The Secure Act 2.0 and Possible Changes Coming to Your Retirement Plan!

Contributed by: Kali Hassinger, CFP®, CSRIC™

The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement, passed in late 2019. This legislation was designed to encourage retirement savings and make significant changes to how inherited retirement assets are distributed. We have written about the Secure Act a bit over the last two years or so (you can read some of our posts here, here, or here), and now, it seems Congress is considering some additional ways to encourage Americans to save for retirement. 

It is, of course, important to note that this is still being debated and reviewed by Congress. The House passed a version of The Secure Act 2.0 on March 29th, but the version that the Senate could pass is expected to differ and be revised before ultimately hitting President Biden’s desk. Some of the key changes that the House and Senate versions of the Bill include are highlighted below:

Automatic Retirement Plan Enrollment

• The new Secure Act would require employers with more than ten employees who establish retirement plans to automatically enroll new employees in the plan with a pre-tax contribution level of 3% of the employee’s compensation. A 1% increase in contributions would be required each year until reaching at least 10% (but not more than 15%) of the employee’s pay. Employees can still override this automatic system and elect their own contribution rate.

Boosting Roth Contributions

Roth Catch-up Contributions

• Catch-up contributions are available at age 50 and, as of now, can be either pre-tax or Roth, depending on what the employee elects. The Secure Act 2.0 could require that all catch-up contributions to retirement plans would be subject to Roth tax treatment. 

• In addition to the current $6,500 catch-up contribution amount at age 50, they could also allow an extra $10,000 catch-up contribution for participants aged 62 to 64.  

Roth Matching Contributions

•  There could be an option to elect that a portion (or all) of an employer’s matching contribution would be treated as a Roth contribution. These additional matches could be included as income to the employee.

Student Loan Matching

• An additional area of employer matching flexibility is associated with employees paying off student loans. While employer matches have traditionally only been provided in conjunction with the employees’ plan contributions, this would allow employers to match retirement plan contributions based on employees’ student loan payments. This would give some relief to those missing retirement plan contributions because of the burden of student loan repayment schedules.

Further Delaying Required Minimum Distributions

•  The original Secure Act pushed the Required Minimum Distribution age from 70 ½ to 72. The Secure Act 2.0 could continue to push that timeline back as far as age 75. The House’s version of the Secure Act would slowly increase the age in a graded schedule. In 2022, the new Required Minimum Distribution age could be 73, with the age increasing to 74 in 2029, and finally up to age 75 by 2032.

Another item on our watch list is related to the original Secure Act from 2019. The Secure Act limited those who could stretch an inherited IRA over their lifetime, and many became subject to a 10-year distribution ruling. The IRS is working to provide more specific guidance on the rules surrounding inherited IRA distribution schedules. Based on the proposed regulation, non-spouse beneficiaries who inherit a retirement account on or after the period when the original account owner was subject to Required Minimum Distributions would be subject to both annual Required Minimum Distributions and required to adhere to the 10-year distribution timeline.

If or when the Secure Act 2.0 is passed into law, we will be sure to provide additional information and guidance to clients, so be on the lookout for possible upcoming blogs and webinars related to this topic. We continuously monitor, discuss, and review these changes with clients and as a firm. If you have any questions about how the Secure Act 2.0 could affect you, your family, or your business, we are always here to help! 

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. 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. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion

Strategies for Retirees: Understanding Your Tax Bracket

Contributed by: Michael Brocavich, CFP®, MBA

Over the last few years, most Americans have seen lower taxes due to the Tax Cuts and Jobs Act put into effect in January 2018. With the increase in the standard deduction and lower tax rates, taking income from your retirement accounts has cost you less in taxes than in previous years. This has allowed retirees to do some strategic income and tax planning in the early years of retirement before they have to start taking Required Minimum Distributions ("RMD") from their Qualified Retirement Accounts.

First, it is important to look at some significant tax changes that came with the Tax Cuts and Jobs Act. The standard deduction for 2022 is $12,950 for single filers and $25,900 for married filing jointly. For married couples over the age of 65, there is an additional $1,300 deduction each. Add that all up, and joint filers who are both 65 or older will have a standard deduction of $28,500. That means that your first $28,500 of income will be federal tax-advantaged!

