How Having an Estate Plan Can Avoid a Major Headache for Heirs

Contributed by: Josh Bitel, CFP®

With the majority of 2023 already in the books, some procrastinators may have seen their New Year's resolutions come and go. Perhaps one of the most common areas of financial planning that clients drag their feet on is getting those pesky estate planning documents drafted. So let's talk about what happens if you don't have a valid will or trust in place when you pass away.

What Is Intestacy?

You are said to have died intestate if you pass without a valid will. Intestacy laws govern the property distribution of someone who dies intestate. Each of the 50 states has adopted intestate succession laws that spell out how this distribution is to occur, and although each state's laws vary, there are some common general principles. The laws are designed to transfer legal ownership of property that the recently deceased owned or controlled to the people the state considers their heirs. These laws also control how these individuals receive this property and when the property is to be distributed.

Example:

John is a Michigan resident and is married with two minor children. He keeps meaning to write his will but has yet to get around to it. One day, John gets hit by a truck while crossing Telegraph and passes away instantly. Because he has no will, the intestate succession laws of Michigan govern how his property is distributed. Under Michigan law, 50 percent of John's property passes to his wife, and 50 percent passes to John's two minor children (25 percent each). Had John had a will, he could have left everything to his wife.

Technical Note:
Real property is distributed under the intestacy laws of the state in which it is located. Personal property is distributed under the state's intestacy laws in which you are domiciled at the time of your death.

Why Should You Avoid Intestacy?

• Cost

  • Intestacy can be more costly than drafting and probating a will. In most states, an administrator must furnish a bond, where you can often waive this requirement in your will. Also, an administrator's powers are limited, and they must get permission from the court to do many things. The cost of these proceedings is paid by your estate.

• You can't decide who gets your property

  • State intestacy laws will determine who receives your property. These laws divide your property among your heirs, and if you have no heirs, the state will claim your property.

  • Unlike beneficiaries under your will, who can be anyone to whom you wish to leave the property, heirs are defined as your legal spouse and specific relatives in your family. If the state can find no heirs, it could claim the property for itself (the property escheats to (goes to) the state). The laws of your state determine the order in which heirs will receive your property, the percentage that each will receive, and in what form they will receive it, whether in cash, property, lump sum, annuity, or other form.

• Special needs are not met

  • State intestacy laws are inflexible. They do not consider the special needs of your heirs. For example, minor children will receive their share with no strings attached, whether they are competent to manage it or not.

• Heirs may be short-changed

  • The predetermined distribution pattern set out by state law can end up giving a larger portion of your estate to an heir than you intended for them to have. It may also leave one of your heirs with too little.

• You can't decide who administers your estate

  • If you die intestate, the probate court will name an administrator to manage your estate. You will have no say in who settles your estate.

• You have no say in who becomes a guardian for your minor children

  • A court will appoint personal and property guardians for your minor children since you didn't specify otherwise. You will also expose the assets you leave your child to the management skills of someone you may not approve of.

• Relations take priority over friends and others

  • State intestacy laws will distribute your property to family members in a preset pattern. These laws do not consider your relationship with your family when dividing up your estate. As a result, that brother you may not have spoken to in 20 years may end up with a portion of your assets that you'd rather he not have.

• Tax planning options are eliminated

  • Without a will or some other means of disposing of your property, you can't plan to minimize or provide payment of income or estate taxes.

How Is Property Distributed Under Intestacy?

The pattern of distribution varies immensely from state to state. You must check with your state to find out what its intestate's will looks like. Generally, the rules are as follows:

• If you leave a spouse but no children, the spouse takes the entire estate.

• If you leave a spouse and children, each takes a share.

• If you leave children and no spouse, the children take the entire estate in equal shares.

• If you leave no spouse or children, the entire estate goes to your parents.

• If you leave no spouse, children, or parents, the entire estate goes to your siblings (or your siblings' descendants).

• If you leave none of the above, the entire estate goes to your grandparents and their descendants (your aunts, uncles, and cousins).

• If you leave no heirs, the next takers are your deceased spouse's heirs.

• If there are no heirs on either side, the next to take is your next of kin, those who are most nearly related to you by blood.

