Letter Of Last Instruction: A Helpful Factbook For Your Family

Contributed by: Josh Bitel, CFP®

A letter of last instruction is an often overlooked element of estate planning. While more popular documents, such as your Will, are critical in showing an overview of how your estate plan should be managed and distributed after you are gone, your letter of last instruction offers more detail on the specifics of your life. Among the important items in this letter are funeral preferences, login information for any electronic data your heirs may need access to, preferred care for pets and veterinarian contact information, and private messages to loved ones. These are just some of the items a letter of last instruction can provide that aren’t normally covered in other documents.

Here at The Center, we recently updated the letter of last instruction and personal record keeping templates we provide to clients. These can be intimidating at first glance, over 50 pages between the two, but committing just 20-30 minutes per week and chipping away at these documents until they are finished can go a long way in providing your family the information they will need to meet your wishes after death.

These documents are important to share with your financial planner as well, as part of your team, we can assist in working with your heirs to carry out your wishes when you are gone. Starting the conversation around these topics can be tricky, but they are important. Contact us at The Center if you like some assistance in this area.

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

American Rescue Plan Act of 2021 – What You Need to Know

Contributed by: Robert Ingram, CFP®

The American Rescue Plan Act of 2021 was signed into law by President Biden last Thursday.  This $1.9 trillion package, intended to provide relief and recovery from the impacts of the Covid-19 pandemic, contains a wide range of provisions.  These span from funding Covid-19 testing, contact tracing, and vaccination efforts, providing grants for school to improve their capabilities to operate amidst the pandemic, funding support to state and local governments to offset lost tax revenues, small business grants, to tax credit and other relief measures for individuals. 

Here are some of the notable provisions that may impact your finances this year and your overall financial plan.

Direct Payments (“Stimulus Checks”)

The American Rescue Plan Act, much like the CARES Act (enacted in March of 2020) and the Consolidated Appropriations Act (enacted last December 2020) before it, provides a refundable tax credit made as a direct payment to individual and families.  These 2021 Recovery Rebate payments have started to go to recipients.

How much could I receive?

• The full credit amount is $1,400 per eligible individual

• Eligible individuals include not only the taxpayers but also the taxpayers’ dependents

This is a key difference from the criteria determining the eligible number of individuals for the 2020 Recovery Rebates in the CARES Act and Consolidated Appropriations Act, which included only the taxpayers and the taxpayers’ children under age 17.

A married couple, for example, filing a joint return with a 21-year-old daughter in college, a 17-year-old son, and an 85-year-old mother living with them whom they claim as a dependent, could receive up to $1,400 x 5 = $7,000 for their 2021 Recovery Rebate.

Who is eligible?

Generally, U.S. citizens or U.S. Resident Aliens with a valid Social Security number, who are not dependents of another taxpayer, and who fall within certain income thresholds are eligible.

Your Adjusted Gross Income (AGI) determines your income eligibility, with the amount of tax credit phasing out to $0 over the following ranges by tax filing status.

• Married Filing Jointly: $150,000 to $160,000

• Head of Household: $112,500 to $120,000

• Single and all other filers: $75,000 to $80,000

For example, if you are married filing jointly and your AGI is an amount up to the initial threshold of $150,000, you would be eligible for the full credit.  If instead, your income falls between $150,000 and $160,000, your eligible credit is reduced proportionally as your income approaches the $160,000 ceiling.  If your income is at the $160,000 level or above, you are no longer eligible.

Determining Eligibility

There are a few different measuring points used to determine your income eligibility for receiving the rebate benefit. 

1. For the direct payments that are already starting to be disbursed now

The IRS uses available information, that is, your most recently filed tax return.  Since we are still within the tax-filing period for 2020, you may or may not have already filed your 2020 return.

If you had already filed your 2020 tax return, the IRS will use your 2020 tax return to determine your Adjusted Gross Income for eligibility.

If you have not filed your 2020 tax return, the IRS will use your 2019 tax return to determine your income eligibility.

