Author: brianl

 

 

 

 

 

  • Strive to minimize your trading frequency.
  • Hold mutual funds and/or ETFs with low expense ratios.
  • Make catch-up contributions (currently $1,000) to your retirement accounts if you’re age 50+.
  • Be sure to start taking RMDs from your tax-deferred accounts when you reach age 72. The penalty for not doing so is steep.
  • Contribute at least the minimum amount needed to your retirement plan in order to get full matching contributions from your employer.
  • As retirement account contribution limits increase over time, increase the amount you sock away.
  • Work for your employer until their contributions to your retirement plan account vest. At that point, you’ll own them and be able to withdraw them from your account.
  • Consider hiring a qualified professional (like a CFA® Charterholder) to manage your investments.
  • Ensure you’re taking the right amount of risk in your investment accounts. See the previous bullet on CFA® Charterholders.
  • Once you have the right amount of risk “dialed in” to your portfolio, stick with it through thick and thin. Resist the urge to sell low. Don’t look at your account balances if need be.
  • Always have some equity exposure. It will help you maintain purchasing power over time.
  • Ensure your investing is aligned with the other pieces of your financial picture (retirement plans, debt load, tax situation, etc.).
  • If you hand your investments over to someone else to manage, hand them over to someone who is only compensated via client fees. This helps to minimize conflicts of interest.
  • Due diligence is your friend when it comes to investing; you can’t know too much about a potential investment.
  • There are lots of investing biases out there. Consider reading about them in order to minimize the odds that you’ll fall victim to them.
  • This bull market will end. Make sure you’re prepared.

Happy New Year!

As you may have heard, Congress passed a bill (here) at the end of last year that has a number of personal finance implications.

Below are the five things that many people will need to know and then below that are several items that a few people will need to know. There are lots of exceptions and provisions to many of these rules, but in an effort to keep this readable, I will (mostly) leave the detail out. When you see a word such as “generally” or “basically” below, that’s why.

Most items of interest are in the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 portion of the spending bill, but there are a few random things from elsewhere that I’ll include as well.

First, under Section 401 (Modifications to Required Minimum Distribution Rules), there is a detrimental change for many families. If you are planning to leave a retirement plan to your descendants, they will generally no longer be able to take the proceeds over their life expectancies. Instead, the maximum deferral period will be 10 years. Relevant details:

1) This does not apply to leaving the retirement plan to your spouse.

2) This does not apply to those who have already inherited a retirement plan.

3) If your estate planning documents leave your retirement account to a trust for the benefit of your heirs, you may want to re-evaluate that decision.

4) If your taxable (i.e. non-Roth, non-basis) retirement plan balances are likely to be high enough that withdrawing one-tenth each year for the ten-year deferral period would be enough to place your heirs into a higher income tax bracket than you are currently in, then Roth conversions for their benefit may be prudent.

Second, under Section 113 (Increase in Age for Required Beginning Date for Mandatory Distributions), there is a small, yet favorable, change. For those who are not yet 72, RMDs (Required Minimum Distributions) from retirement plans will now need to begin at age 72 rather than at age 70½.

Third, under Section 106 (Repeal of Maximum Age for Traditional IRA Contributions), there is another small, yet favorable, change. For those over age 70½ who have earned income, you can now contribute to a Traditional IRA.

Fourth, in the spending bill itself (but not the SECURE Act section we have been discussing), the change in the “kiddie tax” (basically tax on unearned income for a child under 18, or under 24 and a full-time student) that was made by the 2018 Tax Cuts and Jobs Act (TCJA) is repealed. Those earnings will again be taxed at the parent’s marginal rate as they were previously rather than at trust tax rates.

Fifth, (unrelated to this bill) beginning in 2021, the IRS is changing its life expectancy table for the calculation of RMDs. Previously, an 80-year-old using the standard table would have used a life expectancy of 18.7 years. In 2021, it will change to 20.2. The 90-year-old figure will change from 11.4 to 12.2. This means the required distribution will decrease from 5.35% to 4.95% at 80 and 8.77% to 8.20% at 90. This is not a huge change, but it is a favorable one.