• If there are no next of kin, your estate escheats to the state

So as you can see, it pays to have your estate planning documents drafted. Not only can they provide you with peace of mind, but they can also save your heirs time and headaches when dealing with your estate. Talk to your advisor today to see whether or not you are properly covered!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. While we are familiar with the legal and tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on legal or tax matters. These matters should be discussed with the appropriate professional.

Don’t Fall Victim to the Widow’s Penalty!

Contributed by: Nick Defenthaler, CFP®, RICP®

Several years ago, after starting a new relationship with a newly widowed client, I received a confused phone call from her. She had received communication from Medicare that her Part B & D premiums would be significantly increasing for the year. To make matters worse, she also noticed when filing her most recent tax return that she was now in a much higher tax bracket. What happened? Now that her husband was deceased, she was receiving less in Social Security and taking fewer withdrawals from her retirement accounts. Her total income had decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she was a victim of what’s known as the “widow’s penalty.”

Less Income and More Taxes – What Gives?

Simply put, the widow’s penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse’s death.

When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. Additionally, they will lose any other income tied only to the deceased spouse, such as employment income, single-life annuity payments, or pensions with reduced or no survivor benefits. Depending on how much income was tied to the deceased spouse, the surviving spouse’s fixed income could see a sizeable decrease.

At the same time, the surviving spouse starts receiving less income, and they find themselves subject to higher taxes.

With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married filing jointly in the year following their spouse’s death. In 2023, that means they will hit the 22% bracket at only $44,725 in income. Married filers do not reach the 22% bracket until they have more than $95,375 in income. Unfortunately, even if income remains the same, widowed tax filers will inevitably pay higher tax rates on this same income level. 

Tax brackets are not the only place surviving spouses are penalized. Like the client in my story above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Specifically, single filers with a modified adjusted gross income of more than $97,000 are required to pay a surcharge on their Medicare premiums, whereas there is no surcharge until a couple who is married filing jointly reaches $194,000 of income. This means that a couple could have an income of $120,000 and not be subjected to the Medicare IRMAA surcharge, but if the surviving spouse has an income of $100,000, their premium will increase by almost $1,000 per year. In this same example, the widow would now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying $3,600 more in federal tax!

Proactive Planning

Short of remarrying, there is no way to avoid the widow’s penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.

For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse’s lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.

Several years ago, I was working with a couple (we’ll call them John and Mary), and after several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John’s passing. Several months after her husband’s passing, I met with Mary and suggested we convert over $100,000 from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes along with the significant medical deduction that was only present the year John passed, Mary only paid an average tax rate of 10% on the $100,000 we converted. As we stand here today, Mary is now filing single and finds herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates are set to expire at the end of 2025!)

The widow’s penalty should be on every married couple’s radar. While it’s possible that while both spouses are living, their tax rate will always remain the same, as we’ve highlighted above, unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning could help to dramatically reduce the impact this penalty could have on your plan.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained in this blog has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Financial Literacy Never Stops!

Contributed by: Sandra Adams, CFP®

April is Financial Literacy Month. When many of us think about financial literacy, our thoughts immediately go to our children and educating them on the basics of money – debt, credit, budgeting, and the like. But the reality is that financial literacy is a lifelong process and applies to all of us at all ages and stages of life – the learning never stops. From a child's earliest spending to a senior citizen's retirement decisions, individuals apply their knowledge and skills to financial choices, and it is important that they are making informed decisions at all stages.

What we know:

• People who are financially literate are generally less vulnerable to financial fraud.

• Research shows that financial illiteracy is very common, with the Financial Industry Regulatory Authority (FINRA) attributing it to 66% of Americans.

• In its Economic Well-Being of U.S. Households in 2020 report, the U.S. Federal Reserve System Board of Governors found that many Americans are unprepared for retirement. More than one-fourth indicated that they have no retirement savings, and fewer than four in 10 of those not yet retired felt that their retirement savings are on track.

• Low financial literacy has left millennials—the largest share of the American workforce—unprepared for a severe financial crisis, according to research by the TIAA Institute. Over half lack an emergency fund to cover three months' expenses, and 37% are financially fragile (defined as unable or unlikely to come up with $2,000 within a month in the event of an emergency).

