Retirement Plan Contribution Limits and Other Adjustments for 2020

Contributed by: Nick Defenthaler, CFP®

Last month, the IRS released updated retirement account contribution and income limit figures for 2020. Like the recent Social Security cost of living adjustment, these adjustments are minor, but certainly worth noting.

Employer Retirement Plans (401k, 403b, 457, and Thrift Savings Plans)

• $19,500 annual contribution limit (up from $19,000 in 2019)

• $6,500 “catch-up” contribution for those over the age of 50 (up from $6,000 in 2019, and the first increase since 2015 for this contribution type)

• Total amount that can be contributed to a defined contribution plan, including all contribution types (employee deferrals, employer matching and profit sharing), increases to $57,000 (up from $56,000 in 2019) or $63,500 for those over the age of 50 ($6,500 catch-up)

o   Consider contributing after-tax funds, if available and cash flow allows for it.

It’s also worth noting that contribution limits to Traditional IRAs and Roth IRAs were left unchanged moving into 2020 ($6,000 under age 50, $7,000 over age 50).

In addition to the increased contribution limits for employer-sponsored retirement plans, the IRS adjustments provide other increases that can help savers in 2020. A couple of highlights include:

Traditional IRA deductibility income limits:

Contributions to a Traditional IRA may or may not be tax deductible, depending on your tax filing status, whether you are covered by a retirement plan through your employer, and your modified adjusted gross income (MAGI). The deductible amount of your Traditional IRA contribution is reduced (“phased out”) as your MAGI approaches the upper limits of the phase-out range. For example:

• Single

  • Covered under an employer-sponsored retirement plan
    2020 phase out: $65,000 - $75,000

• Married filing jointly

  • Spouse contributing to the IRA is covered under an employer-sponsored retirement plan
    2020 phase out: $104,000 - $124,000

  • Spouse contributing is not covered by an employer-sponsored plan, but the other spouse is covered under an employer-sponsored retirement plan
    2020 phase out: $196,000 - $206,000

Roth IRA contribution income limits:

Whether or not you can make the maximum contribution to a Roth IRA depends on your tax filing status and your MAGI. The contribution you are allowed to make is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range.

• Single

  • 2020 phase out: $124,000 - $139,000

• Married filing jointly

  • 2020 phase out: $196,000 - $206,000

If your income is over this limit, and you cannot make a regular annual contribution, you might consider a popular planning tool known as the “back-door” Roth conversion.

As we enter 2020, these updated figures will be on the forefront when updating your financial game plan. However, as always, if you have any questions surrounding these changes, feel free to reach out to our team!

Nick Defenthaler, CFP®, RICP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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This material is being provided for information purposes only and is not a complete description, nor is it 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.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

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 itsx 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.

Great Expectations

Contributed by: Nicholas Boguth

We hear a lot about how stocks perform “on average”, and what to “expect” from stock returns:

• “On average, stocks return x%.”

• “You can expect stocks to return x% over the long run.”

• “We expect stocks to return x% per year.”

But what to expect and what is average are two very different things. In fact, average happens so rarely, that I would almost never expect the average. Let’s take a look at some numbers.

Below is a chart of one-year rolling returns for the S&P 500 since 1936. Every spot on that line represents the prior 12 months of returns. As you can see, it is quite sporadic. The “average” return for this set of data is +11.9%, but it ranges from -50% to more than +61%!

Return data from Morningstar Direct

When it comes to investing, realistic expectations are very important.

They keep us grounded and help us keep emotions out of the decision-making process. Don’t expect average returns every time you look at your stocks. Statistically speaking, since two standard deviations capture ~95% of data, it is safe to say you can expect somewhere between two standard deviations on any given period. If you are looking at one-year returns, that would be between -23% and +47%.

It is also important to remember your time horizon. Expectations over one year should be very different than expectations over 30 years. For reference, the entire range of 30-year returns for the S&P 500 since 1936 is between +9.1% and +14.7%.