If you aren’t looking for minutia, you can stop reading now. We wish you a happy, healthy, and prosperous 2020!

 

The bold portions below are the bill headings, etc. the non-bold portions are our brief summary of each section, with occasional commentary.

THE SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019 (THE SECURE ACT)

TITLE I: Expanding and Preserving Retirement Savings

SEC. 101. MULTIPLE EMPLOYER PLANS; POOLED EMPLOYER PLANS. – Allows two or more unrelated employers to join a pooled employer plan.

SEC. 102. INCREASE IN 10 PERCENT CAP FOR AUTOMATIC ENROLLMENT SAFE HARBOR AFTER 1ST PLAN YEAR. – the maximum 401(k) contribution for employers using an automatic enrollment safe harbor plan is increased from 10% to 15%.

SEC. 103. RULES RELATING TO ELECTION OF SAFE HARBOR 401(k) STATUS. – simplification of safe harbor rules.

SEC. 104. INCREASE IN CREDIT LIMITATION FOR SMALL EMPLOYER PENSION PLAN STARTUP COSTS. – increases the tax credit for small businesses who set up a retirement plan.

SEC. 105. SMALL EMPLOYER AUTOMATIC ENROLLMENT CREDIT. – provides a small tax credit for employers who set up a new plan with automatic enrollment.

SEC. 106. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS TREATED AS COMPENSATION FOR IRA PURPOSES. – grad student payments are now considered “earned income” so they can fund an IRA (or, more likely, a Roth IRA).

SEC. 107. REPEAL OF MAXIMUM AGE FOR TRADITIONAL IRA CONTRIBUTIONS. – covered above.

SEC. 108. QUALIFIED EMPLOYER PLANS PROHIBITED FROM MAKING LOANS THROUGH CREDIT CARDS AND OTHER SIMILAR ARRANGEMENTS. – makes plan loans less convenient (this is a good thing).

SEC. 109. PORTABILITY OF LIFETIME INCOME OPTIONS. – necessary change because of section 204 below.

SEC. 110. TREATMENT OF CUSTODIAL ACCOUNTS ON TERMINATION OF SECTION 403(b) PLANS. – allows in-kind distribution of terminated 403(b) plan balances.

SEC. 111. CLARIFICATION OF RETIREMENT INCOME ACCOUNT RULES RELATING TO CHURCH-CONTROLLED ORGANIZATIONS. – clarifies that church-controlled organizations can have retirement plans.

SEC. 112. QUALIFIED CASH OR DEFERRED ARRANGEMENTS MUST ALLOW LONG-TERM EMPLOYEES WORKING MORE THAN 500 BUT LESS THAN 1,000 HOURS PER YEAR TO PARTICIPATE. – self-explanatory.

SEC. 113. PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS FOR INDIVIDUALS IN CASE OF BIRTH OF CHILD OR ADOPTION. – $5,000 limit and it can be repaid to the IRA later.

SEC. 114. INCREASE IN AGE FOR REQUIRED BEGINNING DATE FOR MANDATORY DISTRIBUTIONS. – covered above.

SEC. 115. SPECIAL RULES FOR MINIMUM FUNDING STANDARDS FOR COMMUNITY NEWSPAPER PLANS. – helps small newspapers by making the pension funding less stringent.

SEC. 116. TREATING EXCLUDED DIFFICULTY OF CARE PAYMENTS AS COMPENSATION FOR DETERMINING RETIREMENT CONTRIBUTION LIMITATIONS. – allows home healthcare workers to treat “difficulty of care” payments (which are exempt from taxation) as “earned income” so they can fund an IRA or Roth IRA.

TITLE II: Administrative Improvements

SEC. 201. PLAN ADOPTED BY FILING DUE DATE FOR YEAR MAY BE TREATED AS IN EFFECT AS OF CLOSE OF YEAR. – allows plans to be set up after the end of the year for the previous year (as SEPs have long allowed).