A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business. Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending. The earlier one can begin to learn the basics, the better. However, there is always time to learn and apply lessons learned when it comes to handling one's own finances. 

Benefits of Financial Literacy:

Holistically, the benefit of financial literacy is to empower individuals to make smarter decisions. More specifically, financial literacy is important for several reasons.

• Financial literacy can prevent devastating mistakes: Seemingly innocent financial decisions may have long-term implications that cost individuals money or impact life plans. Financial literacy helps individuals avoid making mistakes with their personal finances.

• Financial literacy prepares people for emergencies: Financial literacy topics such as saving or emergency preparedness prepare individuals for the uncertain. Though losing a job or having a significant unexpected expense are always financially impactful, an individual can cushion the blow by implementing their financial literacy in advance by being ready for emergencies.

• Financial literacy can help individuals reach their goals: By better understanding how to budget and save money, individuals can create plans that set expectations, hold them accountable to their finances, and set a course for achieving seemingly unachievable goals. Though someone may not be able to afford a particular goal today, they can always make a plan to better increase their odds of making it happen.

• Financial literacy invokes confidence: Imagine making a life-changing decision without all the information you need to make the best decision. By being armed with the appropriate knowledge about finances, individuals can approach major life choices with greater confidence realizing that they are less likely to be surprised or negatively impacted by unforeseen outcomes.

If you are like we are at The Center and are interested in helping spread the word about Financial Literacy, organizations like Junior Achievement, The JumpStart Coalition, and The Consumer Financial Protection Bureau are great places to go to start.  

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Sandra D. Adams, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Examples used are for illustrative purposes only.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

How to Read Your Credit Report

Contributed by: Matt Trujillo, CFP®

Identifying Information

Credit reports contain a certain amount of personal information. This is called identifying information and, among other things, allows the credit-reporting agency to distinguish between one Robert Smith from California and another Robert Smith from California. Typically, identifying information includes your name, address, Social Security number, previous addresses, employers (past and present), phone number, spouse, and date of birth. This information usually appears at the beginning or end of your report. If any of it is wrong, it should be corrected.

Under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), you can request that the credit bureaus truncate your Social Security number on disclosures they send you, including your credit reports. This step may help prevent identity theft.

Account Information

Account information usually composes the largest part of a credit report. The lender's name, the account number, a description of the account, when it was opened, what the high balance was, what the outstanding balance is, the loan terms, your payment history, and the account's current status are typically included.

Under FACTA, when reporting information furnished by a medical provider, the credit bureaus can only include financial information on your credit report--they are prohibited from disclosing the identity of the medical provider or the nature of the services.

Public Record Information

Credit bureaus collect information from courthouse records and registries. Thus, you may find bankruptcies, tax liens, judgments, and even criminal proceedings listed in your credit file.

Credit Report Inquiries

Whenever someone requests a copy of your credit history, it is recorded as an inquiry in your report. Typically, these appear at the end of the report. They remain on your report for 24 months. These entries allow you to see who has been checking on you and whether unauthorized persons have obtained your credit file.

Occasionally, you will see an inquiry identified as being made pursuant to a prescreening program. Typically, this is a credit card company that has contacted the credit-reporting agency and asked for a list of consumers who meet certain credit criteria. The credit card company has yet to actually see your credit report, but they have received a list of names and addresses from the credit bureau with your name on it. Do not be alarmed. This only means that you will likely receive an offer in the mail for a preapproved credit card. You can ask to be taken off the solicitation list.

Under the Fair Credit Reporting Act (FCRA) and FACTA, you have the right to opt out of prescreen programs and block unwanted solicitations for a period of five years.

Consumer Statement

If you have requested that a consumer statement be included in your credit file, then an abbreviated version of your statement will appear on your report.

What does this information mean?

Each creditor uses its own credit evaluation standards. If you are looking at your credit report now, you may be trying to determine why you just got turned down for the loan you recently applied for. Alternatively, you may intend to apply for a loan and want to see how your credit looks. In either case, you have the report and can read the information, but you probably want to know what it means. You want to see whether you are creditworthy or not.

