Money Centered BLOG
“None of us knows when that event might happen that will cause us to suddenly need help.” - Sandy Adams, CFP®
Read the full CNBC article HERE!
Any opinions are those of Sandy Adams, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Raymond James is not affiliated with CNBC.
Contributed by: Nicholas Boguth, CFA®, CFP®
You may have seen Morningstar’s popular “star rating” at some point in your investment lifetime. Sometimes it shows up on account statements, lists of investment options, or marketing materials – but what exactly is it telling you?
A common mistake we hear is that a fund is presumed to be a “good investment” because it is a “5-star fund” at Morningstar. While the fund may be a good investment, that is not what the star rating tells us.
The star rating is simply telling us how the fund performed compared to peers in the PAST, and we know from one of the most common financial disclosures in the industry that “past performance does not guarantee future results.”
In Morningstar's own words, "It is not meant to be predictive." They do have a qualitative rating that IS meant to be predictive, but that is only available to subscribers of their service (like The Center!) Morningstar is one of our team's many resources in its investment process.
We hope this provides some clarity for when you see these ratings out in the wild. Don't fall victim to what hedge fund billionaire Ray Dalio calls "the biggest mistake in investing" by thinking that just because an investment has done well in the past, it will do well in the future.
Nicholas Boguth, CFA®, CFP® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
The information contained in this letter 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 Nick Boguth, CFA®, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. With the Morningstar rating system, funds are ranked within their categories according to their risk-adjusted return (after accounting for all sales charges and expenses), and stars are assigned such that the distribution reflects a classic bell-shaped curve with the largest section in the center. The 10% of funds in each category with the highest risk-adjusted return receive five stars, the next 22.5% receive four stars, the middle 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. Funds are rated for up to three periods--the trailing three, five, and 10 years and ratings are recalculated each month. Funds with less than three years of performance history are not rated. For funds with only three years of performance history, their three-year star ratings will be the same as their overall star ratings. For funds with five-year records, their overall rating will be calculated based on a 60% weighting for the five-year rating and 40% for the three-year rating. For funds with more than a decade of performance, the overall rating will be weighted as 50% for the 10-year rating, 30% for the five-year rating, and 20% for the three-year rating. The star ratings are recalculated monthly. For multiple-share-class funds, each share class is rated separately and counted as a fraction of a fund within this scale, which may cause slight variations in the distribution percentages. This accounting prevents a single portfolio in a smaller category from dominating any portion of the rating scale. If a fund changes Morningstar Categories, its historical performance for the longer time periods is given less weight, based on the magnitude of the change. (For example, a change from a small-cap category to large-cap category is considered more significant than a change from mid-cap to large-cap.) Doing so ensures the fairest comparisons and minimizes any incentive for fund companies to change a fund's style in an attempt to receive a better rating by shifting to another Morningstar Category. For more information regarding the Morningstar rating system, please go to https://www.morningstar.com/content/dam/marketing/shared/research/methodology/771945_Morningstar_Rating_for_Funds_Methodology.pdf 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. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Contributed by: Josh Bitel, CFP®
With the majority of 2023 already in the books, some procrastinators may have seen their New Year's resolutions come and go. Perhaps one of the most common areas of financial planning that clients drag their feet on is getting those pesky estate planning documents drafted. So let's talk about what happens if you don't have a valid will or trust in place when you pass away.
You are said to have died intestate if you pass without a valid will. Intestacy laws govern the property distribution of someone who dies intestate. Each of the 50 states has adopted intestate succession laws that spell out how this distribution is to occur, and although each state's laws vary, there are some common general principles. The laws are designed to transfer legal ownership of property that the recently deceased owned or controlled to the people the state considers their heirs. These laws also control how these individuals receive this property and when the property is to be distributed.
John is a Michigan resident and is married with two minor children. He keeps meaning to write his will but has yet to get around to it. One day, John gets hit by a truck while crossing Telegraph and passes away instantly. Because he has no will, the intestate succession laws of Michigan govern how his property is distributed. Under Michigan law, 50 percent of John's property passes to his wife, and 50 percent passes to John's two minor children (25 percent each). Had John had a will, he could have left everything to his wife.
Technical Note:
Real property is distributed under the intestacy laws of the state in which it is located. Personal property is distributed under the state's intestacy laws in which you are domiciled at the time of your death.
