our opponents and Nextdoor critics would have you believe,” one speaker said.

Oakmont eventually converted two existing tennis courts into six pickleball courts at a fraction of the cost. The new board ushered in a tone of frugality and oversight that some saw as heavy-handed. Rhetoric at public meetings grew so hostile that the board brought in a security guard to keep order.

“Why don’t we just wait till we’re all dead?” an Oakmont man who favored the pickleball complex declared at one meeting. “Guess what? Oakmont is our last stop. The train ends here. This is the Hotel California.”

Ms. Leznik, a 60-year-old former lawyer who retired early because of a disability, resigned less than four months after she became president, in July 2017. She says she had heart palpitations from the stress.

That left her ally, Mr. Heyman, as acting president.

The next month, at 9:15 a.m. on Aug. 12, the police again got a call from Oakmont, this time from Mr. Heyman, who is 61 and still works in corporate communications.

On Mr. Heyman’s porch sat “a bag containing the chopped off head of a rat,” according to the police report.

“It freaked me out,” says Mr. Heyman. He says he has “no doubt” the rat served as retribution for killing the pickleball project and for the disputes that followed.

At an association meeting soon after, another board member likened “the battle being waged at Oakmont” to “Armageddon.”

Mr. Heyman left the board and later moved out of Oakmont.

“There were clearly sides. One side felt that we’re an active-adult community and it’s our responsibility to provide activities and facilities to the membership,” says Oakmont resident Al Medeiros, 71, who now sits on the board. He counts himself in that group, which he says had been “vilified.”

“The other side seemed to think that well, we’re poor, so we really need to make sure our dues don’t go up and we should just provide the minimum,” he says.

In February, the board discussed remodeling a dated auditorium where hundreds of events, from dances to movies to meetings, take place every year. Some residents talked about constructing a new center and repurposing the old one into a state-of-the-art gym.

The board is also weighing a divisive request from the private golf club that borders many homes in the retirement community. The club is asking all Oakmont residents, golfers or not, to pitch in to help the club meet economic challenges. Someone suggested $5 a person every month.

Mr. Spanier, the new board president, says it “could potentially make pickleball look like a tiny issue.”

Oakmont Village, with views of Hood Mountain, includes roughly 3,200 homes.

#RetirementHome #Retirement #WealthGap #FinancialBehavior #FinancialPlanning #PersonalAdvice #Real Estate

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual.

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Social Security Recipients Get 2.8% Cost of Living Boost in 2019

By Dave Winkler

The Social Security Administration announced a 2.8% cost of living adjustment (COLA) that will benefit 63 million recipients starting January 20191. This adjustment marks the second consecutive year of COLA growth of two percent or greater. In 2017, the increase was 2.0%2. In 2015 and 2016, COLA increases were 0.0% and 0.3%, respectively.

Beneficiaries include Americans who qualify for Social Security benefits, qualified current, divorced, or surviving spouses, disabled workers, and eligible dependents and family members.

At Cornerstone, clients who currently receive Social Security income benefits view this monthly check as helpful, but not the primary source of covering retirement expenses. For many clients, although they tend to qualify for the higher benefit due to higher income during earning years, benefits represents less than 20% of income needed to maintain their chosen standard of living.

Notifications of the 2.8% COLA will be sent to recipients by mail in early December. For the first time, Social Security recipients may also view these notices at www.socialsecurity.gov/myaccount.

  1. https://www.ssa.gov/cola/
  2. https://www.ssa.gov/oact/cola/colaseries.html
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4 Ways to Reduce or Eliminate Probate Costs When Setting Up Your Estate

Leave more for your beneficiaries and charities?

By Cornerstone Wealth Management

Probate costs will reduce estate size. Attorneys fees, court costs, other professional fees and expenses can result in shrinking an estate by up to five percent (5%). For example, with an estate valued at $1 million, settlement costs can be as much as $50,0001. That assumes a routine probate. In addition, the probate process can take over a year to settle.

Where does this money go? If the probate is routine, then these costs are for administration of the settlement process. Few estates require more than that. More complex probates may incur higher cost and potentially require more time to settle. Beneficiaries of small, five-figure estates may be allowed to claim property through affidavit. This option does not apply to larger estates.

The question for those who wish to manage these expenses becomes, how can you exclude more assets from the expense of probate? They key for many is to create a plan that exclude from probate as many assets as possible. What follows are four ideas that have worked for others.

