Why Age Matters with Michigan’s Pension Tax: 2015 Update

Contributed by: Laurie Renchik, CFP®, MBA

In the three years since Michigan’s Pension Tax was enacted, many more baby boomers have reached retirement age and started to tap into their pensions. It’s no secret that tax law is complex and we are not surprised that Michigan retirees have plenty of questions when it comes to the MI pension tax rules.  Even though the pension tax for Michigan retirees was enacted back in 2012, the subject continues to generate interest from retirees and pre-retirees alike. 

The rules for retirees vary based on age:

• Tier 1:  You were born before 1946

• Tier 2:  You were born between 1946 and 1952

• Tier 3:  You were born after 1952

Special Note:  For joint returns, the age of the oldest spouse determines the age category that will apply to the pension and retirement benefits of both spouses, regardless of the age of the younger spouse. 

Taxpayers born before 1946

If you were born before 1946, there is no change in the income taxes for your pension income.  This means your social security income is exempt and so is income from public pensions.  You don’t pay taxes on the first $49,027 ($98,054 if you’re married and filing jointly) from private pensions.  You also get a senior citizen (over age 69) subtraction for interest, dividends and capital gains.

Taxpayers born between 1946 and 1952

 If you were born between 1946 and 1952, your social security income is exempt and so is income from railroad and military pensions.  You don’t get a senior citizen subtraction for interest, dividends and capital gains.  Before age 67, you don’t pay taxes on the first $20,000 ($40,000 if you’re married and filing jointly) from private or public pensions.  After age 67, you can subtract $20,000 ($40,000 if you’re married and filing jointly) from the amount you’ll pay taxes on unless you take the income tax exemption on military or railroad pensions. 

Taxpayers born after 1952

 If you were born after 1952, your social security income is exempt and so is income from railroad and military pensions.  You don’t get a senior citizen subtraction for interest, dividends and capital gains.  Before age 67, you are not eligible for any subtractions from your income from private or public pensions.  After age 67, you can choose to continue to have social security and railroad or military income exempt or you can choose to subtract $20,000 ($40,000 if married and filing jointly) from the amount you’ll pay taxes on. If you choose to keep your social security and railroad or military income exempt, then you can claim a personal exemption.

If you need help sorting through the pension guidelines, please give us a call or email me at laurie.renchik@centerfinplan.com.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

---

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Laurie Renchik, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. 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 matters. You should discuss tax matters with the appropriate professional.

Reaching the Right Amount at my “Plan End”

Contributed by: Nick Defenthaler, CFP®

You’ve probably heard someone (morbidly) joke, “When I die, I want my last check to bounce.”  For some, spending your last dollar on your last day would be considered a success. However, in the world of financial planning, we would consider it playing with fire.  This mantra might seem like the ideal situation in a perfect world, but the reality is simple – we do not live in a perfect world!  I believe having “excess” at the end of your financial plan is a product of thoughtful, prudent planning by the client and advisor.

The goal of the vast majority of our clients is simple: Don’t run out of money in retirement.  So how do we help clients make that happen?  When building a new plan or updating a client’s existing retirement analysis, we use a combination of sophisticated technology and good, old-fashioned human knowledge and expertise.  When you put the two together and have a client who is realistic with their goals, it’s typically a recipe for success. 

Tapping into Technology

Our financial planning software takes a look at many different factors (age, life expectancy, income, savings rate, retirement income sources, portfolio value and allocation, etc.) when testing the probability of success of the sustainability of a client’s financial plan.  As with anything, there has to be a balance.  We see some who are spending far too much in retirement and the software puts up red flags. We also have some families who live well below their means in retirement and could actually spend a lot more than they do.  The key, as with anything in life, is finding the appropriate balance. 

Can’t We Spend More?