The current tax laws have reduced the 15% tax bracket rate to 12%. For married filing jointly, the top of the 12% tax bracket for 2022 is $83,550. That means that retirees aged 65 and older could potentially have up to $112,050 of adjusted gross income and remain in the lowest tax bracket. Understanding the tax laws and taking money from the proper accounts at the right time could help reduce your future taxes throughout retirement and reduce taxes significantly for your heirs.

Strategies for Retirees

1) Roth Conversions: If you are like most retirees, you do not have substantial assets in your Roth IRA, if you even have one at all. With income limits on Roth contributions and clients preferring to save in tax-deductible accounts first, many older taxpayers never opened Roth IRA's. The early part of retirement allows you to strategically take money from your IRA and convert it to a Roth IRA. There is no income limit or even minimum dollar amount requirements for Roth conversions. Still, you have to be aware that pulling money from your Traditional IRA and moving to your Roth IRA is taxable. By understanding your tax situation in retirement, you can move money into your Roth IRA and pay tax at lower rates than you potentially would later in retirement while building tax-advantaged assets and reducing your future RMDs (Required Minimum Distributions).

Common sense would tell you to try and take income and pay the least amount of taxes possible. This is prudent, but many retirees either forget about or do not truly understand their future RMDs and their impact on taxes in the future. With RMDs on Qualified Retirement Accounts at age 72, many retirees will be forced to withdraw more money from their Qualified Retirement accounts than they need and pay taxes on those distributions. You can take money strategically out of these qualified retirement accounts and convert the funds to Roth IRA accounts that do not have minimum distributions at 72. This, in turn, will reduce the values in your Qualified Retirement Accounts, reduce your future RMDs, and give you more tax-advantaged assets to use in retirement or to pass on to your heirs.

Investor Situation:

(This is a hypothetical example for illustration purposes only)

John and Cindy are now ready to retire at age 65 with a desired retirement income of $100,000. Typically it would be suggested that they take their Social Security at their full retirement age of 66 and use their taxable brokerage account for retirement income, delaying WD's from their IRAs till 70 1/2. In this scenario, their taxes could be as minimal as 85% or less of their Social Security. With a standard deduction of $28,500, their Federal Income Taxes would be only a couple thousand dollars or less depending on the capital gains they realized. What is not being considered is that with just a modest growth rate on their Qualified Retirement Accounts of 6%, when they reach 72, they could have an RMD of $85,000 - $90,000, giving them much more income than they need.

Suppose they were to delay taking Social Security to age 70 and do a Roth Conversion of $60,000 per year to top out their 12% tax bracket from ages 65 through 69. They could reduce their future RMDs to align with their retirement income needs, reduce their future taxes, and build a substantial tax-advantaged Roth IRA. In addition, they would also benefit from the delay in Social Security, giving them their maximum benefit assuming they have good longevity.

Base Scenario, no Roth conversions, SS at 66:

(Assumptions: Annual rate of return of 6.0% with a $100,000 per year income adjusted for inflation at 2.58% per year.  Social Security income uses a 1% COLA)

Utilizing Roth Conversion Strategy, $60,000 converted annually, SS at 70:

(Assumptions: Annual rate of return of 6.0% with a $100,000 per year income adjusted for inflation at 2.58% per year.  Social Security income uses a 1% COLA. This is a hypothetical example for illustration purposes only and does not represent an actual investment)

So let’s examine what happened here:

• Over their lifetime, they took $533,000 less in required minimum distributions by doing the conversions, much of which would have been taxed at the 22% tax rate vs. 12% rate;

• They are passing on $1,348,960 in Roth IRA assets to their children that can grow and never be taxed, if certain conditions are met;

• They are passing on $761,306 less in IRA assets to their children, which will be taxed over time at whatever rate applies to the children as adults; and

• In total, the heirs are getting an additional $164,000 than they would have had. The assets are also now positioned to be much more tax-efficient going forward.