Each creditor has its own system. Some use credit scoring, and some don't. Some have severe credit standards, whereas others are more flexible. Some even make loans to consumers who have recently filed for bankruptcy. It is difficult to know what any creditor looks for or sees when they look at your credit report. Your credit-reporting agency does not even know. However, there are some general rules of thumb.

A history of late payments and bad debts means you are a high-risk borrower

The three major credit-reporting agencies provide information about payment performance over the last 12 to 24 months. Charge-offs and judgments up to seven years old may appear on your credit report. Generally, this is not good.

If you have a history of late payments and/or bad debts, it means you are a high credit risk. The lender figures that it will have to wait for its money, work hard to get its money, or not get its money at all. Therefore, the lender is unlikely to give you the benefit of the doubt or the loan.

Alternatively, the lender may offer you credit, but at terms less favorable than those offered to most of the consumers it serves.

Under FACTA, if you are extended credit, but because of your credit report, you were offered less favorable terms, you must be notified of that fact.

Too many inquiries mean you are shopping around too much

When you apply for credit, the lender will request a copy of your credit history. The lender's request appears as an inquiry on your report. More inquiries in a short period of time make loan officers nervous. They assume that you are shopping around for one of two reasons:

• You were turned down everywhere you went but kept trying, or

• You are up to something

In the first case, you appear desperate, but the loan officer does not want to take a risk if none of the other banks in town will. In the second case, the loan officer sees someone who is on a credit spree, shopping for all the credit they can get. They may be financing a bad habit, borrowing to pay off another debt, or just foolish about the amount of credit they need. In any case, the loan officer is unlikely to take the risk by giving you a loan.

Under FACTA, the credit bureaus must notify you if too many inquiries are having a negative impact on your credit report.

A brief credit file means you have insufficient experience with credit

You may have good credit but not enough. Suppose you have five local department store charge cards with a credit limit of $500 on each. You have always paid as agreed, but the highest balance you have ever carried on any particular card is $100. You have had no other credit accounts. Now you are applying for a $16,000 loan to buy a car with only $1,000 down, but nothing on your credit report indicates you have the experience or ability to handle a $450 per month car payment for four years. Your lender knows that everyone must start somewhere, but it doesn't want to be at risk if you make mistakes. You need to build up more credit credentials before you are creditworthy enough to take on this kind of debt.

In these situations, the bank may lend you less money for a less expensive car, agree to lend you a lesser amount if you decide to put more money down or make you the loan if someone cosigns the loan with you.

Errors mean that the lender really cannot evaluate your credit history

Errors on your credit report are bad, even if they are not particularly derogatory when viewed in isolation. Loan officers often compare your loan application to your credit report. If inconsistencies exist, they may become suspicious. They may wonder if you are hiding something. Alternatively, they may become skeptical, assuming that if there is one error, there will likely be more. If there are more errors, there is no way to evaluate your application. Rather than take the time to call you up and sort it all out, a typical loan officer may reject the application and avoid the risk. If the errors indicate that you have bad credit, you are in even more of a pickle. If you see them, you should take action to correct the mistakes on your credit report. Contact your financial advisor with any questions - we are always happy to help!

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

Any opinions are those of Matt Trujillo, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.Any opinions are those of Matt Trujillo, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, and it does not constitute a recommendation.

How to Make the Federal Funds Rate Work for You

Contributed by: Kelsey Arvai, CFP®, MBA

It is worth reviewing how interest rates work and how you might consider adjusting your saving, spending, and investing strategies. Please always consult your CFP® professional regarding your specific situation and what is right for you. The Federal Reserve interest rate (also known as the federal funds rate) is the interest rate at which banks and credit unions borrow from and lend to each other. It is determined by the Federal Reserve System (also known as the Federal Reserve or simply the Fed). The Fed is the central banking system of the United States, and the federal funds rate is one of the key tools for guiding US monetary policy. The federal funds rate impacts everything from annual percentage yields (APYs) you earn on your savings to the rate you pay on credit card balances.