When I’m walking a client through their retirement analysis, looking at a plan we consider to be in good shape, they often get a perplexed look. It happens when they see an estimate of the value of their investable assets at age 95 or “plan end”.  For example, I recently met with a couple in their early sixties. At age 95 (in the year 2048!) they had an estimated $1.2M left at their “plan end”.  The couple had a goal to spend approximately $70,000/yr in retirement (including Social Security) and had a child who they felt did not need the $1.2M the software program was telling them they would have left upon death.  However, when we dug into the numbers, we showed them that the $1.2M in 2048 (33 years from now) is really the equivalent of just over $450,000 in today’s dollars if we factor in the negative effect inflation (3% assumption) has over your purchasing power.  However, in their minds, it was still a good chunk of change to leave as an inheritance.  They were still stuck on that $1.2M – couldn’t they spend more?!  While this was an extremely fair and logical question, my answer was yes. But next I explained that the likelihood of having to adjust their current spending habits downward at some point in the future would increase.  The reason for this is because we want your plan to have a “cushion” or “buffer zone” for the unknowns we haven’t fully factored into your plan.  Things like unexpected medical events, long-term care needs, helping out family, extended periods of negative market returns, etc. can all eat into that “cushion” or “buffer zone” pretty quickly even though on paper, it looks like a large amount today. 

The bottom line is this – financial planning is an ongoing process.  Meeting annually, tracking progress, making adjustments when necessary and being consistent is planning done right. This approach has helped thousands of our clients feel confident during their 20+ years after working. While spending your last dollar on your last day might seem like the Holy Grail, it isn’t something we strive to do for our clients.  Life is full of unknowns. That is why we plan and work together with you to make sure when those unknowns eventually do occur, you will be properly prepared.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Any examples provided in this material are for illustrative purposes only. Actual investor results will vary.

The “One Per Year” Saving Strategy

Contributed by: Nick Defenthaler, CFP®

This is obviously a very common question people will ask and the typical response you will get from most financial professionals is 10%.  While this is certainly a good number to shoot for, many clients, especially younger ones, simply do not have the capacity to currently hit this figure.  This can become frustrating for some because they may feel like the target of 10% is so far off that it can be deflating and can actually deter retirement savings all together because they feel as if saving a number much lower simply won’t make a difference.  More and more recently, I have been recommending a slightly different approach that many clients have been very receptive to and find it far more realistic to implement – the “one per year” strategy. 

When a 25 year old is just starting their career, saving 10% of their income most likely isn’t feasible.  Between student loans, housing, transportation, utilities, groceries and other discretionary spending, someone in this age group might be lucky to contribute 3% - 5%.  My suggestion for these younger professionals is to start saving 5% into a retirement plan (typically around the most you need to contribute to get the full company match if your employer offers one) and increase the percentage by 1% each and every year until you hit 25%.  By age 30, retirement savings would be at 10%, 15% by age 35, 20% by age 40 and eventually hitting 25% by age 45.  Does this mean you shouldn’t save more than 25% once you get there?  Of course not!  If you have the available cash flow, we will almost never discourage our clients from saving more but most clients find it tough to save beyond this percentage.  If you’re getting a later start on retirement savings, this doesn’t mean you can’t use “one per year” strategy.  The key is to make progress and if you can eventually be saving between 20% - 25% of your income in your fifties (when most are typically in their peak earning years) you are putting yourself in a fantastic position in those crucial years leading up to retirement.

By increasing savings gradually, it makes retirement savings far more manageable and realistic for many.  Think about it, if you’re trying to lose 100 pounds and you become fixated on that large number, chances are you’ll become overwhelmed and give up on your weight loss goal.  The people who have the most success are the ones who focus on small victories.  Losing a few pounds per week until that goal is met– the same goes for retirement savings.  

I personally use the “one per year” approach and have found it extremely helpful and motivating.  More and more 401k plans are now offering the option to enroll in an “auto increase” where this 1% bump occurs automatically so you don’t even have to worry about remembering to make the change online each year.  This is the ideal so ask your HR department if your plan offers this option.  When you increase your savings by 1% each year, you honestly don’t even notice the difference, especially if you’ve received a modest pay raise.  Often times that miniscule annual increase is the equivalent of one less Latté or lunch out per week – something I think we can all manage!  Keeping it simple and being consistent is my advice, which is what the “one per year” strategy is all about!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

---

This􀀀 material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Should Ford Employees Contribute After-Tax Money to a 401k?