S&P 500 TR index, monthly returns, 3/31/1936 to 10/31/2019

Lastly, we need to remember that this is only one asset class. If you have a diversified strategy, there is a good chance that large U.S. companies only make up a small percentage of your strategy. International companies, small and mid-sized companies, various bonds, and alternative strategies all merit different expectations. As financial advisors, it is our job to help you understand what to expect. Not sure what to expect? Give us a call.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

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Return data from Morningstar Direct. S&P 500 TR index, monthly returns, 3/31/1936 to 10/31/2019. Any opinions are those of Nicholas Boguth, Investment Research Associate, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Capital Gains Distributions from Mutual Funds

Contributed by: Kali Hassinger, CFP®

Each November and December, investment companies must pay out their capital gains distributions for the year. If you hold these funds within a taxable brokerage account, distributions are taxable events, resulting from the sale of securities throughout the year.

Investors often meet these pay-outs with minimal enthusiasm, however, because there is no immediate economic gain from the distributions. That may seem counterintuitive, given that we refer to these distributions as capital gains! 

When capital gains distributions from mutual funds are paid to investors, that fund’s net asset value is reduced by the amount of the distribution.

This reduction occurs because the fund share price, or net asset value, is calculated by determining the total value of all stocks, bonds, and cash held in the fund’s portfolio, and then dividing the total by the number of outstanding shares. The total value of the portfolio is reduced after a distribution, so the price of the fund drops by the amount of the distribution.

In most situations we recommend that our clients reinvest mutual fund capital gain distributions,  given this is right for the investor's individual financial circumstances. 

This strategy allows you to purchase additional shares of the mutual fund while the price is reduced. Although your account value will not change, because the distribution reduces the fund’s net asset value, you have more shares in the future. By incurring the capital gain, you are also increasing your cost basis in the investment. 

As a counter point, If you rely on the dividend for income it might make more sense to take the mutual fund dividend as cash and not reinvest.

If you own mutual funds in a taxable account and expect the distributions to be large, you should work with your financial planner and tax advisor to weigh the advantages and disadvantages of owning the investment and ultimately incurring the capital gain.

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

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Raymond James and its advisors do not provide tax advice. You should discuss any tax matters with the appropriate professional. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.

Planning for Retirement when Unexpected Events Occur

Contributed by: Sandra Adams, CFP®

This year, more than ever, I have found myself meeting with clients in the prime of their retirement planning years who have experienced some unexpected life events – events that might not normally be part of the retirement planning process.

What am I speaking of? I have had young pre-retirees experience terminal illnesses or become caregivers for spouses or family members, experience the loss of a spouse, experience divorce after a very long marriage but before retirement, and most recently, I have had some lose their long-time jobs with recent layoffs at companies like General Motors.

Losing a job is just one of many unexpected, pre-retirement events that can potentially throw savings goals and plans off course. Some may add that a very negative or extended stock market decline can also hinder retirement and, in most cases, is unexpected. As the old saying goes, you should always “expect the unexpected”.

What can you or should you do now to make sure that you can keep your retirement strategy on track, even if one of these unexpected events comes creeping into your life?

1. Plan Early and Update Often. Although many folks don’t like to think about it, start digging into how much you much income you will need in retirement. If your income projection is significantly less than you are bringing home now, what will change in retirement to make you need less income? Will you have significantly less debt? Will the activities you plan to do in retirement cost significantly less? Be realistic. Take stock on a regular basis of where you are towards your savings goals versus your needs, so that you stay on track and are able to update your strategy if you are not moving toward those goals.

2. Save, Save, and Then Save a Little More. When times are good, and while you can, stretch yourself to meet your savings goals. There is a delicate balance between spending to enjoy your life now and setting aside funds for your retirement. It makes sense to set significant retirement savings goals (especially if you didn’t start as early as you wanted to). And making it a habit to save more – even one percent each year – will help you reach or exceed your retirement savings goals. Other ways to get ahead can include allocating a portion of your annual raise or any bonus you might receive to retirement savings. Aim to save, save, and save a little more to put yourself in a position to absorb the unexpected.