The Fed was first created in 1913 with the enactment of the Federal Reserve Act. A series of financial panics, specifically a severe one in 1907, led to the desire for central control of the monetary system to alleviate financial crises. The Fed is composed of several layers governed by the presidentially-appointed board of governors (known as the Federal Reserve Board or FRB). Historical events such as the Great Depression and the Great Recession have led to the expansion of the roles and responsibilities of the Fed. One of the functions of the Fed is to manage the nation’s money supply through monetary policy. Three key objectives have been established by Congress for monetary policy in the Federal Reserve Act – maximizing employment, stabilizing prices (prevention of inflation or deflation), and moderating long-term rates. The Fed largely implements monetary policy by targeting the federal funds rate – typically by adjusting the rate by 0.25% or 0.5%. The way it works is when you deposit money at a bank or credit union, those deposits provide banks with the capital needed to extend loans and other forms of credit to clients. Banks are required to keep a certain percentage of their total capital in reserve to help guarantee their stability and solvency.

The current federal funds rate is between 4.50% and 4.75% as of early February (part of the effort by the central bank to control inflation and maintain a stable economy). When interest rates are rising, make sure you look for high-yield savings opportunities, pay down credit card debt, and, if you’re looking for a car or home, make sure your interest rate reflects the current rate.

If you have a credit card, the most important strategy to focus on right now is prioritizing paying it off. While changes to interest rates will not affect your current fixed-rate loans, such as your car loan or mortgage, if you carry a balance on a credit card, the rate you owe on that money will continue to rise alongside short-term rates set by the Fed. If you cannot pay down your debt quickly, consider moving your debt over to a balance transfer credit card that could ensure you will pay no interest on your balance for a number of months.

On a positive note, rising interest rates create savings opportunities. Even though interest rates on deposits tend to correlate with the rise of the fed funds rate – you will likely earn next to nothing on your regular savings account, which typically is around 0.01%. If you have accumulated a large amount of cash in the bank above your current cash needs and emergency savings (three to six months of expenses), you might consider looking to a high-yield savings account, a money-market fund, or a one year Treasury bill (T-bill). Rates have increased quite a bit lately; the one year bill is now at 5.07%, and the two year is around 4.65%. Interest on T-bills is not taxable at the state level. Not a significant impact for Michigan residents, but if you live in a high-income state such as California, these become even more attractive. Our team has identified several money markets funds offering yields of around 4.5% (more than you would typically see at the bank).

The Federal Funds Rate is important to understand as the rate changes can impact your wallet. Ultimately, it is your own habits that are the main factor in determining your financial situation. As always, if you have any questions, feel free to contact our Team at The Center; we would be happy to help!

Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Investors should consider the investment objective, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other important information, is available from your Financial Advisor and should be read carefully before investing.

Retirement Plan Contribution and Eligibility Limits for 2022

Contributed by: Kelsey Arvai, MBA

Contributed by: Robert Ingram, CFP®

The IRS has released its updated figures for retirement account contribution and income eligibility limits. Here are the adjustments for 2022:

Employer retirement plan contribution limits including 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan:

• Employee elective deferral contribution limit is increased to $20,500 (up from $19,500).

• IRA catch-up contribution limit for individuals over 50 remains unchanged at $1,000.

• The total amount that can be contributed to a defined contribution plan including all contribution types (e.g., employee deferrals, employer matching, and profit-sharing) is $61,000 or $67,500 if over the age of 50 (increased from $58,000 or $64,500 for age 50+ in 2021).

􀁸 Traditional, Roth, SIMPLE, and SEP IRA contribution limits:

• Individuals can contribute $14,000 to their SIMPLE retirement accounts (up from $13,500).

• SIMPLE IRA catch-up contributions for individuals over 50 is $3,000.

• Limit on annual IRA contributions remains unchanged at $6,000.

• IRA catch-up contribution limit for individuals over 50 remains unchanged at $1,000.

The income ranges for determining eligibility to make deductible contributions to Traditional IRAs and contributions to Roth IRAs increased for 2022.

Traditional IRA deductibility income limits:

• For single taxpayers covered by a workplace retirement plan, the phase-out range increased to $68,000 to $78,000 (up from $66,000 to $76,000).

• Married filing jointly taxpayers:

  • If the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range increased to $109,000 to $129,000 (up from $105,000 to $125,000).

  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range increased to $204,000 to $214,000 (up from $198,000 to $208,000).