Contributed by: Nick Defenthaler, CFP®

Earlier this month, my colleague, Matt Trujillo and I hosted a webinar for Ford Motor employees to discuss the potential benefits of contributing after-tax dollars to their 401k plan.  These Ford workers are not alone. About 25% of companies offer retirement plans with after-tax contributions that are completely separate from the plan’s Traditional 401k or Roth 401k (Columbia Management). Recent IRS rulings have made contributing to the after-tax component far more attractive because, once an eligible distribution event is met, the dollars can be rolled over to a Roth IRA for tax-free growth.  Most employees aren’t even aware their plan offers after-tax contributions and, if they do, there is typically confusion around how it works and if it makes sense for them.

Do After-tax Contributions Make Sense for Me?

In most cases, the after-tax portion is the best fit for someone who is currently maximizing their pre-tax/Traditional 401k but who still has the capacity to save more for retirement.  As mentioned before, the after-tax contribution is a separate contribution type and is above and beyond the normal 401k limits ($18,000 in 2015, $24,000 if over the age of 50 however, subject to the overall $53,000 plan limit).  It is really all about making “excess savings” as efficient as possible.  Tax-free accounts are about as efficient as they come and can potentially save an individual or family hundreds of thousands of dollars in retirement.  For more information, this blog by Tim Wyman goes into greater detail on contributing after-tax dollars into your plan.

Every 401k plan is different and they all have their nuances.  This is why we’ll be hosting company-specific webinars in the coming months to review how the after-tax component works in specific plans and to go over the pros and cons. This kind of information can help you decide if an after-tax plan makes sense for you.  Keep your eyes open for e-mails, blogs, and more on our Facebook, Twitter, and LinkedIn pages for updates on webinars we will be hosting in the near future!

As always, if you have specific questions relating to your company retirement plan, never hesitate to reach out to us. We are here to help! 

Unless certain criteria are met, employees must be 59½ or older and must have satisfied the five-year period that starts with the year the employee makes his or her first Roth contribution to the 401k plan before tax-free withdrawals are permitted.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and investors may incur a profit or a loss. 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.  

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

Health Care Dollars and Aging

Contributed by: Sandra Adams, CFP®

I ran across an interesting article recently by Howard Gleckman, author of the book "Caring for our Parents." The article “How we Spend Our Health Care Dollars As We Age” discussed current trends in health care spending for seniors and affirmed for me some of the key issues we discuss with clients regarding health care spending and aging in retirement.

Spending on Health Care Changes with Age

The article referenced recent research by the Employee Benefit Research Institute indicating that out-of-pocket spending for routine health care changes very little after age 65, and remains relatively unchanged even after age 85 for these routine expenses (trips to the doctor or dentist, medications, etc.). That’s mainly because Medicare covers the bulk of those expenses. The story changes dramatically when it comes to very high cost medical procedures/care or long-term support or services. As we age, we are far more likely to need these high cost services (about 27% of those age 65 - 74 had an overnight stay in the hospital during the period of 2010 - 2012, while more than 42% of those 85 and over spent at least one night a hospital during that same period). The key here is this: Medicare is the primary source of health insurance for those over the age of 65. MEDICARE IS NOT LONG TERM CARE INSURANCE.

How to Plan for Potential Health Care Expenses

According to a study by the Kaiser Family Foundation, out-of-pocket costs alone for someone spending two years in a nursing facility can run $24,000 - $67,000. If you do need skilled care for a period of time for either rehabilitation or long term care, the costs can be devastating to your finances. So what do you do to plan ahead for these potential costs?

1. Discuss options with your financial planner for long term care insurance. There are ways to purchase policies as part of employer groups and associations or individually. There are also new hybrid life/long term care or annuity/long term care policies that may fit well in your overall financial plan.

2. Discuss options with your financial planner to self-insure the costs for potential health/long term care costs using existing assets. You can earmark specific assets or income streams for those potential future costs in a way that least disrupts your overall financial plan.

3. Discuss with your financial planner any possible future government benefits that you may be eligible for that might help to cover any future long-term care costs (i.e. Veteran's Aid & Attendance Benefits). Determine if you may be eligible and put the proper financial and legal planning in place for future eligibility when and if needed.

As always, planning now for the future what if's is always better than planning in a crisis. Have a conversation about your future health care and long-term care planning with your financial planner at your upcoming financial review.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

---

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Sandra Adams, CFP ® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Long Term Care Insurance may not be suitable for all investors. Please consult with a licensed financial professional when considering your insurance options.

Can You Roll Your 401(k) to an IRA without Leaving Your Job?