Folks that would be eligible for the direct payment based on 2019 income but whose 2020 income might result in a reduced payment (or could make them ineligible) may benefit from not having filed their 2020 returns.

For those whose income was within the phase-out range or was above the eligibility phase-out based on the 2019 tax returns, there are other opportunities to benefit from these rebates (particularly if your income had fallen in 2020 due to the pandemic or other factors).

 2. The “Additional Determination Date”

Taxpayers who have not yet filed their 2020 returns but do file them before an Additional Payment Determination Date will have their rebate payment recalculated based on their 2020 AGI.  If the recalculated rebate payment is higher than the amount determined from the 2019 taxes, the IRS will send out another “stimulus check” to make up the difference.

The Rescue Act sets this Additional Payment Determination Date as the earlier of

• 90 days after the 2020 tax year filing deadline (still April 15th as of this writing) or

• September 1st

Keep in mind that If you anticipate filing an extension for 2020 and the extended filing deadline is October 15, you would still need to file your return much sooner to have your potential rebate recalculated using 2020 income.

3. Filing your 2021 Tax Return

Remember that the Recovery Rebate is a 2021 tax credit, so even if the advanced direct payments of the credit are determined using the 2019/2020 tax returns for income eligibility, filing your tax return for 2021 is the 3rd way to be eligible for this benefit.

If your 2021 AGI is lower than the 2019/2019 AGIs used to determine the advanced payment, and it is low enough to result in an eligible credit or a larger credit than was already paid out, this difference is applied as a tax credit on your 2021 tax return.

Increased Child Tax Credit (CTC) for 2021

The American Rescue Plan Act also makes some temporary enhancements to the normal Child Tax Credit for 2021.

• The Child Tax Credit is raised to $3,000 from $2,000 for children over age 6 and to $3,600 for children under age 6

• Eligible children can be up to 17 years old rather than just under age 17.

• The enhanced CTC is also a fully refundable tax credit this year. (i.e. it can become a tax refund if the credit makes the tax liability negative)

• A provision also has the IRS paying out 50% of the estimated 2021 tax credit over equal installments starting in July 2021, all based on your most recently filed tax return.

*If, however, at the end of 2021 you were eligible for a smaller amount than was paid out to you, that difference is “clawed back” by adding it to your tax liability on your 2021 tax return.

Because tax credits reduce tax liability dollar for dollar, this credit overall can have a significant impact on a family’s tax situation, particularly for a family with young children.  As a hypothetical example, a married couple with 3 kids (ages 3, 5, and 8) filing jointly with $100,000 of income in 2021 (assuming all ordinary income) and taking the standard deduction ($25,100) would have tax liability of $8,590.  After subtracting the CTC for the kids ($3,600 + $3,600 + $3,000 = $10,200), the couple’s tax liability would be negative $1,610 ($8,590 - $10,200) meaning a refund of $1,610!

With these enhanced credits, the credit amounts do begin to phase-out at the following Adjusted Gross Income (AGI) levels:

Married Filing Jointly: $150,000

Head of Household: $112,500

Single and all other filers: $75,000

Being ineligible for the 2021 enhanced child tax credit does not exclude you from using the normal child tax credit of up to $2,000 per child. You can still qualify for that credit up to these higher-income phase-out thresholds:

Married Filing Jointly: $400,000

Single and all other filers: $200,000

Child and Dependent Care Tax Credit Increased for 2021

The Rescue Act also makes changes to the Child and Dependent Care Tax Credit for this year that essentially raises the maximum possible credit from $1,050 to $4,000 for a single qualifying dependent and from $2,100 to $8,000 for two or more dependents.

• First, the maximum amount of eligible expenses (such as daycare) used to calculate the tax credit increases from $3,000 to $8,000 for a single dependent and from $6,000 to $16,000 for multiple dependents.

• There is also a percentage number applied to the taxpayer’s eligible expenses to calculate the actual credit amount (this is known as the ‘Applicable Percentage). For 2021, the Applicable Percentage increases to 50% from the previous maximum of 35%.

• The income threshold for reducing that percentage is expanded to an AGI of $125,000 (regardless of tax filing status).