SEC. 202. COMBINED ANNUAL REPORT FOR GROUP OF PLANS. – allows plans that are basically the same to file consolidated Form 5500.

SEC. 203. DISCLOSURE REGARDING LIFETIME INCOME. – requires employers to show plan participants what income their plan balance is likely to generate in retirement. Most individuals have unrealistic expectations, so this is a helpful change for employees although it is (slightly) more work for employers. The DOL is to provide a model disclosure.

SEC. 204. FIDUCIARY SAFE HARBOR FOR SELECTION OF LIFETIME INCOME PROVIDER. – employer retirement plans can more easily allow annuity options. Many folks think this may open the door to sales of poor insurance products within 401(k) plans (much as 403(b) plans are chock-full of terrible investment options). Giving support to this view is how happy insurance companies were with this provision and how hard they lobbied for it.

SEC. 205. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT OLDER, LONGER SERVICE PARTICIPANTS. – protects the benefits of participants in closed retirement plans.

SEC. 206. MODIFICATION OF PBGC PREMIUMS FOR CSEC PLANS. – changes funding rules.

TITLE III: Other Benefits

SEC. 301. BENEFITS PROVIDED TO VOLUNTEER FIREFIGHTERS AND EMERGENCY MEDICAL RESPONDERS. – one-year repeal of the SALT (State and Local Tax) limit but just for a very small group.

SEC. 302. EXPANSION OF SECTION 529 PLANS. – allows 529 funds to be used for registered apprenticeships, home/private/religious schooling, and up to $10,000 of qualified student loan repayments.

TITLE IV: Revenue Provisions

SEC. 401. MODIFICATION OF REQUIRED DISTRIBUTION RULES FOR DESIGNATED BENEFICIARIES. – covered above.

SEC. 402. INCREASE IN PENALTY FOR FAILURE TO FILE. – increases the failure to file penalty to the lesser of $400 or 100 percent of the amount of the tax due.

SEC. 403. INCREASED PENALTIES FOR FAILURE TO FILE RETIREMENT PLAN RETURNS. – self-explanatory, applies to employers.

SEC. 404. INCREASE INFORMATION SHARING TO ADMINISTER EXCISE TAXES. – the IRS can share information with U.S. Customs and Border Protection to help collect the heavy vehicle use tax.

 

Do you have questions about how these changes might affect your situation? Call us at 970-710-0330 or email us at brian@sherwoodim.com today!

Photo credit: John Salvino

Wishing you and yours a happy, healthy, and prosperous 2020.

Who can you trust to provide you with reliable financial advice? If you are like most people, you assume that the people who provide financial advice are required to act in your best interest. Unfortunately, that’s only true for a relatively small number of advisors – those who are fiduciaries.

Under financial laws and regulations, there are two sets of rules. One set is for people who sell financial products, generally brokers and insurance company representatives.  These salespeople are contractually obligated to place the interests of their employer ahead of the interests of their clients.

The other set of rules is for those who are registered as investment advisers with the federal Securities and Exchange Commission (SEC) or comparable state regulators. Registered investment advisers (RIAs) are legally obligated to place your interests first. They are fiduciaries. That means they must not only be loyal to serving your exclusive best interests, they must also adhere to a high standard of professional competence.

Unlike other classic professions, such as law and medicine, anyone can call himself an investment or financial advisor even if they are really just a salesperson. Recent financial reform legislation is attempting to change this situation, but there are powerful and extraordinarily well-funded financial service company lobbying organizations working overtime to protect the status quo.

The Committee for the Fiduciary Standard has drafted the very straightforward oath below. It commits us to adhere to a fiduciary standard at all times when working with our clients.

Please call us at 970-710-0330 if you would like more information about why it is so vitally important to work with a fiduciary when you need advice. We would be delighted to discuss this subject with you further.

 

HAPPY THANKSGIVING!