Co-Contributed by: Nick Defenthaler, CFP® and Matt Trujillo, CFP®

Typically, when you hear “rollover” you think retirement or changing jobs.  For the vast majority of clients, these two situations will really be the only time they will complete a 401k rollover.  However, you might not know about another type of situation in which you can move funds from your company retirement plan to your IRA.  This is what’s known as the “in-service” rollover and is an often overlooked planning opportunity. 

Rollover Refresher

A rollover is a pretty simple concept.  It is the process of moving your employer retirement account (401k, 403b, 457, etc.) over to an IRA that you have complete control over and is completely separate from your ex-employer.  Most people do this when they retire or switch jobs.  If completed properly, rolling over funds from your company retirement plan to your IRA is a tax and penalty free transaction because the tax characteristics of a 401k and IRA are generally the same.   

What is an “in-service” rollover?

Unlike the “traditional” rollover, an “in-service” rollover is probably something you’ve never heard of and for good reason.  First, not all company retirement plans allow for it, and second, even for those that do, the details can be confusing to employees.  The bottom line: An in-service rollover allows an employee (often at a specified age such as 55) to be able to roll their 401k to an IRA while still employed with the company.  The employee is also still able to contribute to the plan, even after the rollover is complete.  Most plans allow this type of rollover once per year, but depending on the plan, you could potentially complete the rollover more often for different contribution types.

Why complete an “in-service” rollover?

More investment options – With any company retirement plan, you will be limited to the investment options the plan offers.  By having the funds in an IRA, you can invest in just about any mutual fund, ETF, stock, bond, etc.  Having access to more options can potentially improve investment performance, reduce volatility and make your overall portfolio allocation more efficient.

Coordination with your other assets – If you’re working with a financial planner, he or she can coordinate an IRA into your overall plan far more efficiently than a 401k.  How many times has your planner recommended changes in your 401k that simply don’t get completed? (Tisk, tisk!)  If your planner is managing the IRA for you, those recommended changes are going to get completed instead of falling off your personal “to-do” list.     

Additional flexibility – IRAs allow certain penalty-free withdrawals that aren’t available in a 401k or other company retirement plans (certain medical expenses, higher education expenses, first time homebuyer allowance, etc.).  Although using an IRA for these expenses should be a last resort, it’s nice to have the flexibility if needed.

Exploring “in-service” rollovers

So what now?  The first thing is to always keep your financial planner in the loop when you retire or switch jobs to see if a rollover makes sense for your situation.  Second, let’s work together to see if your current company retirement plans allows for an in-service rollover.  It’s typically a 5 minute phone call with us, you and your HR department to find out.  With so many things going on in life, an in-service rollover is probably pretty close to the bottom of your priority list.  This is why you have us on your financial team. We bring these opportunities to your attention and work with you to see if they could benefit your situation! 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® & Matt Trujillo, CFP®, and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. IRA withdrawals may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply. In-Service Rollovers mentioned may not be suitable for all investors. Be sure to contact a qualified professional regarding your particular situation before electing an In-Service Rollover. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.

3 Steps for Coping with Financial Roadblocks

Contributed by: Laurie Renchik, CFP®, MBA

Going through a divorce or changing jobs can put your life in a spin. That wasn’t in your plan, so what’s next? Getting financial facts together, especially during a significant change in life, can easily get shifted to the back burner. I see these kinds of life events as potential financial roadblocks.  When you begin navigating through a financial roadblock, all of the answers may not be clear upfront.

Undoubtedly there are options and trade-offs involved.   People worry that they lack knowledge on financial topics.  If you find yourself in a position where financial planning in that moment seems overwhelming, intimidating, or you are just plain fearful of making a mistake, I recommend starting with these three steps to simplify, organize, focus and ultimately overcome your financial roadblock:

1. Create a realistic post-financial change budget.  This could be post-retirement, post-divorce or post-career change.  Maybe you haven’t paid enough attention to what you are spending or saving. You need to take into consideration a change in income. This fundamental step will help you understand what you can or need to do.

2. Invest in yourself by putting together a snapshot of your financial health.  This is accomplished with a personal net worth statement. The formula to use is:  Assets – liabilities = net worth.  There are a number of reasons why preparing a net worth statement is a good move.  It gives you a one page reality check to use as a planning tool, you can check progress toward financial objectives and it can help you identify potential red flags like an emergency fund that has dipped too low or debt that is rising faster than anticipated.