• For married filing separately taxpayers who are covered by a workplace retirement plan, the phase-out range remains the same, $0 to $10,000.

Roth IRA contribution income limits:

• For single taxpayers and Head of Household, the income phase-out range is increased to $129,000 to $144,000 (up from $125,000 to $140,000).

• For married filing jointly, the income phase-out range is increased to $204,000 to $214,000 (up from $198,000 to $208,000).

• For married filing separately, the income phase-out range remains unchanged at $0 to $10,000.

One strategy that has been used to accumulate dollars in a Roth IRA, even if your income level prohibits you from making regular contributions, is to accumulate non-deductible Traditional IRA contributions and then use Roth IRA conversions to move funds to the Roth IRA. This is known as the so-called “backdoor Roth IRA.” For individuals with an employer retirement savings plan, like a 401k or 403(b), that allows after-tax contributions in addition to the typical pre-tax or Roth contributions, there may be an opportunity to convert those after-tax contributions to a Roth IRA as well.

We continue to follow the proposed Build Back Better legislation going through Congress, and it’s probably not a big surprise that this continues, and will continue, to evolve. It still may be too early to tell, but it’s possible that these types of “back-door Roth IRA” strategies will go away starting in 2022.

These strategies would no longer be allowed under the proposed tax law changes in the Build Back Better plan. This year may be your last chance to use these strategies, so keep them on your radar. You can check out our blogs on “Back-Door Roth IRA” HERE and on the “Build Back Better plan” HERE.

Health Savings Account (HSA) contribution limits for 2022:

• For those with an individual high deductible health plan, HSA annual deductible contribution limit is $3,650.

• For those with a family HDHP, HSA annual deductible contribution limit is $7,300.

With increased retirement savings opportunities in 2022, we encourage you to keep these figures in mind when reviewing and updating your financial plan. If you have any questions, please feel free to reach out; we love to help! We hope you have a happy and healthy holiday season!

Kelsey Arvai, MBA, is a Client Service Associate at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The Key To Financial Planning Is Sticking to the Basics!

Contributed by: Sandra Adams, CFP®

A colleague of mine and I were recently presenting a session on Savings for Junior Achievement for a Detroit High School class as part of The Center’s Financial Literacy initiatives. As part of our presentation, we both shared personal stories about how the fundamentals of budgeting and savings had personally impacted us during our earlier years. Why am I sharing this with you?

First, it was a good reminder that our perspective about money certainly changes over time. Thinking back, I now realize that how I think about money now is certainly different than how I thought about money in my teens and twenties. This is important especially when we are talking to our children and grandchildren about handling money.

Second, it was a good reminder that our experience teaches us good lessons. The things we have been through over our lifetimes, especially with money, sticks in our minds either positively or negatively. Positive experiences and behaviors we will tend to repeat and negative experiences and behaviors we hopefully will learn from and NOT repeat. Although some people take longer to learn than others.

Third, and most importantly, I was reminded with my own story that sticking to the financial planning basics works.

The Basics Are:

• Paying yourself first. (Building savings to yourself right into your budget!)

• Living within your means (spending first for needs and then for wants; spending for wants only if there is money in the budget).

• Building a savings reserve for emergencies.

• Building savings in advance for short-term goals.

• Not accumulating debt that is not needed and paying off any credit in the money that it is accumulated.

• And once you can do all that, building long-term savings for long-term goals like buying a house and retirement.

At one point in my life, I was in a real financial hole, but by sticking to the basics and having a lot of patience, I slowly dug myself out. And I sit here today being able to say that by following the fundamentals, you can be financially successful.  Sticking to the basics works!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

The Benefits Of Working With An ‘Ensemble Practice’

Contributed by: Josh Bitel, CFP®

Financial planning practices come in all shapes and sizes, but perhaps the two most common arrangements are solo practices and ensemble practices. Solo practices are normally led by a single advisor who calls the shots, while ensemble practices are team-oriented firms, all working toward a common goal. The Center identifies with the latter.