Photo by Element5 Digital

 

“And because most of us regard ourselves as ethical and competent, we often fail to understand how widespread and harmful advisers’ conflicts of interests can be.” – Jason Zweig, The Wall Street Journal

This is why it is important to work with an independent, fee-only investment adviser. This type of adviser avoids conflicts of interest by ONLY being compensated by his/her clients. This topic is discussed in the podcast below:

Click here to listen.

Don’t have time to listen? Here’s the Reader’s Digest version:

  • Most people start thinking about hiring a financial professional when they’re approaching retirement. But the lack of a uniform code of conduct among financial professionals allows many glorified salespeople to legally pose as trusted advisors. This episode explains how different kinds of financial advisors work and earn their living–and why these differences matter.
  • Guest pre-retiree Patty starts with the story of a personal finance class she attended with her husband at her local college. The “instructor” was an insurance salesperson who used the class to try to sell them annuities as the solution to their retirement income challenges.
  • Guest Lynne Egan,  the Deputy Securities Commissioner for the state of Montana, attended a similar class and confirms that these “trolling sessions” are both common and legal. It’s the job of investors to understand the differences between a glorified investment salesperson and a fiduciary financial advisors who is committed to acting in your best interests.
  • Guest Phyllis Borzi, former assistant secretary of the Department of Labor during the Obama administration, worked tirelessly to introduce legislation that would have required all advisors to act as fiduciaries. Her efforts were legally thwarted by industry opposition. As a result, there are no uniform standards of care among financial advisors.
  • Registered representatives, or brokers, earn commissions selling products, and only need to meet the “suitability standard,” which means that as long as a product they recommend generally aligns with an investor’s risk tolerance and investment objective, the broker can recommend the product that pays them the highest commission. Investors who want to work with an advisor who puts their needs first need to to ask many qualifying questions, starting with, “Are you a fiduciary?”
  • Legally, investment advisers are required to serve as fiduciaries, which they fulfill, in part, by being paid directly by clients and receiving no commissions for managing their investments. But many investment advisers are also brokers, and can still receive commissions for selling certain products, such as insurance.  Investors who want to hire “100% fiduciaries” should limit their choices to independent, fee-only investment advisers who are not also brokers. Investors should also require the advisor to sign an industry standard fiduciary oath.

 

As you move through different stages of life, you will face new and unique financial situations. Did you just get engaged? Perhaps you are wondering how you and your partner are going to manage your money together. Do you have children? Maybe you are looking for ways to pay for their college education.

When you navigate through these various life events, you might seek professional guidance to help you make sound financial choices.

1. Getting married

Getting married is an exciting time in one’s life, but it also brings about many challenges. One challenge that you and your spouse will face is how to merge your finances. Careful planning and communication are important, since the financial decisions you make now can have a lasting impact on your future.

You’ll want to discuss your financial goals and determine which are most important to both of you. You should also prepare a budget to make sure you are spending less than you earn. Other issues to consider as a couple include combining financial accounts, integrating insurance coverage, and increasing retirement plan contributions.

2. Buying a home

Buying a home can be stressful, especially for first-time homebuyers. Since most people finance their home purchases, buying a house usually means getting a mortgage. As a result, you’ll need to determine how large a mortgage you can afford by taking into account your gross monthly income, housing expenses, and long-term debt.

And if you haven’t already done so, you’ll need to save for a down payment. Traditionally, lenders have required a 20% down payment on the purchase of a home, however many lenders now offer loans with lower down payments.

3. Starting a family

Starting a family is an important — and expensive — commitment. As your family grows, you will likely need to reassess and make changes to your budget. Many of your living expenses will increase (e.g., grocery, health-care, and housing costs). In addition, you’ll need to account for new expenses such as child care and building a college fund.

Having a family also means you should review your insurance coverage needs. Life insurance can help protect your family from financial uncertainty if you die, while disability insurance will help replace your income if you become injured or sick.