3. Address financial decisions proactively.  Instead of guessing or letting things roll along, begin by thinking about financial goals and obligations on a timeline.  This can be as simple as prioritizing in 3 buckets.  What do I have to do now (immediate action)? What can be tackled soon (big picture prep steps)? And what can be done later (accomplished after the priorities are under control)?

You may not know all of the answers today, but this exercise will at least help simplify, organize, and address the financial issues that are weighing on your mind. If you need help navigating through a financial change due to divorce or a career move don’t hesitate to call or email me.    

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. 

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

---

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Boomerang Drain: Can an Adult Child Derail your own Financial Goals?

Contributed by: Timothy Wyman, CFP®, JD

You’ve raised your children, launched them out into the world, and cut the purse strings, right? For many of us, the answer is no. Financially caring for those that left the nest but not the wallet is a sensitive subject, but a real one when it comes to planning for your own retirement. The National Center for Policy Analysis reports that more than half of parents of 18 to 39 year olds are providing some support:

59% of baby boomer parents financially support their adult children, often paying living expenses, medical bills and student loans.

For most of us, there is a relatively set amount of money/cash flow to work with.  If we spend more on financial support for adult children, this leaves less for other areas such as travel and/or saving. This is not making a judgment if such support is right or wrong. It is just math. 

Tactics for Setting Goals and Boundaries

If you find yourself wanting to provide financial support, consider setting both goals and boundaries.  Ask yourself these questions:

1. What expenses are you willing to contribute?

2. How long do you want to contribute? 

3. What are the expectations of your child?

In the past, I have worked with clients that have decided to provide financial support to their “boomerang” child.  They were glad that they were in the financial position to do so and acknowledged that some of their own plans were being put on hold because of their choice.  The parents set a 2-year window for their child, a son in this case, and laid out their expectations. It looked something like this:

• They decided they were willing to pay for their adult child’s rent and car for 3 months at 100%

• The next three months they covered 50% of the rent

•  After that, the child was fully responsible for the payment

 The plan worked out well for all of them and now mom and dad are back to enjoying the empty nest years.

More Retirement Goal Drains

Boomerang drain is just one of the pitfalls or obstacles to avoid if you want your empty nest years feel like being, “In college, only with money.” Many of us simply don’t make the time to plan what we want your empty nest years to be (here are my tips on that). Another obstacle can be debt, which doesn’t have to be a four-letter word.  Managing the use of credit is an important component to building and maintaining wealth and having flexible cash flow to accommodate travel or ramping up your savings for retirement. For more strategies on managing debt, click here.

When it comes to reaching retirement goals, I’m a where there’s a will, there’s a way kind of person. Is the glass half full or half empty? I prefer it filled to the rim with a napkin underneath to catch any potential drips. We all face challenges in retirement planning. The important part is overcoming those challenges by filling that glass to overflowing … and I’ve seen many clients do it over the years. If you are an empty nester facing any of these potential drains on your goals, talk to your financial planner. 

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Timothy Wyman, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

What to Consider Before You Buy a Second Home

Contributed by: Timothy Wyman, CFP®, JD

Well it’s that time of year again.  No not the cold and flu season – well actually it’s that time too.  Rather, I am talking about the time of year where my wife and I go up north for a few days and after a fantastic 24 hours have the conversation.  You know, should we buy our own vacation home/condo rather than mooch off our friends (hey they are good friends)? It’s a question that many of my Empty and Soon-to-be-Empty Nester clients ask.

First Steps to a Second Home

Our friends, we will call them John & Michelle to protect their identity, decided a few years ago to purchase a condo in God’s Country (that’s northern Michigan….not way up North).   So far the purchase has worked out well and I think they did a few things right.  They actually bought the condo with another family as they knew neither of them would use the condo fully on their own.  They spelled out their “parenting” time or who had first right of refusal for each Holiday.  And last but not least, they formed a Limited Liability Company (LLC) to own the property in order to shield other personal assets from potential liability. All in all, the purchase has been wonderful for us…..er I mean them.