  1. Joint accounts. Married couples may hold property as joint tenants. Jointly titled property includes a right of survivorship and is exempt from probate. At the death of the first spouse, assets then pass to the surviving spouse. State law varies on this matter. Some states allow a variation called tenancy by the entirety, in which married spouses each own an undivided interest in property with the right of survivorship (they need consent from the other spouse to transfer their ownership interest in the property). Other states allow community property with right of survivorship; assets titled in this manner also skip the probate process.2,3 Joint accounts may still face legal challenges. For example, a potential beneficiary to assets in a jointly held bank account may claim that it is not a “true” joint account, but a “convenience account” where a second accountholder was added just for financial expediency. Or, a joint account arrangement with right of survivorship may be found inconsistent with an estate plan.4 While not a solution for all, joint accounts can be a tool that can be effective for many.
  2. POD & TOD accounts. Payable-on-death and transfer-on-death forms are used to permit easy transfer of bank and investment accounts, and in some states, motor vehicles. During the life of the original owner, the named beneficiary has no rights to claim the asset. Upon the owner’s death, the named beneficiary can claim the assets or securities by showing his or her I.D. and valid proof of the original owner’s death5.
  3. Gifting. For 2018, the IRS allows tax free gifts of up to $15,000 per person to as many different people as you like. Gifting will reduce the size of your taxable estate. Gifting over $15,000 per recipient per year may be subject to federal gift tax (which tops out at 40%) and count against your lifetime gift tax exclusion. In 2018, the lifetime individual gift tax exemption is $11.18 million, and $22.36 million for married couples.6,7
  4. Revocable living trusts. In a sense, these estate planning vehicles allow people to do much of their own probate while living. The Grantor – the person who establishes the trust – funds it while alive with up to 100% of his or her assets, designating the beneficiaries of those assets at his or her death. The trust owns assets once owned by the Grantor, yet the Grantor can invest, spend, and manage these assets as if it is their own while alive. Upon the Grantor’s death, the trust becomes irrevocable, and its assets should be able to be distributed by a successor trustee without having to be probated. The distribution is private (as opposed to the completely public process of probate), and it can save heirs court costs and time.8

Are there assets not subject to the probate fees and process? Yes, there are all kinds of non-probate assets. The common denominator of a non-probate asset is that they transfer by beneficiary designation, which allows these assets to pass either to a designated beneficiary or a joint tenant, regardless of what a will states. Examples: assets jointly owned with right of survivorship, trusts and assets held within trusts, TOD accounts, proceeds from life insurance policies, and IRA and 401(k) accounts.9

Make sure to list/update retirement account beneficiaries. When you open a retirement account (such as an IRA), you are asked to designate beneficiaries of that account. This beneficiary form stipulates where these assets will go when you die. A beneficiary form commonly takes precedence over a will.7

Your beneficiary designations need to be reviewed, and updated when appropriate. This will help prevent you from inadvertently leaving an asset to a former spouse or estranged family member.

If you are married and have a workplace retirement account, under federal law, your spouse is the default beneficiary unless he or she in writing declines. Your spouse is automatically entitled to receive 50% of the account assets should you die, even if you designate another person as the account’s primary beneficiary. In contrast, a married IRA owner may name anyone as a primary or secondary beneficiary, without spousal consent.10

If you or someone you know would like to get coaching on approaches to estate planning, we welcome your call.

#Probate #AvoidProbate #ProbateCosts #BeneficiaryDesignation #TOD #POD #EstatePlanning #FinancialPlanning #Gifting #Charity #Taxes #TaxStrategies

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

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 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.1 – nolo.com/legal-encyclopedia/why-avoid-probate-29861.html [9/12/18]
2 – info.legalzoom.com/difference-between-community-property-rights-survivorship-vs-joint-tenancy-21133.html [9/12/18]
3 – law.cornell.edu/wex/tenancy_by_the_entirety [9/12/18]
4 – clarkhill.com/alerts/a-guide-for-challenging-a-joint-account-arrangement-in-michigan [3/16/17]
5 – nolo.com/legal-encyclopedia/avoid-probate-transfer-on-death-accounts-29544.html [9/12/18]
6 – thebalance.com/how-is-the-gift-tax-calculated-3505674 [7/25/18]
7 – marketwatch.com/story/how-to-avoid-making-the-same-mistake-aretha-franklin-did-2018-09-04 [9/4/18]
8 – thebalance.com/how-does-a-revocable-living-trust-avoid-probate-3505224 [7/24/18]
9 – fidelity.com/life-events/inheritance/inheritance-basics/probate [9/12/18]
10 – connorsandsullivan.com/Articles/Beneficiary-Designations-Getting-the-Right-Assets-to-the-Right-People.shtml [9/12/18]

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7 Myths About Retirement

By Cornerstone Wealth Management

Before it is too late, let’s clear up some important misconceptions. While some retirement clichés have been around for decades, others have recently joined their ranks. Let’s explore seven popular retirement myths.