4. Paying for college

Paying for college is a major financial undertaking and usually involves a combination of strategies to help cover costs — savings, financial aid, income during the college years, and potentially other creative cost-cutting measures. Hopefully, you’ve been saving money on a regular basis to amass a healthy sum when your child is ready for college. But as college costs continue to rise each year, what you’ve saved may not be enough.

For this reason, many families supplement their savings at college time with federal or college financial aid. Federal aid can include student and parent loans (need-based and non-need-based), grants and work-study (both need-based), while college aid consists primarily of grants and scholarships (need-based and merit-based). In fact, college grants and scholarships can make up a significant portion of the college funding puzzle, so exploring the availability of college aid is probably the single biggest thing you can do after saving regularly to optimize your bottom line. In addition to financial aid, you might take out a private college loan or borrow against your home equity. Or you might pay college expenses using your current income or other savings or investments.

5. Saving for retirement

You know that saving for retirement is important. However, sometimes it’s easy to delay saving while you’re still young and retirement seems too far off in the future. Proper planning is important, and the sooner you get started, the easier it will be to meet your retirement income needs. Depending on your desired retirement lifestyle, experts suggest that you may need 80% to 100% of your pre-retirement income to maintain your standard of living. However, this is only a general guideline. To determine your specific needs, you’ll need to estimate all your potential sources of retirement income and retirement expenses, taking taxes and inflation into account.

Once you’ve estimated how much money you’ll need for retirement, your next goal is to save that amount. Employer-sponsored retirement plans like 401(k)s and 403(b)s are powerful savings tools because you can make pre-tax contributions (reducing your current taxable income), and any investment earnings grow tax deferred until withdrawn, when they are taxed as ordinary income. You may be able to enhance your savings even more if your employer matches contributions. IRAs also offer tax-deferred growth of earnings.

Broadridge Investor Communication Solutions, Inc. Copyright 2019

Photo by Drew Hays

Brian is excited to be teaching a new course at Colorado Mountain College this fall:

For more information or to sign up, please visit the CMC website and type “retirement” in the Search box.

Brian recently spoke with KMTS’s Gabe Chenoweth about the class he teaches at Colorado Mountain College. You can listen to the interview here.

Brian will be teaching his next class, Retirement Income Planning, on September 25th. You can learn more about the class by clicking on this link and typing “retirement” into the Search field.

Saving enough to fund 30+ years of retirement can be tough, especially when there are lots of other demands on your cash flow. Here are some tips that can help you build the nest egg you need:

  • Minimize the fees you pay on mutual funds and/or ETFs you hold within your accounts. Consider using Vanguard mutual funds and ETFs to achieve this objective.
  • Make catch-up contributions (currently $6,000) if you’re age 50+.
  • Contribute at least the minimum amount needed to get full matching contributions from your employer.
  • As account contribution limits increase over time, increase the amount you sock away.
  • Don’t get divorced. Getting divorced may subject your retirement plan balance to a QDRO (Qualified Domestic Relations Order). A QDRO can decimate your retirement savings.
  • Pay your federal taxes on time and in full. Otherwise, Uncle Sam could start withdrawing the amounts you owe him from your retirement accounts.
  • Work for your employer until their contributions to your account vest. At that point, you’ll own them and be able to withdraw them from your account.
  • Hire a qualified professional (like a CFA® charterholder) to manage the investments within your retirement plan accounts. New software programs allow portfolio management pros to manage virtually any type of retirement account on your behalf.
  • Ensure you’re taking the right amount of risk in your retirement accounts. See the previous bullet on CFA® charterholders.

 

Brian Littlejohn, MBA, CFP®, CFA is a fee-only financial advisor serving clients in Glenwood Springs, CO and beyond. His firm, Sherwood Investment Management, provides investment management, retirement planning, and comprehensive financial planning to help clients organize, grow, and protect their assets. Sherwood Investment Management is completely independent, acts as a fiduciary for its clients at all times, and never accepts commissions of any kind.