Before this change under the Rescue Act, the 35% applicable percentage reduced down to 20% at a much lower income range.  Starting at $15,000 the percentage decreased 1% point for every $2,000 that your AGI exceeded that threshold down to a minimum floor of 20% (actually reached at an AGI of $45,000).  This meant the credit amount was more limited for most taxpayers.

For 2021 the same reduction applies, but it does not start until an AGI of $125,000.  As a result, when AGI hits $185,000, the applicable percentage is capped at 20%.  The combination of these changes allows more people to be eligible for higher potential tax credits.

• One downside for higher-income earners of $400,000 or more is that the Rescue Act adds a phase-out from the 20% minimum Applicable Percentage.  Starting at a $400,000 AGI, the 20% Applicable Percentage is reduced 1% point for every $2,000 your income exceeds that threshold.  This effectively makes you ineligible for any credit amount once your AGI exceeds $440,000.

Other Provisions of Note:

Federal unemployment support

Certain unemployment compensation benefits have been extended, including

• The federal unemployment insurance (UI) supplement is set at $300 per week through Sept. 6.k.

• The Pandemic Unemployment Assistance program providing benefits to individuals such as those self-employed is extended to September 6th

The Rescue Act also makes the first $10,200 in federal unemployment insurance assistance nontaxable for incomes under $150,000.  This would be $20,400 for two spouses.

*A key point is the $150,000 AGI threshold includes the unemployment benefits received)

Health Insurance Support

• Provides COBRA subsidies in 2021 for individuals that were involuntarily terminated.  Individuals can maintain their coverage at $0 cost from April through September.

• Expands the Premium Assistance Tax Credits for health insurance plans purchased through the state exchanges.

Small Business Support

Additionally, there is $15 billion in new funding for Economic Injury Disaster Loans (EIDL) as grants. The bill designates $7 billion for the Paycheck Protection Program (PPP) to nonprofits and news services. An additional $1 billion funds a grant program for independent live venues, theaters and cultural institutions. EIDL grants are exempt from inclusion in recipients’ gross income for tax purposes.

As you may have noticed, many of these provisions in the new legislation are nuanced and how they apply to your specific situation depends on several factors.  Continue to have conversations with your financial planner, and as always please reach out if you have questions.

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.

5 Social Security Rules to Know for Maximizing Your Benefits

Contributed by: Robert Ingram, CFP®

Social Security is still a key source of income for most retirees.  At the same time with the program’s many nuanced rules and options, just understanding your available benefits can be confusing enough, let alone figuring out how to make the most of those benefits throughout retirement.  Additionally, there are some strategies not as widely publicized and they can easily fly under the radar.

Here are five Social Security rules to keep in mind as you plan your Social Security filing strategy. 

1. Delaying Social Security Can Increase Your Benefit Amount

Under the Social Security retirement program, you can collect your full retirement benefit at the designated Full Retirement Age (FRA), determined by your birth year.  Individuals born from 1943 to 1954 reached FRA at age 66.  In each year from 1955 to 1959 the FRA increases by 2 months (e.g. 1955 = age 66 and 2 months, 1956 = age 66 and 4 months, and so on). Those born in 1960 or later reach their FRA at age 67.

Think of your full retirement age benefit as your baseline benefit.  You can begin collecting benefits as early as age 62.  However, your benefit amount would be reduced by a small percentage for each month that you collected early.  This can add up to a sizable reduction. For example, if your full retirement age is 67 and you begin collecting as early as possible at 62, you could see your benefit reduced by 30%.

Now, the opposite is also true if you begin collecting your benefits after your full retirement age.  For each month that you delay taking your benefits beyond your full retirement age until age 70, your benefit amount increases by 2/3 of 1%.  (Are you thinking that doesn’t sound like much?)  These delayed retirement credits would yield an 8% increase over 12 months.  For clients that are concerned about longevity in retirement (a.ka. living a long time needing retirement income), this can be an effective way to help protect themselves.