  1. “When I’m retired, I won’t need to invest anymore.” Many see retirement as an end of a journey, a finish line to a long career. In reality, retirement can be the start of a new phase of life that could last for decades. By not maintain positions in equities (stocks or mutual funds), it is possible to lose ground to purchasing power as even moderate inflation has the potential to devalue the money you’ve saved. Depending on your situation, a good rule of thumb may be to keep saving money, keep earning income, keep invested, even in retirement.
  2. “My taxes will be lower when I retire.” Not necessarily. While earning less or no income could put you in a lower tax bracket, you could also lose some of the tax breaks you enjoyed during your working years. In addition, local, state and federal taxes will almost certainly rise over time. In addition, you could pay taxes on funds withdrawn from IRAs and other qualified retirement plans. This could include a portion of your Social Security benefits. Although your earned income may decrease, you may end up losing a meaningfully larger percentage of it to taxes after you retire.1
  3. “I don’t have enough saved. I’ll have to work the rest of my life. If your retirement resources are falling short of what you might need in later years, working longer may be the most practical solution. This will allow you to use earned income to cover expenses for a longer period, and shorten the number of years you would need to otherwise cover when you stop work. Meanwhile, you may be able to make larger, catch-up contributions to IRAs after 50, and remember that you have savings potential in workplace retirement plans. If you are 50 or older this in 2018, you can put as much as $24,500 into a 401(k) plan. Some participants in 403(b) or 457(b) plans are also allowed that step-up. And during this time, you can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested longer (see #1 above).2 The bottom line is, don’t give up, and fight the good fight.
  4. “Medicare will take care of my long term care expenses.” Not true, and among the most costly of these myths. Medicare may (this is not guaranteed) pay for up to 100 days of your long-term care expenses. If you need months or years of long-term care and do not own a long term care policy or own a policy and don’t have adequate coverage, you may have to pay for it out of pocket. According to Genworth Financial’s Annual Cost of Care Survey, the average yearly cost of a semi-private room in a nursing home is $235 a day ($85,775 per year).3,4 In Northern California, the cost will likely be higher.
  5. “I should help my kids with college costs.” That’s a nice thought, an expensive idea, and for many not a good idea. Unlike student financial assistance, there is no such program as retiree “financial assistance.” Your student can work, save, and or borrow to pay to cover their cost of college. S/he will have decades to pay loans back. In contrast, you can’t go to the bank and get a “retirement loan.” Moreover, if you outlive your money your kids may end up taking you in and you may be a financial burden to them, which for many is a parent’s worst nightmare. Putting your financial requirements above theirs may be fair and smart as you approach retirement.
  6. “I’ll live on less in retirement.” We all have an image in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out, and relying on senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. However, the initial phase may be a different story. For many, the first few years of retirement mean traveling, new adventures, and “living it up” a little – all of which may mean new retirees may actually “live on more” out of the retirement gate.
  7. “No one really retires anymore.” It may be true that many baby boomers will probably keep working to some degree. Some people love to work and want to work as long as they can. What if you can’t, though? What if your employer shocks you and suddenly lets you go? What if your health does not permit you to work as much as you would like, or even at all? You could retire more abruptly than you believe you will. This is why even people who expect to work into their later years should have a solid retirement plan.

There is no “generic” retirement experience, and therefore, there is no one-size-fits-all retirement plan. Each individual, couple, or family should have a strategy tailored to their particular money situation and life and financial objectives.

If you or someone you know would like to get coaching on the most appropriate approach to planning for retirement, we welcome your call.