Consider the “Carrying” Costs

For a short period of time a second home or vacation home sounds like a wonderful idea to us (wine is involved in many instances).  However, after a few minutes we decide that it is not for us.  Although interest rates are low, making the cost more manageable, we have some other financial priorities at this time.  Also, many folks do not fully consider, or fully appreciate, the “carrying” costs of owning a second home.  The real or total cost of owning a second home is much more than principal & interest payments.  Additional costs can include:

• Property taxes

• Association dues

• Utilities

• Insurance

• Repairs & maintenance (necessary year round, whether or not you’re there)

Additionally, simply furnishing and updating two homes is no cheap undertaking. For now, we are content renting for the couple of times that we make it up north. 

3 Factors in Buying a Second Home

That said, I wouldn’t be surprised if we decide to make a second home purchase in the future – for lifestyle purposes rather than investment.  And if we do, we’ll make the following a part of our decision-making process:

• Use: Do we expect to use it more than just a couple of weeks? If so then buying may make sense.

• Location: What area makes sense now and in the future? Are we willing to drive X hours?

• Price: What price point will still allow us to fund retirement savings? What are the ongoing expenses?

Adding a second home can have wonderful lifestyle benefits.  Many a family has built cherished memories thanks to the family cottage.  Make sure you weigh the full cost of owning a second home with the desired lifestyle benefits.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James.

NUA: Answering 7 Questions about Net Unrealized Appreciation

The financial planning profession is full of acronyms such as RMD, IRA, TSA and NUA. One acronym making a comeback due to the increase in the US Equity market is “NUA”. NUA stands for net unrealized appreciation and anyone with a 401k account containing stock might want to better understand it. NUA comes into play when a person retires or otherwise leaves an employer sponsored 401k plan. In many cases, 401k funds are rolled over to an IRA. However, if you hold company stock in the 401k plan, you might be best served by rolling the company stock out separately.

Before getting to an example, here are the gory details: The net unrealized appreciation in securities is the excess of the fair market value over the cost basis and may be excluded from the participant's income. Further, it is not subject to the 10% penalty tax even though the participant is under age 59-1/2, since, with limited exceptions; the 10% tax only applies to amounts included in income. The cost basis is added to income and subject to the 10% penalty, if the participant is under 59.5 and the securities are not rolled over to an IRA.

Suppose Mary age 62 works for a large company that offers a 401k plan. Over the years she has purchased $50,000 of XYZ company stock and it has appreciated over the years with a current value of $150,000. Therefore, Mary has a basis of $50,000 and net unrealized appreciation of $100,000.

If Mary rolls XYZ stock over to an IRA at retirement or termination, the full $150,000 will be taxed like the other funds at ordinary income tax rates when distributed. However, if Mary rolls XYZ stock out separately the tax rules are different and potentially more favorable. In the example above, if Mary rolls XYZ out she will pay ordinary income tax immediately on $50,000 but may obtain long term capital treatment on the $100,000 appreciation when the stock is sold; thus potentially saving several thousand dollars in income tax.

Here are some critical questions to review when considering taking advantage of this opportunity:

Have you determined whether you own eligible employer stock within your workplace retirement plan?

Have you determined whether you have a distribution triggering event that would allow you to take a lump sum distribution of your employer stock from your plan?

Have you discussed the special taxation rules that apply to lump sum distributions of employer stock and NUA?

• Cost basis taxable as ordinary income

• Net unrealized appreciation taxable at long term capital gains rates when stock is sold

Have you discussed the criteria necessary to qualify for NUA’s special tax treatment?

• Qualifying lump sum distribution including stock of the sponsoring employer taken within one taxable year

• Transfer of stock in kind to a brokerage account

• Sale of stock outside of the current qualified plan

Have you discussed the pros and cons of rolling over your employer stock into an IRA, taking into consideration such things as available investment options, fees and expenses, services, taxes and penalties, creditor protection, required minimum distributions and the tax treatment of the employer stock?

Have you discussed the pros and cons of selling your employer stock within the plan, including the need for proper diversification?

Have you discussed with your tax advisor whether a NUA tax strategy would be beneficial from a tax planning perspective given your current situation?

These are a handful of the key questions that should be considered when deciding whether or not this opportunity makes sense for you. Professional guidance is always suggested before making any final decisions.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matt Trujillo, CFP® and Tim Wyman, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Strategies mentioned may not be appropriate for all investors.