2. Delaying Social Security Can Impact Benefits To A Surviving Spouse

For married couples that are receiving their Social Security retirement benefits, when one spouse passes away, the surviving spouse will receive only one benefit going forward.  It is the larger of his or her benefit or the deceased spouse’s benefit. 

By delaying Social Security to increase your benefit amount while you are living, you are also locking in a higher benefit amount that could be available to your surviving spouse.   Conversely, taking benefits early at a reduced amount may leave a smaller benefit available to your surviving spouse.  These different possible scenarios present both unique challenges and planning opportunities for maximizing the value of your benefits over both spouses’ lifetimes.

3. Withdrawal of Social Security Application (The “Do-Over”)

Suppose you have started collecting your benefits and then you changed your mind.  Perhaps you had collected early at a reduced benefit.  Can you go back and reverse the decision to claim benefits?  Well, if you are within the first 12 months of claiming, you can.

You can withdraw your application for benefits and then reapply later.  This resets things as if you had never started benefit.  Keep in mind there are also some important requirements.

• You must repay all of the benefits you and your family received from your original retirement application, including:

  • Benefit amounts your spouse collected based on your earnings record or benefits dependent children received

  • Any amounts withheld for Medicare premiums

  • Voluntary tax withholding

• Anyone who receives benefits based on your application must provide written consent

• You can only withdraw your application once in your lifetime.

4. Voluntary Suspension

Ok, you may be wondering if it has been longer than 12 months since you claimed your benefits and you change your mind, are you completely stuck?  Well, not exactly.  There is another way to increase your benefit amount.

Once you reach full retirement age, you can request a suspension of your benefit payments (regardless of when you started them).  By doing so, the benefit you were receiving earns those delayed retirement credits of 2/3 of 1% for each month that your benefits are suspended.  This results in a higher amount when you resume your benefits, no later than age 70.

This strategy of suspending benefits can be an effective tax planning tool for years in which you anticipate other outside income, like a pension that recently started or a lump sum from the sale of a business.

5. Benefits Based On An Ex-Spouse’s Earnings

If you are divorced, you may be able to collect benefits based on your ex-spouse’s Social Security record.  Similar to the benefits for married couples, you can receive up to one-half of your ex-spouse’s full retirement amount by waiting until your full retirement age to apply.  Collecting earlier than your full retirement age still results in a reduced benefit.

You can collect based on your ex-spouse’s record if you meet the following criteria:

• You were married at least 10 years and you have been divorced for at least 2 years

• You are unmarried

• You are age 62 or older

• The benefit you are entitled to on your Social Security earnings record is less than the benefit you would receive based on your ex-spouse’s record

If the amount you could receive based on your ex-spouse’s record is larger than the amount from your record, you have the opportunity to receive the higher benefit.

Decisions around when and how to collect Social Security benefits can be complicated and depend so heavily on your unique circumstances.  Your health, your retirement spending needs, your income sources, and financial assets are just a few that come to mind.  If you have questions about how Social Security fits within your overall retirement income plan, or if we can be a resource for you, please reach out to us!

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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This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Prior to making a decision, please consult with your financial advisor about your individual situation.

How Risky Was It To Invest In Gamestop?

Contributed by: Nicholas Boguth

A quick Google search tells us that the odds of winning the Powerball Jackpot is roughly .000000003%. The odds of getting struck by lightning is roughly .0002%. What are the odds of getting rich by investing in a stock that grows by 100x in a year like Gamestop? Also slim.

It is hard not to envy those individuals posting screenshots of their LIFE-CHANGING gains like we saw last month with some of the lucky winners of the GME hysteria. The only problem is that it is far more likely that style of investing ends with life-changing LOSSES.

How often does a stock return 100x?

Christopher Mayer explored that question in his book, “100 Baggers”. His research found that 110 stocks returned 100x between 1976-2014.

Pair that with research from Credit Suisse and you soon realize that if your goal is to get rich quick, the odds are stacked against you. The number of listed securities has fluctuated from 3,000+ to 7,000+ over the past 50 years, and there have been OVER 15,000 new stocks listed in that time frame alone.