#retirementmyths #financialmyths #retirementfail #FinancialBehavior #FinancialPlanning #PersonalAdvice #RetirementIncome  #RetirementPlanning

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 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 – money.usnews.com/money/retirement/iras/articles/2017-04-03/5-new-taxes-to-watch-out-for-in-retirement [4/3/18]
2 – fool.com/retirement/2017/10/29/what-are-the-maximum-401k-contribution-limits-for.aspx [3/6/18]
3 – medicare.gov/coverage/skilled-nursing-facility-care.html [9/13/18]
4 – fool.com/retirement/2018/05/24/the-1-retirement-expense-were-still-not-preparing.aspx [5/24/18]

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Is the right time to Roth it?

For some, the recent tax reforms indicate, yes. For others, not so fast.

By Cornerstone Wealth Management

Can federal income tax rates get lower than they are today? Given the national debt and the outlook for Social Security and Medicare, it is hard to imagine that rates go much lower. In fact, it is more likely that federal income taxes get higher, as the tax cuts created by the 2017 reforms are scheduled to sunset when 2025 ends.

Additionally, the Feds are now using a different yardstick, the “chained Consumer Price Index,” to measure cost-of-living adjustments in the federal tax code. As a result, you could inadvertently find yourself in a higher marginal tax bracket over time, even if tax rates do not change. Due to this, it is possible that today’s tax breaks could eventually be worth less.1

As a result of tax reform, we are occasionally asked if this is a good time to convert a traditional IRA to a Roth. A conversion to a Roth IRA is a taxable event. If the account balance in your IRA is large, the taxable income linked to the conversion could be sizable, and you could end up in a higher tax bracket in the conversion year. For some, that literally may be a small price to pay.2

The jump in your taxable income for such a conversion may be a headache – but like many headaches, is likely to be short-lived. Consider the long term advantages that could come from converting a traditional IRA balance into a Roth IRA. A “big picture” comprehensive financial plan can help you estimate the short and long term merits of this transaction, even before you decide to pull the trigger.

Generally, you can take tax-free withdrawals from a Roth IRA once the Roth IRA has been in existence for five years and you are age 59½ or older. For those who retire well before age 65, tax-free and penalty-free Roth IRA income could be very nice.3

You can also contribute to a Roth IRA regardless of your age, provided you earn income and your income level is not so high as to bar these inflows. In contrast, a traditional IRA does not permit contributions after age 70½ and requires annual withdrawals once you reach that age.2

Lastly, a Roth IRA is can be a good estate planning strategy. If IRS rules are followed, Roth IRA beneficiaries may end up with a tax free inheritance.3

A Roth IRA conversion does not have to be “all or nothing.” Some traditional IRA account holders elect to convert just part of their traditional IRA to a Roth, while others choose to convert the entire balance over multiple years, the better to manage the taxable income stemming from the conversions.2

Important change: you can no longer undo a Roth conversion. The Tax Cuts & Jobs Act did away with Roth “recharacterizations” – that is, turning a Roth IRA back to a traditional one. This do-over is no longer allowed.2

Talk to a tax or financial professional as you explore your decision. While this may seem like a good time to consider a Roth conversion, we have seem working with our clients that this move is not suitable for everyone. Especially during years of high earned income. The resulting tax hit may seem to outweigh the potential long-run advantages.

If you or someone you know would like to get coaching on the most appropriate approach to reviewing Roth strategies, we welcome your call.

#IRA #RothIRA #Roth #RothConversion #FinancialPlanning #Investments #RetirementIncome #RetirementPlanning #Taxes #TaxStrategies #TaxSavings #Cornerstonewmi

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 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 – money.cnn.com/2017/12/20/pf/taxes/tax-cuts-temporary/index.html [12/20/17]
2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [8/17/18]
3 – fidelity.com/building-savings/learn-about-iras/convert-to-roth [8/27/18]

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IRA vs. 401(k)

Comparing two popular retirement account types.

By Cornerstone Wealth Management

When you think about retirement accounts, it is likely that at least one of these two account types come to mind: the IRA and the 401(k). Each are common and relatively easy ways to save for retirement. Each have unique and common features and benefits. What follows is a summary of features, merits, and demerits of each account type.

What IRAs and 401(k)s have in common.