An ensemble practice is structured with multiple advisors under the same roof. This allows for constant sharing of ideas, best practices, strategies, and even sharing of resources. The Center has a 2 hour meeting every Monday for just this purpose. Our planners at The Center, all with unique expertise, get together to eat lunch and share client cases, tough questions, interesting reading pieces, and maybe a few jokes here and there. This is all possible because we are all working collaboratively toward a shared vision, as outlined in the Vision 2030 document our entire team had a hand in creating.

The Center, as with many ensemble practices, leverages the power of teams. We have team members who are specialists in such areas as insurance, divorce planning, tax planning, retirement planning, and many more. So if an advisor is met with a tough client case involving long-term care, for example, he or she can seek out help from a team member with expertise in this area instantly.

An often overlooked advantage for clients choosing to work with an ensemble practice such as The Center is the foundation for internal succession planning. It is often said that as an advisor ages, so do their clients. This begs the questions who will take care of me when my advisor retires? And from the advisors end, who will take care of my legacy once I’ve moved on? With a practice like ours, there is an internal succession plan in place for many years before a planner decides to retire. Often, clients are transitioned to an advisor who has been working under the tutelage of the retiring advisor.

As with anything, you must weigh the pros and cons of working with an advisor under their practice’s arrangement. In the end, it is all about finding the right person to help you reach your goals and feel comfortable along the way. At The Center, we have found that working in a team-based environment toward a shared vision helps us serve our clients the best way we can.

A Top Issue Financial Planning Clients Are Facing Due To The Pandemic

Contributed by: Sandra Adams, CFP®

We are approaching a year of living in what many are calling the “new normal”.  While the future remains unknown, last year provided us with the opportunity to reflect on what is most important in our lives.

When the health of ourselves and the ones we love is threatened, it sparks the reevaluation of our top priorities. During the Covid-19 pandemic, advisors at The Center found that clients are most concerned about the wellbeing of their families instead of short-term market volatility. Additionally, we have had more conversations about charitable giving and the causes clients want to support, especially now when so many people are in need.

I have had many conversations with clients in 2020 that reminded me of a book by Simon Sinek called “What is Your Why?” The book is about helping people find clarity, meaning, and fulfillment to find their purpose. Helping clients find their purpose is woven into the fabric of The Center. It has never been more evident and meaningful than in the last year. Even pre-Covid, after working together to learn what the client wants/needs, we can begin using their financial resources towards those goals – aka helping them LIVE THEIR PLAN.  While the past year may have shifted some of those goals (or delayed some of them – like travel, etc.), I believe that Covid-19 provided extra time, allowing many to focus on their most important goals – their WHY’s.

If you are interested in a financial planner and want to discover your “Why’s”, please reach out.  We would be happy to help you focus on narrowing those down and put those into action steps so that you can ultimately LIVE YOUR PLAN™.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

9 Actionable Steps For The New Year To Help Your Finances

Contributed by: Josh Bitel, CFP®

Yes, it’s time to turn the page on 2020 and start anew!  There’s nothing like a fresh calendar to begin making plans for your envisioned future.  We previously provided you with some tips for year-end tax planning in our annual year-end tax letter. Here, we provide you with some very specific and actionable steps you can take now. Ultimately, while no strategy can guarantee your goals will be met, these steps are a great start on improving your financial health in the New Year:

1. Take score: review your net worth as compared to one year ago.

2. Review your cash flow: how much came in last year and how much went out (hint: it is better to have less go out than came in).

3. Be intentional with your 2021 spending: also known as the dreaded budget – so think “spending plan” instead.

4. Review and update beneficiaries on IRA’s, 401k’s and life insurance: raise your hand if you want your ex-spouse to receive your 401k.

5. Review the titling of your non retirement accounts: consider a “transfer on death” designation, living trust, or joint ownership to avoid probate.

6. Revisit your portfolio’s asset allocation:

7. Review your Social Security Statement: if not yet retired you will need to go online – everyone’s trying to save a buck on printing and mailing costs

8. Check to see if your retirement plan is on track: plan your income need in retirement, review your expected sources of income, and plan for any shortfall.

9. Set up a regular review schedule with your advisor: an objective third party is best – but at a minimum set aside time on your own, with your spouse, or trusted friend to plan on improving your financial health.

So, after you promise to exercise more and eat less, get started on tackling your financial checklist!

We wish you a wonderful New Year!

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.