2) Harvesting Tax Gains: For clients like above that have also been able to save not only in Qualified Retirement Accounts but also brokerage accounts, there may be an opportunity to harvest taxable gains in the first years of retirement as well. Another advantage of the 12% (formally 15%) tax bracket is that capital gains realized up to the top of the 12% bracket are not taxable to the account owner.

Brokerage accounts allow you to sell stocks or mutual funds that you have held for a long time with large gains in them. You can then use these highly appreciated funds for income in retirement or to rebalance your brokerage account to reduce risk and future taxes.

Combining the two strategies would create multiple advantages. Using your assets in your brokerage account for income in the first years while converting IRA assets to Roth IRA can potentially convert more money to a Roth while still staying in the 12% tax bracket. You will have to be aware of the amount of long-term capital gains, as the combination of those gains and your conversions could put some of your taxable income over the 12% tax bracket threshold.

Optimizing withdrawals in retirement is a complex process that requires a firm understanding of tax situations, financial goals, and how accounts are structured. However, the two simple strategies highlighted here could potentially help reduce the amount of tax due in retirement.

It is important to take the time to think about taxes and make a plan to manage withdrawals. Be sure to consult with a tax advisor and your financial planner to determine the course of action that makes sense for you.

Michael Brocavich, CFP®, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

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 Michael Brocavich, CFP®, MBA and not necessarily those of Raymond James.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Examples used are for illustrative purposes only.

Don’t Forget to Plan for Your “Every Day” Retirement

Contributed by: Sandra Adams, CFP®

On a recent podcast focused on Longevity entitled “Nobody Plans for an Inactive Retirement,” Dr. Joe Coughlin from the MIT Age Lab commented that we all plan for our big goals in retirement. This includes the big trips, the projects, the events, and activities we want to check off our bucket list that we have been waiting decades to have the time and resources to achieve. However, he also says, “retirees have to have meaningful engagement, things to do every day that bring value to their lives; they have to be able to plan for what they will do on the most boring Tuesday afternoon, and know that they will feel satisfied with their day.”

We talk to clients about this as one of the pre-retirement planning items that is just as essential as the financial piece of their planning. Once you know you have enough money to be financially secure retiring, it is just as important to plan for what you will spend your time doing once you get there. And, of course, that includes all of the big goals. But that also includes what you will do every day in between; you have to have something meaningful to get up for every day, or your retirement will not be a success.

For many clients, the recent COVID pandemic and lockdowns were a trial run for what they might experience in retirement. Making sure the resources and technology were in place to maintain social connections, get resources when needed, and find meaningful things to do for many days in a row (instead of finding yourself in front of the television for hours on end) was a trial by fire for certain. We recommend that clients start building social networks outside of work, begin getting proficient at hobbies before they retire, dip their toes into volunteer opportunities they might be interested in pursuing later in life, and consider where they might want to live. This gives you the best opportunity to stay active and engaged as you age into your next stage of life. 

As an added layer of planning, taking the opportunity to take some extended vacations or sabbaticals from work pre-retirement to “test drive” retirement is not a bad idea. Take some time to simulate retirement and see what it is like for you. You can often see what you are missing and what you have yet to plan for before jumping into the deep end.

Work with your financial planner to plan for your retirement. Remember that, in addition to making sure that you are financially secure and that your big goals are prepared for, you are planning for all of the normal, average days of your retirement. A good resource is “A Purposeful Retirement” by Hyrum Smith (click here to read the blog I wrote referencing this book). Planning for all facets of your retirement will give you the greatest opportunity to live your best retirement life. If you or anyone you know is planning for retirement and needs guidance, please reach out to us. We are always happy to help.

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.

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 D. Adams, CFP® and not necessarily those of Raymond James.

Tips for Investors During Times of Market Volatility

Contributed by: Michael Brocavich, CFP®, MBA

When faced with volatility in the market, emotions can be triggered in investors that can impact their judgment and potentially affect returns. These pullbacks can make folks want to pull up stakes and run – a reaction that is often a mistake, especially for long‐term investors.