  • Taxes are deferred. One significant advantage is that funds held in these accounts have the potential to grow and compound year after year tax deferred.1 When money is eventually withdraw from either plan, it will be taxed as ordinary income.
  • IRAs and 401(k)s can reduce ordinary income taxes. It varies depending on whether the account is traditional or Roth in nature. Contributions to a traditional IRA may be tax deductible while contributions to a 401(k) lower your taxable income. When money is eventually withdraw from either plan, it will be taxed as ordinary income. When you have a Roth IRA or Roth 401(k), contributions are not tax deductible, but can potentially be withdrawn from the account without taxation.1
  • Generally, the I.R.S. penalizes withdrawals from these accounts before age 59½. Distributions from traditional IRAs and 401(k)s prior to age 59½ usually trigger a 10% federal tax penalty, on top of income tax on the withdrawn amount. Roth IRAs and Roth 401(k)s allow you to withdraw a sum equivalent to your account contributions at any time without taxes or penalties, but early distributions of the account earnings are taxable and may also be hit with the 10% early withdrawal penalty.1
  • You must make annual withdrawals from 401(k)s and traditional IRAs after age 70½. This is called a Required Minimum Distribution (RMD). And while withdrawals from a Roth IRA are not required during the owner’s lifetime, only after his or her death. Roth 401(k)s do require annual withdrawals after age 70½.2 At this point, you may be starting to get confused on the nuances. If you have questions, we welcome you call.

How IRAs and 401(k)s differ.

  • Annual contribution limits for IRAs and 401(k)s differ greatly. As an employee non-business owner, you may direct up to $18,500 into a 401(k) in 2018; $24,500, if you are 50 or older. In contrast, the maximum 2018 IRA contribution is $5,500; $6,500, if you are 50 or older.1 The additional $6,500 contribution is called a “catch-up.”
  • Your employer may match your 401(k) contributions. This is free money coming your way. If your employer offers matching, amount of match differs by employer, is usually partial, but certainly nothing to disregard – it might be a portion of the dollars you contribute up to 6% of your annual salary, for example. Do these employer contributions count toward your personal yearly 401(k) contribution limit? No, they do not. Retirement planning tip: Consider contributing at least enough to qualify for the full match if your company offers one.1
  • An IRA permits a wide variety of investments, in contrast to a 401(k). The typical 401(k) might offer only about 20 investment options, and you have no control over what investments funds are chosen. With an IRA, you can have access to hundreds of investment options.1,3
  • You can contribute to a 401(k) no matter how much you earn. Your income may limit your eligibility to contribute to a Roth IRA; at certain income levels, you may be prohibited from contributing the full amount, or any amount.1
  • If you leave your job, you cannot take your 401(k) with you. It stays in the hands of the retirement plan administrator that your employer has selected. The money remains invested, but you may have less control over it than you once did. You do have choices: you can withdraw the money from the old 401(k), which will likely result in a tax penalty; you can leave it where it is; you can possibly transfer it to a 401(k) at your new job; or, you can transfer it into an IRA.4,5
  • You cannot control 401(k) fees. Some 401(k)s have high annual account and administrative fees that effectively eat into their annual investment returns. How costa are established is beyond your control. The annual fees on your IRA may not be as expensive.1

All this said, contributing to an IRA or a 401(k) is a prudent idea. In fact, many pre-retirees contribute to both 401(k)s and IRAs in the same tax year. Today, investing in these account types appear to be essential in achieving retirement savings and retirement income goals.

If you or someone you know would like to get coaching on the most appropriate approach to saving money for retirement, or would like assistance with the jargon below, we welcome your call.

Note: Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

#401k #IRA #traditionalIRA #RMD #RequiredMinimumDistribution #CatchUp #Investments #MarketOutlook #RetirementIncome  #RetirementPlanning #Taxes #TaxStrategies #TaxSavings #cornerstonewmi

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 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 – nerdwallet.com/article/ira-vs-401k-retirement-accounts [4/30/18]
2 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [5/30/18]
3 – tinyurl.com/y77cjtfz [10/31/17]
4 – finance.zacks.com/tax-penalty-moving-401k-ira-3585.html [9/6/18]
5 – cnbc.com/2018/04/26/what-to-do-with-your-401k-when-you-change-jobs.html [4/26/18]

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A Good Problem: How to Handle a Financial Windfall

What do you do with sudden money?

Provided by Cornerstone Wealth Management

Imagine getting rich, quick. Liberating? Yes of course. Frustrating and challenging? Most likely.

Sudden money can help you resolve retirement saving or college funding goals, and set the stage for your financial independence. On the downside, you’ll pay higher taxes, attract more attention, and maybe even deal with “wealth envy.” Sudden Money may also include grief or stress if associated to death, divorce, or a employer buy-out.