3. Take Control of What You Can Control. While you cannot control what happens to the markets, your job (for the most part), or your health (other than eating right and exercising), there are things you can control. You can control your savings rate: You can be disciplined about saving, save regularly and continue to save more over time. You can save in the right places: You can attempt to max out your savings within your employer retirement savings plans on a tax-deferred basis, you can have a liquid cash emergency reserve fund of at least 3-6 months of expenses “in case” something unexpected comes up, and you can have an after-tax investment account and/or ROTH IRA (if your income tax bracket allows) in case a life event causes an earlier-than-expected retirement or a temporary unemployment situation. You can keep debt under control and plan to have as much debt paid off as possible going into retirement. Reducing fixed costs during retirement allows you to use your cash flow for wants versus needs, and provides you with greater flexibility if an unexpected event occurs.

4. Put Protections and Guardrails in Place. Planners like to call this “risk management”. We are talking about protection for contingencies, so they don’t sink your retirement ship. Having a reserve or emergency savings account is a good first step. But what else might you put in place? It’s important to have the right insurances – disability insurance, life insurance, and long-term care insurance. Continuing education and networking are also important protections – WHAT? Keep up your credentials and training, so that if your current job is phased out, you are prepared to quickly jump back on the horse and become re-employed. Many folks become complacent, and if something unexpected happens with their company or their role, are completely unprepared to seek new employment. Unfortunately, the U.S. Government Accountability Office estimates that older workers wait more than 40 weeks to become re-employed, so being prepared can make all of the difference.

5. Seek Good Advice. This is not a time to DIY. Way too many things can go wrong when it comes to a potential early retirement transition. Seeking the advice of a trained professional can help you find the best course of action. In most cases, assessing your specific situation and making the best possible decisions, especially when it comes to things like pensions, Social Security, and which accounts to tap for retirement income, can make a huge difference.

“The more things change, the more things stay the same” – Jean-Baptiste Alphonse Karr

When we do an initial financial plan for a client, we like to say that something will very likely change when the client walks out the door, and we will need to adjust the plan. Life happens. A financial plan must be fluid and flexible. And so must you, as someone who is planning for retirement. Unexpected events that happen just as you are reaching for the golden doorknob to retirement can be frustrating. But if you have expected the unexpected, planned for the contingencies, and have some spending flexibility built into your plan, you will be on your way to a long and successful retirement.

Sandra Adams, CFP®, CeFT™, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® 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.

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Opinions expressed in the attached article are those of Sandra D. Adams and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. 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. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax, and if taken prior to age 59 ½, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Like Traditional IRAs, contributions limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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

Webinar in Review: Year-End Tax and Planning Strategies

Contributed by: Robert Ingram, CFP®

With 2019 winding down and the holidays right around the corner, it’s understandable when our personal finances don’t always get our full attention this time of year. However, you should keep several important and timely tax and financial planning strategies top of mind before the year ends. During this 60-minute discussion, we will cover the following topics and more:

•       Tax planning strategies to consider for your investments and retirement accounts

•       Charitable giving in light of the recent tax law changes

•       Retirement planning tips and updates on 2020 contribution limits

If you weren’t able to attend the webinar live, we’d encourage you to check out the recording below.

There are time stamps provided so you can fast-forward to the topics you are most interested in.

• 3:00- Medicare Overview

• 6:30- Required Minimum Distributions (RMD)

• 12:00- Tax Reform Refresher & Income Tax Brackets

• 22:00- Long Term Capital Gains Rates

• 23:30- Efficient Charitable Giving & Donating Appreciated Securities

• 34:00- Roth IRA Conversions

• 41:00- Tax Efficient Investing & Tax Loss Harvesting

• 46:00- Employer Retirement Plans

• 49:00- Health Savings Accounts (HSA)

• 54:00- Gifting Ideas

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.