The likelihood that we will continue to see volatility this year is high. The Fed has slowed down its bond buying activities and is raising interest rates, the threat of a new COVID variant that could shut down the economy still exists, and there are supply chain and labor issues around the globe. To top it all off, we are gearing up for mid‐term elections in November.

Here are some tips to consider when we do face a volatile market. Having a plan during this time can help provide clarity, confidence, and even strategies to take advantage of the volatility.

• First, we need to remember that market volatility is normal. As investors, when we experience long periods of upward markets with little volatility, we forget how regular market volatility really is. We need to remember that historically, the market will dip by 5% at least three times a year. Also, on average, the market will have a 10% correction once a year. Understanding that volatility is a natural process of investing and challenging to avoid can help curb some emotions triggered by these markets.

• Make sure your employer retirement accounts are rebalanced appropriately. Over the last few years, money invested in stocks have severely outperformed the bond market. Now is a good time to revisit the allocations in your Employer‐Sponsored Retirement plans to make sure your allocation is still within your risk tolerance. You will want to make sure that your allocation to stock funds and bonds funds is appropriate for the amount of risk you want to take. If you are unsure of how you should

• Increase Plan contributions when markets are down. For younger investors still in the accumulation stage, a volatile market is a great time to increase your contributions. Though it may seem scary to increase your contributions when markets are volatile, you are actually buying into the market when prices are on sale. Contributions added when the market is down 5‐10% from the previous high have much more earning power than contributions made when the market is up 5‐10% from its last high.

• Have additional cash on hand to invest in dips and corrections. For investors who have been able to max out their Employer‐Sponsored plans and still have additional cash to invest, a volatile market can make for an excellent opportunity to do so. Consider talking with your advisor about moving extra cash to your investment accounts to invest on dips and corrections. Together, you can develop a strategy to get your cash invested over time or all at once, depending on market conditions.

Stumbling through bad times without a strategy makes a troubling situation even worse. If you do not have a retirement or investment plan, you will not accurately assess the damage when markets do take a dive. This could increase stress and cause investors to make bad decisions.

These periods of volatility are an opportunity to connect with your advisor, enabling them to act as a sounding board for your concerns. By talking about current events in light of your overall financial plan, your advisor can provide a reassuring perspective to help you stay the course or even invest extra cash during an opportune time.

Michael Brocavich, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past Performance does not guarantee future results.

How to Find the Right Retirement Income Figure for You

Contributed by: Sandra Adams, CFP®

A big part of the planning work that we do is planning for future retirement. Simply put, how much income will you need each year to support the expenses you will have in retirement, and what income sources and assets will you have once you get there to support those needs throughout your lifetime.

For many clients, they have an accurate calculation of the income they will need. This is based on what expenses they have pre-retirement adjusted by the expenses that will go away (like mortgages, employment-related expenses, etc.), and those that may increase (like travel, those related to additional hobbies, etc.). For other clients, coming up with a future retirement income need is truly a wild guess. They may not have a good handle on what they spend now, and knowing what they need in retirement is even more of a mystery to them. So, where should you start to develop your correct retirement income figure?

First, we suggest tracking expenses before retirement to determine your average monthly spending. We suggest using a budget tracking tool to track spending for two or three months at least a couple of times, during different times of the year, to catch irregular expenses and trends. Once you feel that you have a good handle on your average income needed monthly, you can estimate your annual need. This method also helps you understand WHERE you are spending and where that might change once you retire. You can also develop an annual expense need estimate by backing into it. For example, start with your gross salary and subtract what you pay in taxes and save to 401k or other savings vehicles. You can generally assume what is left is going towards spending. However, this method will not tell you where you are spending and how it will change. Now, we at least have a number to start with for our planning projections.

Next, I often suggest that clients very close to retirement try living on their future retirement income BEFORE they retire to see if it feels comfortable. For instance, I have had clients live on just one of a couple’s salary to see if they could do it without feeling like they were denying themselves. Trying to live on the amount you are planning on living on in future retirement, even for a few months, gives you a taste of your future reality. If it feels comfortable, you likely have the correct number. However, if you feel like you are denying yourself and completely changing how you live, perhaps you need to go back to the drawing board and plan for a different income goal to see if that is possible. Not planning for the retirement you want from the beginning will only set you up for years of retirement planning. Why not see if the retirement you want is possible by starting with the right retirement income number?