Some “back of the napkin” calculations would suggest that there is a ~0.5% chance you pick the stock that returns 100x, and that is assuming you hold through all the turbulence and sell at the correct time as well.

Back to the major problem – while 110 stocks returned 100x, there were THOUSANDS of stocks that failed. Some go bankrupt or get delisted because they never trade above $1/share, or lose 90% of their value and plateau. There’s a good chance a lot of those companies shared the financial position of Gamestop as well (Gamestop lost almost $500M in 2020).

So when we see a Reddit user celebrating their life-changing journey from $50k to $5M, know that there are DOZENS of individuals who tried the same thing – but are sulking in a less fortunate journey from $50k to $0.

At The Center, we believe in a more sustainable, long-term approach to gaining (and preserving) wealth. If you have questions about how that applies to you and your financial plan, please don’t hesitate to call or email anyone on our team.

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

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Any opinions are those of Nick Boguth and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. 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 a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

A Better Way To Pass Down Wealth To The Next Generation

Contributed by: Kali Hassinger, CFP®, CDFA®

You may have heard the saying, “Shirtsleeves to shirtsleeves in three generations.”  In a family, it refers to the phenomenon of a generation building wealth, passing it down to the second generation, but going broke by the third. Whether you are passing down investment assets or a family business, many parents have the hope that their money will enrich the lives of their children, grandchildren, and future generations for years to come. However, successful transitions do not just happen when assets are distributed.  Like most challenges in life, transitions require planning, communication, and coordination.

When planning for generational wealth transfers, opening the lines of communication is often the first and most difficult hurdle to overcome. Parents may be reluctant to share information on wealth and money for many different reasons. Our society as a whole often treats money as a taboo subject that is rarely discussed in personal terms. Other concerns could be stifling an heir’s initiative or the threat of a child’s future divorce. Simply avoiding these conversations, however, can lead to unintended confusion, irresponsibility, or resentment.

Family meetings devoted to discussing wealth can help heirs better understand their parents’ plan and any possible role they may play in the future. Family meetings also give participants the opportunity to express their views, accept responsibility, or acknowledge where they may need additional help in the future. There are many ways these meetings can be conducted, but they all center on the same objectives of trust, communication, and understanding.

A meeting with the family’s advisors, financial planner, attorney, and CPA should take place at some point as well. This will help the family to gain both comfort with the advisors and a greater understanding of the level of assets in question. With the passing of the SECURE Act eliminating the stretch IRA in many situations, retirement assets that are transitioning to the next generation may require more detailed tax strategies. The Estate tax limit has also fluctuated drastically throughout the last few decades, and that will most likely be the case going forward.  It’s important that those who will ultimately gain control of assets understand why plans were put into place and how they will function going forward. While no amount of planning can ultimately guarantee success, when the lines of communication are open between owners, heirs, and advisors, a family is able to develop the best strategy for all involved.

Successful family meetings are intended to engage family members, not be a set of rules handed from one generation to the next. Healthy communication builds trust, and trust builds understanding. We often encourage clients to involve children in their Annual Review meetings when they're comfortable. If full disclosure of all information seems too invasive initially, have a conversation with your planner prior to the meeting. We are happy to tailor the meeting as necessary and can review only the portions of your plan that you are comfortable sharing!

Senior Financial Planner Joins Center Team: Meet Michael!

Welcome to the team!

The Center proudly welcomes Michael Brocavich, CFP®, MBA to our team. With nearly 13 years of experience in the profession, Michael is thrilled to join a team where he can collaborate with other professionals to further enhance his career as a financial planner. 

Background

His extensive background includes both personal and corporate finance. After earning a BA in Economics and Management from Albion College, he launched his career in finance with Federal Mogul in Southfield, Michigan. He then went on to earn an MBA from Wayne State University and relocated to Chicago, where he worked as a senior financial analyst, first for Federal Mogul and later Barton, Inc.

Michael entered the personal finance field in 2007 when he joined MetLife Investors' Marketing and Distribution division. In 2013, he opened an Edward Jones office in Northville, Michigan, helping individual investors and small business owners with financial goal planning and wealth management.