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Changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While familiar with the tax provisions of the issues to be discussed, Raymond James and its advisors do not provide tax or legal advice. You should discuss tax or legal matters with the appropriate professional.

Trade War Winners and Losers

Contributed by: Jaclyn Jackson

Emboldened by NAFTA trade deal renegotiations with Mexico and Canada, car import taxation, and the U.S.-China trade war, protectionism is at the forefront of U.S. economic policy. As the world spotlight focuses on the U.S.-China trade war, many are watching to see how the battle between two of the largest world economies will play out, and how it will affect global economic interdependence.

For those keeping score, trade war winners and losers are as follows:

Winners

• Cheap Exporters (Vietnam, Taiwan, South Korea, Japan) - Companies have opted to move distribution from China to Vietnam in attempt to bypass U.S. tariffs. As of August 2019, the U.S. imports 40% more from Vietnam than it did in 2018. Cheap exporters win with more opportunities to improve their gross domestic product (GDP). In the case of Vietnam, exports to the U.S. are 26% of their 2019 GDP.

• Brazil - China imports 60% of soybeans traded worldwide. After Beijing issued a retaliatory 25% duty on U.S. imports, Brazil exported two million additional metric tons of soybeans to China between October and November of 2018.

• Manufacturing Sector - Fabricated metals, machinery, and electronic instrument industries doubled jobs from 15,000 to 30,000 between May 2018 and May 2019. Not to mention, of the 2.6 million new jobs added since tariff announcements, 204,000 of them were in the manufacturing sector.

Losers

• Consumers - Americans may feel the pain in their wallets, with increased prices of products impacted by the trade war.

• European Union - Opposite cheap exporters, the European Union (EU) is at risk of worsened gross domestic product. Currently, exports create 40% of GDP. Twelve percent of that GDP is generated from the United States. As the EU’s largest exporter and economy, Germany is at risk of being hit hardest.

Perspective Matters

Keep in mind that viewing the trade war through the lens of winners and losers is an oversimplification. The economic interconnectedness of globalization is quite complex. It’s no wonder many are scratching their heads when considering whether protectionist policies are helpful or harmful.

Also, the data tells conflicting stories. Case in point: the manufacturing industry. As explained above, the industry is experiencing domestic job growth, which would point to a benefit of protectionism. For balance, according to the Bureau of Labor Statistics, only six of the 20 major manufacturing categories have grown faster since tariff threats began. The other 14 have been either consistent or done worse. Notably, textile, paper, and chemical industries slumped, because of steel or softwood lumber tariff retaliation. Vehicle, technology, heavy equipment, and agriculture companies have suffered a similar fate. What’s more, some industries have cut jobs because of rising production costs from tariffs. General Motors, for example, lost $1 billion in 2018 and projects additional costs of the same amount this year. As a result, they’ve closed plants, subsequently fueling a strike by 46,000 employees. The pain doesn’t stop there; GM’s major suppliers have also lost vital business.

Opportunity Knocks

No doubt, international equities have taken one on the chin, and protectionist policies have not helped. In fact, international markets have underperformed the S&P 500 over the last seven years. However, if we zoom out a bit, historically low international valuations may indicate an entry point for long-term investors. The diagram below reflects less than average valuations for developed markets, Europe, Japan, and emerging markets. While trade war headlines impact emerging markets most, valuations urge investors to review these spaces further for investing potential.

Source: FactSet, MSCI, Standard & Poor’s, Thomson Reubers, J.P. Morgan Asset Management.

Additionally, looking at when international stocks have outperformed U.S. stocks between 1975 and 2015, we see a pattern; international and U.S. equity performance is generally cyclical. The data indicates that as the cyclical nature between U.S. stocks and international stocks shifts in favor of international stocks, long-term investors have a chance to recover the difference between current valuations and 25-year historical averages. It also punctuates the importance of portfolio diversification.