Sudden Money does not always lead to happy endings. Take the example of Alex and Rhoda Toth, a real-life Florida couple down to their last $25 who hit a lottery jackpot of roughly $13 million in 1990. Their story ended badly: by 2006, they were bankrupt and faced tax fraud charges. Or Illinois resident Janite Lee, who won $18 million in the state lottery. Eight short years later, Janite filed for bankruptcy; had $700 to her name and owed $2.5 million to creditors. Sudden Money doesn’t automatically breed “old money” behavior or success. Without long-range vision, one generation’s wealth may not transfer to the next. Wealth coaching firm The Williams Group spent years studying the estate transfers of more than 2,000 affluent households. It found that 70% of the time, the wealth built by one generation failed to successfully migrate to the next.1,2

What are some wise steps to take when you receive a windfall? What might you do to keep that money in your life and in your family for their future?

Keep quiet, if you can. If you aren’t in the spotlight, don’t step into it. Aside from you and your family, the only other parties that need to know about your financial windfall is the Internal Revenue Service, the financial professionals who you consult or hire, and your attorney. Beyond those people, there isn’t generally an upside to notify anyone else.

What if you can’t keep a low profile? Winning a lottery prize, selling your company, signing a multiyear deal – when your wealth is more in the public domain, expect friends and strangers and their “opportunities” to come knocking at your door. Time to put on your business face: Be fair, firm, and friendly – and avoid handling the requests directly. One well-intended generous handout on your part may risk opening the floodgates to others. Let your financial team review requests for loans, business proposals, and pipe dreams.

Yes, your team. If big money comes your way, you need skilled professionals in your corner – a tax professional, an attorney, and a wealth manager. Ideally, your tax professional is a Certified Public Accountant (CPA) and or Enrolled Agent (EA) and tax advisor, your lawyer is an estate planning attorney, and your wealth manager is “big picture” and pays attention to tax efficiency.

Think in increments. When sudden money enhances your financial standing, you need to think about the immediate future, the near future, and the decades ahead. Many people celebrate their good fortune when they receive sudden wealth and live in the moment, only to wonder years later where that moment went. Many times, it is better to identify what needs immediate attention, and delay anything else until life becomes more stable.

In the short term, an infusion of money may result in tax challenges; it may also require you to reconsider existing beneficiary designations on IRAs, retirement plans, and investment accounts and insurance policies. A will, a trust, an existing estate plan – they may need to be revisited. Resist the immediate temptation to try and grow the newly acquired wealth quickly by investing aggressively.

Looking down the road a few miles, think about what financial independence (or greater financial freedom) means to you. How do you want to spend your time? Do you want to continue working, or change your career? If you own a business, should you stick with it, or sell or transfer ownership? What kinds of near-term possibilities could this mean for you? What are the strategies that could help you defer or reduce taxes long term? How can you manage investment and other financial risks in your life?

Looking further ahead, tax efficiency can potentially make an enormous difference for that windfall. You may end up with considerably more money (or considerably less) decades from now due to asset location and other tax factors.

Important idea: Think about doing nothing for a while. Nothing financially momentous, that is. There’s nothing wrong with that. Sudden, impulsive moves with sudden wealth can backfire.

Welcome the positive financial changes, but don’t change yourself. Remaining true to your morals, ethics, and beliefs will help you stay grounded. Turning to professionals who know how to capably guide that wealth is just as vital.

If you or someone you know would like to get coaching on the most appropriate to sudden money, we welcome your call.

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 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 – bankrate.com/finance/personal-finance/lottery-winners-who-went-broke-1.aspx#slide=1 [5/23/18]
2 – money.cnn.com/2018/09/10/investing/multi-generation-wealth/index.html [9/10/18]

This article was prepared by a third for information only. It is not intended to provide specific advice or recommendations for any individual.

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When Is Social Security Income Taxable?

To find out if this tax applies to you, look closely at two factors.

Provided by Cornerstone Wealth Management

Your Social Security income could be taxed. That may seem unfair or unfathomable. Regardless of how you feel about it, it is a possibility.

Since 1984, Social Security recipients have had to contend with this possibility. Social Security benefits became taxable above a certain yearly income level in that year. Then in 1993, a second, higher yearly income threshold (at which a higher tax rate applies) was added. Unfortunately for today’s recipient, these income thresholds have never been adjusted upward for inflation.1 As a result, more Social Security recipients have been exposed to the tax over time. Today, about 56% of senior households now have some percentage of their Social Security incomes taxed.1

Only part of your Social Security income may be taxable, not all of it. This is good news for some. Two factors come into play here: your filing status and your combined income.