Specialties

He joined Raymond James Financial Services in May of 2017 as a financial advisor specializing in financial planning, wealth management, and estate planning. 

Personal Life

Michael and his wife live in nearby Plymouth. In his spare time, he enjoys golf, the company of friends and family, and everything Detroit Sports.

How Much Guaranteed Income Should You Have In Retirement?

Contributed by: Nick Defenthaler, CFP®, RICP®

How much guaranteed income (we’re talking Social Security, pension, and annuity income) should you have in retirement? I am frequently asked this by clients who are nearing or entering retirement AND are seeking our guidance on how to create not only a tax-efficient but well-diversified retirement paycheck. 

“The 50% Rule”

Although every situation is unique, in most cases, we want to see roughly 50% or more of a retiree’s spending need satisfied by fixed income. For example, if your goal is to spend $140,000 before-tax (gross) in retirement, ideally, we’d want to see roughly $70,000 or more come from a combination of Social Security, pension, or an annuity income stream. Reason being, this generally means less reliance on the portfolio for your spending needs. Of course, the withdrawal rate on your portfolio will also come into play when determining if your spending goal would be sustainable throughout retirement. To learn more about our thoughts on the “4% rule” and sequence of return risk, click here.  

Below is an illustration we use frequently with clients to help show where their retirement paycheck will be coming from. The chart also displays the portfolio withdrawal rate to give clients an idea if their desired spending level is realistic or not over the long-term.

Cash Targets

Once we have an idea of what is required to come from your actual portfolio to supplement your spending goal, we’ll typically leave 6 – 12 months (or more depending of course on someone’s risk tolerance) of cash on the “sidelines” to ensure the safety of your short-term cash needs. Believe it or not, since 1980, the average intra-year market decline for the S&P 500 has been 13.8%. Over those 40 years, however, 30 (75% of the time) have ended the year in positive territory:

Market declines are imminent and we want to plan ahead to help mitigate their potential impact. By having cash available at all times for your spending needs, it allows you to still receive income from your portfolio while giving it time to “heal” and recover – something that typically occurs within a 12-month time frame.

A real-world example of this is a client situation that occurred in late March 2020 when the market was going through its bottoming process due to COVID. I received a phone call from a couple who had an unforeseen long-term care event occur which required a one-time distribution that was close to 8% of their entire portfolio. At the time, the stock portion of their accounts was down north of 30% but thankfully, due to their 50% weighting in bonds, their total portfolio was down roughly 17% (still very painful considering the conservative allocation, however). We collectively decided to draw the income need entirely from several of the bond funds that were actually in positive territory at the time. While this did skew their overall allocation a bit and positioned them closer to 58% stock, 42% bond, we did not want to sell any of the equity funds that had been beaten up so badly. This proved to be a winning strategy as the equity funds we held off on selling ended the year up over 15%.  

As you begin the home stretch of your working career, it’s very important to begin dialing in on what you’re actually spending now, compared to what you’d like to spend in retirement.  Sometimes the numbers are very close and oftentimes, they are quite different.  As clients approach retirement, we work together to help determine this magic number and provide analysis on whether or not the spending goal is sustainable over the long-term.  From there, it’s our job to help re-create a retirement paycheck for you that meets your own unique goals.  Don’t hesitate to reach out if we can ever offer a first or second opinion on the best way to create your own retirement paycheck.

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.

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Opinions expressed are those of the author but not necessarily those of Raymond James, and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Charts in this article are for illustration purposes only.

Important Information for Tax Season 2020

Contributed by: Lauren Adams, CFA®, CFP®

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2020 Form 1099 mailing schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages

• February 15 – Mailing of original Form 1099s

• February 28 – Begin mailing delayed and amended Form 1099s

• March 15 – Final mailing of any remaining delayed original Form 1099s

Additional important information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2021, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts

• Processing of original issue discount and mortgage-backed bonds

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2020.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

You can find additional information here.