Chart: MSCI EAFE Index vs. S&P 500 Total Return Index. Source: FactSet, as of 12/31/15.

While it is unclear how protectionist policies will play out, and who will win or lose as a result, long-term trends must be considered. More importantly, investors must ask themselves whether protectionism will indefinitely deter international markets, or just force them to adapt and reimagine how world markets interact.

Jaclyn Jackson is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

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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 opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.
Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss.
Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Reducing Your Medicare Premium Surcharges

Contributed by: Robert Ingram, CFP®

For many clients with incomes above a certain level, Medicare premiums may be higher for Part B and Part D. As a Medicare recipient’s income exceeds specific thresholds, they may pay adjusted amounts in addition to the baseline Part B and/or Part D premiums.

Now, what if you have been paying these Medicare surcharges, but you experience a drop in your income? Can you also get your Medicare surcharge reduced? The answer is, possibly yes.

If you experience a change to your income because of certain life events, you can request that the Social Security Administration (SSA) review your situation and use your more recent income to determine what premium adjustment (if any) should apply. Examples of these life-changing events include:

• Work stoppage or work reduction

• Death of a spouse

• Marriage

• Loss of pension income

• Divorce or Annulment

• Loss of income-producing property

You might be asking yourself, “Why do I have to request this? Aren’t Medicare premiums automatically adjusted according to my income?”. A big reason for making the change request when you experience a qualifying change in income has to do with how and when the SSA measures your income.

Income-Related Monthly Adjustment Amount (IRMAA)

To determine whether your income makes you subject to an Income-Related Monthly Adjustment Amount (IRMAA) to the regular Medicare Part B or Part D premiums for the current year, the SSA looks at the income you reported to the IRS for the previous two years. This means that your Modified Adjusted Gross Income (Adjusted Gross Income with tax-exempt income added back) reported for 2017 determines your Medicare premiums for 2019. 

For individuals paying Part B premiums, for example, the standard premium in 2019 is $135.50 per month. However, the following table illustrates what you would pay in 2019 for Part B depending on your 2017 income.

For a couple who filed a joint return with income above $170,000 and up to $214,000 in 2017, each spouse paying for Medicare Part B may pay an additional $54.10 per month above the standard premium (a total of $189.60 monthly) in 2019. A couple with income that falls between $320,000 and $750,000 (or an individual filing single with income between $160,000 and $500,000) in 2017 could each pay an additional $297.90 above the standard premium, for a total of $433.40 per month in 2019.

If an individual (or couple) experienced a drop in income for 2019, it might normally take until 2021 for the Medicare premiums to reflect any reduction based on the 2019 income. Let’s say the couple who had reported income between $320,000 and $750,000 retires in 2019 and sees their income drop to an expected $165,000. The expected income falling within the $170,000 threshold could mean a difference of $297.90 per month (each!) in Medicare Part B premiums (from $433.40 to $135.50).

If a qualifying life event caused the drop in expected income, then filing a request with the SSA could mean a more immediate change in Medicare premiums, rather than waiting for the savings until 2021.

How do you request the premium surcharge reduction? 

If you think you have experienced a reduction in income due to one or more of the qualifying events, make your request to the Social Security Administration by submitting the Medicare Income-Related Monthly Adjustment Amount –Life-Changing Event form (form SSA-44).

Along with this form, you will also provide supporting documentation for your Modified Adjusted Gross Income and your life-changing event (see form SSA-44 instructions). Examples of supporting documentation may include items such as:

• Federal income tax return

• Signed statements from employers, pay stubs

• Certified documents for transfers of a business

• Marriage certificate

• Certified death certificates

• Letter or statement from pension administrator explaining a reduction/termination

For other disagreements with an IRMAA determination, you have the right to appeal. You can file an appeal online (socialsecurity.gov/disability/appeal) and select “Request Non-Medical Reconsideration”, file a Request for Reconsideration form, or contact your local Social Security office.