When it comes to retirement income, you do not want to guess the number. It is worth your time and effort to come up with the most accurate number for you to meet your ideal retirement goals. Retirement planning projections are only as good as the assumptions we use. If we are not using the right assumptions, especially the right number for your retirement income, the projections for your retirement success will not be as accurate as you want them to be.

Work with your financial planner to find the tools you need to come up with YOUR most accurate retirement income need, and then make sure your plan can support those needs. We want you to have the most successful retirement possible!

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.

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 D. Adams, CFP® and not necessarily those of Raymond James.

The Power of Compounding Interest

Contributed by: Kelsey Arvai, MBA

Saving for retirement can feel like flossing your teeth; we know we should, but sometimes it is easier to keep putting it off. If you are young and have yet to prioritize your retirement savings, you are not alone. According to Investment Executive, only 58% of Millennials are actively saving for retirement. While this might sound as scary as flossing your teeth, time is your greatest advantage.

When comparing a 25 and 35-year-old who have each saved $10,000 in their 401(k)’s, the 25-year-old could build a $200,000 retirement fund by the time they are 65 without adding any more money (assuming an 8% rate of return). In contrast, the 35-year-old could reach $100,000 of savings by age 65 without saving another dime (assuming an 8% rate of return). Both are able to grow their savings massively, thanks to compounding interest. The 25-year-old has had more time (10 years) for their interest to compound, hence the $100,000 advantage over the 35-year-old. The lesson here is that the sooner you start saving for retirement, the more time you will have to take advantage of compounding interest.

Compounding happens when your savings are reinvested to generate their own earnings, those earnings create more, and so on. This is the key to helping grow your savings, and getting started early pays off. With time on your side, saving becomes much more pleasant and accessible. If you have access to an employer-based retirement plan, it is a good idea to make the most of it. Most employers will also match some of your contribution, and it is in your best interest to contribute at least that match, so you are not leaving any money on the table. For example, if your employer matches up to 3%, it would be most beneficial to you to defer at least 3% of your paycheck (pretax) so that you retain the full 6% (3% of your deferral + 3% employer match) of your income going into your retirement savings.

Since the deductions are pretax, meaning the savings happen before the check hits your bank account, you will likely hardly notice your money being put away once you have created the habit. The longer you wait to plan for your retirement, the more you will need to invest later on. In your twenties and thirties, a longer time horizon before you retire affords you the ability to invest largely in stocks, where you will be able to handle market losses and benefit from market growth.

An early start is only the beginning for retirement savings. It is important to stay consistent with your commitment to your retirement savings. The sooner you start saving, the better - reach out to us if you have any questions on how to get started! 

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

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 Kelsey Arvai, MBA and not necessarily those of Raymond James.

What Happens to my Social Security Benefit If I Retire Early?

Contributed by: Kali Hassinger, CFP®, CSRIC™

Did you know that the benefit shown on your Social Security estimate statement is not just based on your work history? Your estimated benefit actually assumes that you will work from now until your full retirement age, and on top of that, it assumes that your income will remain about the same that entire time. For some of our younger, working, and successful clients, early retirement is becoming a frequent discussion topic. What happens, however, if you retire early and do not pay into Social Security for several years? In a world where pensions have become a thing of the past for most people, Social Security will be the largest, if not the only, fixed income source in retirement. 

Your Social Security benefit is based on your highest 35 earning years, with the current full retirement age at 67. So, what happens to your benefit if you retire at age 50? That is a full 17 years earlier than your statement assumes you will work, effectively cutting out half of what could be your highest earning years.