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Lauren Adams, CFA®, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals and also leads the client service, marketing, finance, and human resources departments.

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Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Should Some Of Your Money Be In Bonds?

Contributed by: Angela Palacios, CFP®, AIF®

The Center's Director of Investments Angela Palacios, CFP®, AIF® explains 3 reasons why you should own bonds.

Through thoughtful financial planning, The Center wants to make sure that you achieve your goals regardless of what markets are doing for short periods of time.  We are often asked why we would want to own bonds in a portfolio (especially now with interest rates at all-time lows!). While equity markets generally provide positive returns, there are still periods when they do not.

By their nature, stocks are better than bonds at providing investment returns as there is more risk involved in investing.  There is no promise to repay your principal or interest along the way.  However, while stocks might be better at providing total returns, bonds can provide returns more consistently because of these “promises”.  If we were only focused on investment return, our portfolio would reflect 100% stocks. However, for most investors it still makes sense to continue holding bonds…here are a few reasons why!

Reason #1: To support a withdrawal strategy

One of the worst-case scenarios could have been retiring right before the Great Recession (late 2007).  What if you had retired right before this scenario and needed to withdraw money from your portfolio even as markets corrected?  Owning bonds during times of stress means there is a bucket within your portfolio that you can live on – perhaps for extended periods of time if needed – without having to touch stock positions that are down (they can even provide funds to deploy into equities opportunistically or through routine rebalancing).  Using bonds as your source of income during this time (both the interest and selling bond positions) allows the equity positions a chance to rebound (which usually happens as we have experienced in the past). 

Reason #2: Less Downside Capture

If you capture less of the downside it usually won’t take you nearly as long to get back to your “break-even” or back to where your portfolio value started before equity markets correct.  The below chart does a great job of showing how this looked after the Great Recession.  It shows the dark blue line [a portfolio mix of 60% stock(S&P 500) and 40% bonds (Barclays US aggregate bond index)] recovered nearly a year and a half earlier than a portfolio holding just stock.

JP Morgan Guide to the Markets

Reason #3: Better Investor Behavior

Never underestimate the shock of opening a statement and seeing a swift downturn in your nest egg!  An allocation to bonds can potentially really assist your portfolio in this aspect as shown by the chart above.  If you look at the February ’09 point on the chart and cover up everything to the right of that, ask yourself “Is the “green line” experience something you could shrug off and continue holding or even invest more at this point?”.  Now it is clear that you should have held on to your stock positions but in those moments back in 2009, we didn’t have the benefit of “hindsight” to lean on.

Current Events: What Do Bonds Have Going For Them Now?

JP Morgan Guide to the Markets

All that being said, bonds are in a unique position right now (although similar to where we stood 5 years ago before rates started to rise).  So what do bonds have going for them other than just how they behave as part of your overall return experience?  There are a few tailwinds out there for bonds.  For U.S.-based bonds, while interest rates are low in the U.S., they are still better than other countries with the exception of emerging markets and below investment grade issues.  This steadily attracts buyers of our debt supporting prices even at these low-interest rates.

Another point is that we are still in the midst of a pandemic, there could continue to be unanticipated economic impacts that affect markets unexpectedly.  The economy is pretty vulnerable right now and when we are vulnerable an unexpected shock (black swan event) could have a larger than expected impact on markets if it were to occur.  Remember these are events no one could see coming (like the pandemic itself!).  Right now it is a far easier decision to sell stock positions and rebalance into bonds while calmer markets are prevailing than in the midst of a downturn.  These markets are pricing everything to perfection, rates staying low, Federal reserve continuing with their bond-buying strategies, vaccine dosages being deployed without a hiccup, no more widespread shutdowns, another government stimulus package, etc.  Things don’t always go to plan so adding to bonds helps to insulate you against events that are out of our control.

Another caveat to this is the lower interest rates are, the fewer bonds tend to correlate with stocks.  Meaning when rates are lower the assistance they provide during equity market downturns should be improved.