Social Security defines your combined income as the sum of your “adjusted gross income” (AGI), any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of “modified AGI,” or MAGI.)2

Single filers with a combined income from $25,000 to $34,000 and joint filers with combined incomes from $32,000 to $44,000 may have up to 50% of their Social Security benefits taxed.2

Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2

If you are a head of household, or a qualifying widow/widower with a dependent child, the combined income thresholds for single filers apply to you.2

What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive. (The only exception is if you are married filing separately and do not live with your spouse at any time during the year. In that case, part of your Social Security benefits may be taxed if your combined income exceeds $25,000.)2

You may be able to estimate these taxes in advance. You can use an online calculator (a Google search will lead you to a few such tools) or the worksheet in I.R.S. Publication 915.2

You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 22% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2,3

Did you know that 13 states tax Social Security payments? In alphabetical order, they are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. It might be a surprise to some that California is not on this list. Sometimes, only higher-income seniors face such taxation. For example, in Kansas, Missouri, and Rhode Island, the respective AGI thresholds for the taxation of a single filer’s Social Security income are $75,000, $80,000, and $85,000.1

If it appears your benefits will be taxed, what can you do? You could explore a few options to try and minimize the tax hit, but keep in mind that if your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, though, some moves might help.

If you have a number of income-generating investments, you could opt to try and revise your portfolio so that less income and tax-exempt interest are produced annually. Part of our work with clients is to review this possibility.

As written about in another article, a charitable IRA gift may be a good idea. You can make one if you are 70½ or older in the year of the donation. Individually, you can endow a qualified charity with as much as $100,000 in a single year this way. This idea could have a dual purpose: The amount of the gift counts toward your Required Minimum Distribution (RMD) and will not be counted in your taxable income.4

You could withdraw more retirement income from Roth accounts to lower AGI. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax exempt as long as you are age 59½ or older and have held the account for at least five tax years.5

Will the income limits linked to taxation of Social Security benefits ever be raised? Retirees can only hope so, but with more baby boomers becoming eligible for Social Security, the I.R.S. and the Treasury stand to receive greater tax revenue with the current limits in place.

If you would like to review options to help manage social security taxes, we welcome your call.

#FinancialPlanning #RetirementIncome  #RetirementPlanning #SocialSecurity #Taxes #TaxStrategies #TaxSavings

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 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 – fool.com/retirement/2018/08/30/everything-you-need-to-know-about-social-security.aspx [8/30/18]
2 – forbes.com/sites/kellyphillipserb/2018/02/15/do-you-need-to-pay-tax-on-your-social-security-benefits-in-2018 [2/15/18]
3 – cnbc.com/2018/09/12/the-irs-is-warning-retirees-of-this-impending-surprise-tax.html [9/12/18]
4 – fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds [9/17/18]
5 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [10/25/17]

New California Bill regulates increases to life insurance premiums

Among several laws signed by Governor Jerry Brown on September 2018 is Assembly Bill (AB) 2634, which is intended to protect and assist consumers affected by cost increases in their existing life insurance policies.

Current California law requires a carrier to provide notice for premium increases.

AB 2634 goes into effect for all policies on April 1, 2019 and requires carriers to provide a “summary notice” to a policy owner of flexible premium policies 90 days before any cost of insurance increases. This summary notice must include:

  • The name and definition of “each nonguaranteed element in the current scale of nonguaranteed elements that is subject to an adverse change.”
  • A statement of the current rate or charge, the new rate or charge, and the percentage change.
  • An explanation that the “adverse change” is “based on expectations of the future cost of providing the benefits under the policy, and that the adverse change to the current scale of nonguaranteed elements will reduce the accumulation value and may increase the risk of policy lapse based on continued payment of current premiums.”
  • The date the adverse change will take effect.

The notice also requires carriers to notify the owner of the policy that they have the following options:

  • Do nothing – take no action
  • Pay the additional premium
  • Reduce the policy benefit amount
  • Surrender the policy
  • Convert the policy (if the policy qualifies for a conversion)

The bill also requires carriers to include “an inforce illustration of current and future benefits and values whenever the policy is subject to an adverse change in the current scale of nonguaranteed elements” and to advise the policy owner to contact the agent or carrier if there are questions.