If you disagree with an IRMAA determination because your reported Modified Adjusted Gross Income is incorrect, you need to address the correction first with the IRS.

Because these Medicare surcharges are determined each year, you have opportunities to do more proactive income and tax planning leading up to and after Medicare enrollment. Employing different strategies that help control your Adjusted Gross Income could also help control potential Medicare premiums in future years. If you have questions about your particular situation, feel free to reach out to us!

• Want more information about Medicare? Check out The Center’s Medicare FAQ

• Looking for financial strategies and tax tips for year-end? Check out this webinar.

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.

What You Need to Know Before You Dip Into Retirement Accounts

Contributed by: Timothy Wyman, CFP®, JD

In general, a 10% penalty applies when you access your IRA, 401(k), and other retirement accounts before age 59. The word “penalty” seems harsh, so the Internal Revenue Code classifies it as an excise tax on early distributions. Moreover, the 10% excise tax is in addition to the ordinary income taxes owed on distributions from pretax accounts. Therefore, the general rule of keeping your hands off these funds until at least age 59.5 is a good one. 

However, what if you really need the money?

Fortunately, there are exceptions to the 10% penalty rule. A complete list may be found here.

For example, “first-time” homebuyers may take out up to $10,000 to help buy or build their primary residence. A similar exception applies to higher education costs for you, your spouse, or children. These two apply for IRAs, but not 401(k) accounts.

Another exemption for medical expenses paid on behalf of yourself, your spouse, or a dependent applies only on the amount that exceeds 10% of your adjusted gross income. Let’s assume Bob and Mary are facing significant ($170,000) medical expenses for their son, Bob Jr. The expenses are not covered by their regular health insurance plan, so the couple withdraws $170,000 from Bob’s IRA. In addition to pension and social security, this distribution increases their Adjusted Gross Income to $250,000, so Bob and Mary will pay about $2,500, the 10% excise tax on approximately $25,000. 

It is best to avoid early distributions from your IRA and 401(k) accounts; after all, the money is meant for your retirement years.

However, in the event there are no other alternatives, you may be able to avoid the 10% penalty….er, excise tax.

Timothy Wyman, CFP®, JD, is the Managing Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® For the second consecutive year, in 2019 Forbes included Tim in its Best-In-State Wealth Advisors List in Michigan¹. He was also named a 2018 Financial Times 400 Top Financial Advisor²

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¹ The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research is based on an algorithm of qualitative criteria and quantitative data. Those advisors that are considered have a minimum of 7 years of experience, and the algorithm weighs factors like revenue trends, AUM, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of 29,334 advisors nominated by their firms, 3,477 received the award. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Any opinions are those of Center for Financial Planning, Inc.® and not necessarily those of Raymond James.

² The FT 400 was developed in collaboration with Ignites Research, a subsidiary of the FT that provides special-ized content on asset management. To qualify for the list, advisers had to have 10 years of experience and at least $300 million in assets under management (AUM) and no more than 60% of the AUM with institutional clients. The FT reaches out to some of the largest brokerages in the U.S. and asks them to provide a list of advisors who meet the minimum criteria outlined above. These advisors are then invited to apply for the ranking. Only advisors who submit an online application can be considered for the ranking. In 2018, roughly 880 applications were re-ceived and 400 were selected to the final list (45.5%). The 400 qualified advisers were then scored on six attrib-utes: AUM, AUM growth rate, compliance record, years of experience, industry certifications, and online accessibil-ity. AUM is the top factor, accounting for roughly 60-70 percent of the applicant's score. Additionally, to provide a diversity of advisors, the FT placed a cap on the number of advisors from any one state that's roughly correlated to the distribution of millionaires across the U.S. The ranking may not be representative of any one client's experi-ence, is not an endorsement, and is not indicative of advisor's future performance. Neither Raymond James nor any of its Financial Advisors pay a fee in exchange for this award/rating. The FT is not affiliated with Raymond James.