We recently had a client ask about this exact scenario, and the results were pretty surprising! This client has been earning an excellent salary for the last ten years and has maxed out the Social Security tax income cap every year. Her Social Security statement, of course, assumes that she would continue to pay in the maximum amount (which is 6.2% of $147,000 for an employee in 2022 - or $9,114 - with the employer paying the additional 6.2%) until her full retirement age of 67. By completely stopping her income, and therefore, her contributions to Social Security tax at age 50, she wanted to be sure that her retirement plan was still on track.

We were able to analyze her Social Security earning history and then project her future earnings based on her current income and future retirement age of 50. Her current statement showed a future annual benefit of $36,000. When we reduced her income to $0 at age 50, her estimated Social Security benefit actually dropped by 13% or, in dollars, $4,680 per year. That is still a $31,320 per year fixed income source that would last our client throughout retirement. Given that she is working 17 years less than the statement assumes, a 13% decrease is not too bad. This is just one example, of course, but it is indicative of what we have seen for many of our early retirees. 

If you are considering an early retirement, Social Security is not the only topic you will want to check on before making any final decisions. There are other issues to consider, such as health insurance, having enough savings in non-retirement accounts that are not subject to an early withdrawal penalty, and, of course, making sure you have saved enough to reach your goals! If you would like to chat about Social Security and your overall retirement plan, we are always happy to help!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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 Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James.

Is My Pension Subject to Michigan Income Tax?

Contributed by: Nick Defenthaler, CFP®, RICP®

It is hard to believe, but it has been ten years since former Michigan Governor Rick Snyder signed his budget balancing plan into law, which became effective in 2012. As a result, Michigan joined the majority of states in the country in taxing pension and retirement account income (401k, 403b, IRA, distributions) at the state income tax rate of 4.25%. 

As a refresher, here are the different age categories that will determine the taxability of your pension:

1) IF YOU WERE BORN BEFORE 1946:

• Benefits are exempt from Michigan state tax up to $54,404 if filing single, or $108,808 if married filing jointly.

2) IF YOU WERE BORN BETWEEN 1946 AND 1952:

• Benefits are exempt from Michigan state tax up to $20,000 if filing single, or $40,000 if married filing jointly.

3) IF YOU WERE BORN AFTER 1952:

• Benefits are fully taxable in Michigan.

What happens when spouses have birth years in different age categories? Great question! The state has offered favorable treatment in this situation and uses the oldest spouse’s birthdate to determine the applicable age category. For example, if Mark (age 69, born in 1953) and Tina (age 74, born in 1948) have combined pension and IRA income of $60,000, only $20,000 of it will be subject to Michigan state income tax ($60,000 – $40,000). Tina’s birth year of 1948 is used to determine the applicable exemption amount – in this case, $40,000 because they file their taxes jointly. 

Taxing retirement benefits has been a controversial topic in Michigan. As we sit here today, Governor Whitmer is advocating for a repeal of taxing retirees – however, no formal proposal has been released at this time. The following states are the only ones that do not tax retirement income (most of which do not carry any state tax at all) – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, Illinois, Mississippi, Pennsylvania, and Wyoming. Also, Michigan is one of 37 states that still does not tax Social Security benefits.

Here is a neat look at how the various states across the country match up against one another when it comes to the various forms of taxation:

Source: www.michigan.gov/taxes

Taxes, both federal and state, play a major role in one’s overall retirement income planning strategy. In many cases, there are strategies that could potentially reduce your overall tax bill by being strategic on which accounts you draw from in retirement or how you choose to turn on various forms of fixed retirement income. If you would like to dig into your situation to see if there are planning opportunities you should be taking advantage of, please reach out to us for guidance or a second opinion.

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.

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.

Tips to Help You Achieve Your Financial Goals

Contributed by: Kelsey Arvai, MBA

We hope your 2022 is off to a great start! As we all know, the New Year is an opportune time to reset and reevaluate your goals. With this in mind, we have come up with some simple yet effective strategies to position yourself for a prosperous year ahead.

Automate Savings and Debt Reduction

Establishing and maintaining a positive cash flow is a top-tier priority for your financial health. Automation is key to being efficient and effective while working toward your financial goals. Prioritizing your savings contribution through automation helps hedge against the temptation to spend the funds elsewhere. Additionally, utilizing automatic payments for your credit card could help your credit score if the time the payment happens is before your due date. After establishing an emergency fund through your automated savings, you might consider directing excess cash to your retirement and health savings plans.