Regardless of the type of insurance policy, owners should have their policies reviewed on a periodic basis. If you would like a review of your policy, we welcome your call.

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3 Ways The Middle Class Can Be Charitable and Make a Difference

You don’t need to be wealthy to make an impact and get a win-win.

Provided by Cornerstone Wealth Management

Do you have to make a multimillion-dollar donations to a charity to earn immediate or future financial benefits? No. If you’re not yet a millionaire or simply a “millionaire next door,” yet want to give, consider the following ideas, which may bring you immediate or future tax deductions.

Partnership gifts. These gifts are made via long-term arrangements between donors and recipient charities or non-profits, usually with income resulting for the donor and an eventual transfer of the principal to the charity at the donor’s death.

For example, a charitable remainder trust (CRT) may be structured to provide a beneficiary (i.e., you) with cash flow for a defined number of years, even for life. After the end of the trust term (or your death), the remaining trust principal passes to charity, or in some cases if your prefer, to a family foundation. Another option: You could even name a CRT as the beneficiary of your IRA as part of your estate planning strategy. In fact, some charities and universities are happy to administer a CRT you create for free if the remaining trust principal is designated for that charity or university’s investment or endowment fund. A charitable lead trust (CLT) makes annual charitable gifts on your behalf, for a set number of years; if structured and executed properly, the trust beneficiaries (i.e., your heirs) can eventually receive the leftover trust assets without having to pay estate or gift taxes on them.1,2

If you don’t have enough funds to start one of these, you might opt to invest some of your assets in a pooled income fund offered by a university or charity. In a pooled income fund, your gifted assets go into a “pool” of assets invested by a fund manager; as a donor, you are assigned “units” in the fund proportionate to your share of the fund’s total assets. In turn, you get a proportionate share of the income of the fund for life, and when your last income beneficiary passes away, the principal of your gift goes to the school or charity.3

If you like the idea of a family foundation, but don’t quite have the money and don’t want the bureaucracy, you could consider setting up a donor-advised fund (DAF). Essentially, this is a charitable savings account. You make an irrevocable contribution to a third-party fund, realizing an immediate tax deduction for the year of the gift; the fund invests the money in an account you create, where it grows without being taxed. You can request where the charitable donations from the DAF go, and you have a say in how you want the funds in the DAF invested, but the DAF makes the actual donations to non-profits and has the legal control over these matters.1,4 Among our clients and in Northern California, there are a number of families where a DAF is an ideal solution short and long term.

Lifetime gifts. These are charitable gifts in which the donor retains no powers or other controls over the gift once it is made. The gift is irrevocable, or in federal tax terms, “complete.” A lifetime gift of this sort is not included in what the Internal Revenue Service calls your Gross Estate. However, taxable gifts are used in calculation of estate tax.5

Lifetime gifts also include outright gifts of cash or appreciated property, such as stocks, business interests, or real estate. Thanks to the 2017 federal tax reforms, you can make outright gifts via cash or check and deduct such donations up to 60% of your income. A gift of appreciated property could bring you an income tax deduction for its fair market value and help you avoid the capital gains tax that would result from the sale of the asset.6,7

Through a partial or whole gift of appreciated property, you can transfer a real estate deed to a school or charity and get around capital gains taxes that may result from a property’s sale. You may receive an immediate charitable income tax deduction for the full fair market value of the gifted property, a deduction which you may apply up to 30% of your adjusted gross income. If you seek a little more control, you could even arrange a retained life estate, in which you transfer the title to your home to a charity or non-profit while retaining the right to live in it as your primary residence for the rest of your life.8

Life insurance policies and IRAs. Donating a paid-up life insurance policy to a university or charity may allow you an immediate charitable deduction for the value of the gift. You can also name a charity as the beneficiary of an IRA; upon your death, the full value of the account will transfer to the charity without being subject to federal estate or income taxes.6

The caveats. Based on current tax law, as your income increases, you may face limits on the amounts of charitable gifts you can deduct. Your charitable deductions for any federal tax year cannot be more than 50% of your adjusted gross income. But if you exceed such limits, the I.R.S. lets you carry forward excess contributions for up to five years.9

Would you like to learn more? Now is as good a time as any to do so. Your charitable gifting can have real impact even if you don’t have a fortune. Keep in mind that your unique circumstances need to be weighed before making any decision. Please consult your financial professional, tax professional, or attorney prior to making any move. If you would like to get coaching on a gifting approach that might work for you, we welcome your call.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.