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

Social Security Cost of Living Adjustment for 2020

Contributed by: Kali Hassinger, CFP®

The Social Security Administration recently announced that monthly benefits for nearly 69 million Americans will increase by 1.6% beginning in January 2020. The adjustment is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, through the third quarter. This cost of living adjustment (COLA, for short) is slightly less than the raises received in 2018 and 2019, which were 2% and 2.8%, respectively.

For many, Social Security is one of the only forms of guaranteed, fixed income that will rise over the course of retirement. The Senior Citizens League estimates, however, that Social Security benefits have lost approximately 33% of their buying power since 2000. This is why, when running retirement spending and safety projections, we factor an erosion of Social Security’s purchasing power into our clients’ financial plans.

So far, no changes to the Medicare premium and Social Security wage base tax have been announced, but they are expected by year end. Medicare trustees estimate Part B premiums will increase by about $9 per month for those not subject to the income-related surcharge. Unfortunately, the Social Security COLA adjustment is often partially or completely wiped out by the increase in Medicare premiums.

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

A HOUSE DIVIDED: Handling the Marital Home in Divorce

Contributed by: Jacki Roessler, CDFA®

As we head away from the lazy days of summer in Michigan and families are securely back in their school-time routines, many divorcing clients turn their focus to questions about how to handle the marital home. In fact, lately, it’s a question I hear at least once a week. Read on for important factors to consider and some often overlooked tips.

There are three general ways to treat the marital home in a divorce.

1. With Option A, one party keeps the home and pays the other party their equitable interest, either from home equity or from their share of another asset. Let’s assume a couple has a home with an appraised value of $300,000 and an outstanding mortgage of $200,000. If the wife retains the home, she owes the husband $50,000 for his share of the equity. To pay him, she can re-finance the mortgage for $250,000 and give him $50,000 in cash, or the husband can take his $50,000 from the wife’s share of a bank or investment account or a pre-tax equivalent amount from a retirement asset.

2. Option B is to list the home for sale and split the net proceeds. Using the same example as above, let’s assume the home is sold for $300,000. After paying off the mortgage lien and deducting 8% in closing costs and sales commission ($24,000), the remaining equity is $76,000. In this scenario, both parties would net $38,000 in cash.

3. Lastly, with Option C, the parties jointly retain the home (as Tenants in Common) for an agreed upon number of years, at which point the house would be sold and the proceeds split. At the time of sale, whoever was paying down the mortgage would receive credit for any portion of the principal paid in the intervening years. This type of arrangement often allows one party the option to buy out the other’s interest at a future date, and at an agreed upon value.

Many couples find the most difficulty in separating the financial and emotional aspects of the house.

For many, the house comes with a mortgage payment and with property tax obligations, insurance, maintenance and upkeep costs. The financial burden may not be worth the comfort of keeping it. For others, staying put may be the most cost-effective option. The best tip I can give my clients is to carefully itemize all the potential, realistic costs associated with the home before making an emotion-based decision about who should keep it. Take stock of needed repairs, appliances reaching the end of their life, and what it costs to keep the house warm in the winter and cool in the summer. 

Another important financial consideration is to make sure the home is properly valued.

I’ve had many clients use a quick, free, internet-generated estimate rather than spend money on a qualified appraisal. If the house will be jointly retained and sold in the future, or sold at the time of the divorce, an appraisal isn’t necessary. As a financial planner, I never want clients to needlessly spend money. However, if one party is buying out the other’s interest in the home, it’s imperative to get a reasonable (and hopefully neutral) appraisal by a qualified appraiser. If the house needs a new roof or just had a sprinkler system installed, the internet estimate won’t include that. Realtor appraisals generally aren’t acceptable for this purpose.

As always, each couple’s situation is unique, and their circumstances should receive a critical analysis. Seek advice from an experienced financial advisor.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

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Opinions expressed in the attached article are those of Center for Financial Planning, Inc and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The scenarios described are hypothetical examples for illustration purposes only. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.