Max Out Your 401(k) and Health Savings Account (HSA)

The beginning of the year is a great time to review your 401(k) and HSA contributions. In doing so, you can ensure that you are maximizing your benefits and taking advantage of increased deferral limits for 2022. 401(k), 403(b), and most 457 plan contribution limits have been bumped up to $20,500 for elective employee deferral.

HSA contribution limits have also been increased to a maximum of $3,650 for individuals and $7,300 for family coverage. It is estimated that couples retiring today will face $200,000-$300,000 of out-of-pocket medical expenses over the course of their retirement years. HSA balances can build and grow over time, and these accounts can be used to offset healthcare costs in retirement.

Plan for Charitable Giving

The beginning of the year is also a great time to determine your charitable goals and budget for the year ahead. We have written extensively on how to best pick a charity, so if you are unsure of which causes or organizations you would like to support, these blogs may be helpful!

How to Pick a Charity…During a Pandemic Part 1: Important Documents

How to Pick a Charity…During a Pandemic Part 2: Commitment to the Mission

How to Pick a Charity…During a Pandemic Part 3: Resources

Invest in Your Emotional and Physical Well-Being

As you take stock of your financial health this year, carving out time for your physical health is equally paramount. There is a connection between health and wealth, and each should be reviewed by a professional, at least annually.

Reach Out to Your Financial Advisor 

Working with your advisor on an ongoing basis can provide you support to keep you on track while you are determining and working towards financial goals. If you ever have any questions, please reach out to us. We are always happy to help!

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

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 Kelsey Arvai, MBA and not necessarily those of Raymond James.

Five Important Financial Questions to Ask Yourself Going into 2022

Contributed by: Sandra Adams, CFP®

Once again, a new year is upon us. Rather than start the year with financial New Year’s Resolutions that we are doubtful to keep, why not simply start by asking ourselves some important financial questions, answering them honestly, and taking some action steps in response? Here are the five questions we recommend asking to get your year started on the right foot:

1. What are the top financial goals you want to accomplish in 2022 (and do they align with what you value most)? 

Prioritizing what you want to accomplish and ensuring it is in line with what you value most is the first key to financial success. Once you have set your goals, you can put into motion just how to get there.

2. How can I accomplish my financial goals and save more? 

Most likely, many of your financial goals involve having money saved to meet them. Whether it be a large family vacation, paying off a mortgage, or making a certain amount of progress towards a significant life goal like retirement, most goals involve accumulating money. The beginning of the year is an excellent time to determine your financial budget and set aside funds for these goals. Make sure to keep in mind the new retirement plan contribution limits for 2022 and budget savings outside of retirement accounts for short-term goals and debt payoffs.

3. Does my investment strategy match my goals?  

The beginning of the year is always a good time to review your Investment Policy Statement. In return, you can determine if your investment strategy is still in line with your short and long-term financial goals and make sure that you are not taking too much or too little of a risk for the goals you have in mind for YOUR specific plan.

4. Am I financially protecting my loved ones? 

It makes sense to continually review your plan to ensure that your goal is solid from a risk perspective. Each year, you should review all of your insurance protections, including life insurance, disability insurance, liability insurance (home and auto), and possible long-term care insurance, to ensure that your family is fully protected.

5. Am I being financially safe/smart around potential financial credit and fraud risks? 

With electronic and internet transactions posing threats to our financial safety, it is important to be aware of precautions to take when transacting business electronically, having credit and fraud monitoring services in place, and proactively monitoring your credit report regularly. If you don’t have a credit and/or fraud monitoring service, you should likely have something in place (ask your advisor for recommended services).

Asking these quick questions and taking the action steps to answer them will get you on the right footing to a successful 2022. For assistance with any of these items, reach out to your financial advisor — we are always willing to help!

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.

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 D. Adams, CFP® and not necessarily those of Raymond James.