The chart below provides the historical basis for this view. It shows for each month since 1926 the stock-bond correlation over the subsequent 120 months (orange line). The chart also plots for each month where the 10-year Treasury yield stood (blue line). Notice that the two data series tend to rise and fall in unison, with higher Treasury yields associated with higher stock-bond correlations over the subsequent decade.  It also shows that while the 10-year treasury rate stays below 4% their performance remains uncorrelated or negatively correlated which is exactly what we are hoping for in the event of equity market volatility.

What If The Markets’ Worst Fears Are Realized And Rates Increase Causing Bonds To Lose Value?

A bad year of performance for bonds is far different than for equities.  This decade has had some tough years for bond positions.  The Bloomberg Barclays US Aggregate bond index has experienced a negative performance calendar year in 2013 (-1.98%) and two years where returns were essentially flat (2015 up .48% and 2018 up .1%).  While it is hard to predict the path of interest rates over the coming year diversification within your bond portfolio will be important.  For example, shortening the duration of the bond portion of your portfolio may help alleviate some of the risks of interest rates rising (remember when interest rates rise bond prices tend to fall).

I hope this helps your understanding as to why we are interested in still owning bonds as a portion of your investment portfolio!  Please don’t hesitate to reach out with any questions you may have!

Angela Palacios, CFP®, AIF® is a Partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. You cannot invest directly in any index. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

How to Decide Where to Live in Retirement

Contributed by: Sandra Adams, CFP®

One of the issues for most retirees, once you have determined that you are ready to retire and can afford to do so, is where you want to live in retirement? This, of course, is a loaded question. There are so many factors that go into making this decision, and it is as much emotional as it is financial. I could certainly write a detailed commentary on this topic, but here we will provide some bullet points to provide some issues and decision points to consider.

Location, Location, Location.  For the majority of people, the most important decision in making the retirement living decision is the location. Will you remain in your pre-retirement community that you are familiar with?  Where are your friends, connections and social contacts?  Or will you make a change, perhaps to a different or warmer climate? To a more rural setting?  Or maybe closer to the city where health care, transportation, resources and cultural activities are more accessible?  You may decide to move closer to family at this point in your life — this may be a dangerous proposition — as growing and maturing families tend to move again just as you move to be near them, leaving you again stranded in a place where you know no one.  You may find that it is more important to find a location where you can be near friends that you can socialize with, that you have commonalities with and that will provide mutual support.

Once the location is determined, the physical space becomes important.  Will you stay in the same home you’ve always lived in and “age in place”?  If you decide to do that, it may become necessary to take a good hard look at your home and make sure that it is equipped to be safe and easy for you to live in for the next 20 – 30 years or so of your retirement, if that is your plan. And if you truly do wish to stay in your own home to age (according to a recent survey by the National Council on Aging, 9 in 10 seniors plans to stay in their own home to age), you have to plan ahead to make things as safe and accommodating for yourself and your spouse as possible, so there is not a need for you to need to move to an assisted living or nursing care facility in the unfortunate case that you have a medical emergency and your home is not equipped for you to stay there.  

For those who don’t desire to stay in their pre-retirement home, there are endless choices:

• You might decide to downsize to a smaller home, condo or apartment.

• You might choose to move into a senior-only community so that you can associate with people that are in the same life situation.

• You might choose to live in a multi-generational planned community.

• You might choose to live in a shared home situation — think of older adults sharing the same living space, expenses, and providing support and resources with one another (circa the Golden Girls).

• You might decide to move in with or share space with family members.

So, how do you go about making your decision about where and in what kind of house/housing facility to live in retirement?      

• Develop your criteria – What kind of climate are you looking for?  How active do you want your social life to be? What kind of access do you want to health care and other facilities? Make a list and search locations that fit your criteria.

• Identify neutral professionals to guide you

• Do a trial run

• Consult your family

• Put together a transition team

To move or not to move, that is the question.  And even making not to move — aging in place — does not mean that there are no choices or changes to make.  But if you do decide to make a move, it is a process that takes planning, and one that should not be taken lightly. Give the process serious consideration — it is a large part of your potential retirement planning picture.

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.