Cost
Intestacy can be more costly than drafting and probating a will. In most states, an administrator must furnish a bond, where you can often waive this requirement in your will. Also, an administrator's powers are limited, and they must get permission from the court to do many things. The cost of these proceedings is paid by your estate.
You can't decide who gets your property
State intestacy laws will determine who receives your property. These laws divide your property among your heirs, and if you have no heirs, the state will claim your property.
Unlike beneficiaries under your will, who can be anyone to whom you wish to leave the property, heirs are defined as your legal spouse and specific relatives in your family. If the state can find no heirs, it could claim the property for itself (the property escheats to (goes to) the state). The laws of your state determine the order in which heirs will receive your property, the percentage that each will receive, and in what form they will receive it, whether in cash, property, lump sum, annuity, or other form.
Special needs are not met
State intestacy laws are inflexible. They do not consider the special needs of your heirs. For example, minor children will receive their share with no strings attached, whether they are competent to manage it or not.
Heirs may be short-changed
The predetermined distribution pattern set out by state law can end up giving a larger portion of your estate to an heir than you intended for them to have. It may also leave one of your heirs with too little.
You can't decide who administers your estate
If you die intestate, the probate court will name an administrator to manage your estate. You will have no say in who settles your estate.
You have no say in who becomes a guardian for your minor children
A court will appoint personal and property guardians for your minor children since you didn't specify otherwise. You will also expose the assets you leave your child to the management skills of someone you may not approve of.
Relations take priority over friends and others
State intestacy laws will distribute your property to family members in a preset pattern. These laws do not consider your relationship with your family when dividing up your estate. As a result, that brother you may not have spoken to in 20 years may end up with a portion of your assets that you'd rather he not have.
Tax planning options are eliminated
Without a will or some other means of disposing of your property, you can't plan to minimize or provide payment of income or estate taxes.
The pattern of distribution varies immensely from state to state. You must check with your state to find out what its intestate's will looks like. Generally, the rules are as follows:
If you leave a spouse but no children, the spouse takes the entire estate.
If you leave a spouse and children, each takes a share.
If you leave children and no spouse, the children take the entire estate in equal shares.
If you leave no spouse or children, the entire estate goes to your parents.
If you leave no spouse, children, or parents, the entire estate goes to your siblings (or your siblings' descendants).
If you leave none of the above, the entire estate goes to your grandparents and their descendants (your aunts, uncles, and cousins).
If you leave no heirs, the next takers are your deceased spouse's heirs.
If there are no heirs on either side, the next to take is your next of kin, those who are most nearly related to you by blood.
If there are no next of kin, your estate escheats to the state
So as you can see, it pays to have your estate planning documents drafted. Not only can they provide you with peace of mind, but they can also save your heirs time and headaches when dealing with your estate. Talk to your advisor today to see whether or not you are properly covered!
Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.
This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. While we are familiar with the legal and tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on legal or tax matters. These matters should be discussed with the appropriate professional.
Contributed by: Nicholas Boguth, CFA®, CFP®
The markets can be described as cyclical, volatile, and full of booms and busts. Often those cycles seem clear as day when looking back on them through history, but they are much harder to identify in real-time. And even when most investors seem to be on the same page about what point of its cycle an investment is in, there is no telling just how far that investment can continue to climb or fall before it turns around. If many investors agree that Nvidia is in a “bubble” at ~35x price to sales, but its stock price climbs another 100%...were they right?
That cyclical nature creates an unpredictable stream of winners and losers every year, but it is important to recognize that it is just that…unpredictable. Today’s winning investments very likely could have been yesterday’s losers. Here are a few recent examples:
Energy was the worst-performing sector in 2020 (down over 30% while the market was generally positive). Then from 2021 through 2022, it ran up an incredible 150% (the next closest was healthcare at +23%)
The financial sector was the worst performer in 2011 but the best performer in 2012.
Real estate was the worst sector in 2013 but the best in 2014.
This trend has been common throughout history. Does that mean we just cracked the code? Just buy the worst-performing sector from the prior year and profit! Well, that doesn’t always work out either:
Energy was the worst-performing sector in 2019 and also the worst-performing sector in 2020.
Communications was one of the worst in 2013 and again in 2014.
Financials were the worst in 2007, and again in 2008.
The uncomfortable fact about the markets is that they are unpredictable, risky, and do not always seem to make sense at the moment, but with that risk comes reward. Trying to time market cycles is a losing game. We believe in creating an approach that positions our clients for success through every boom and bust in their lifetime. No one knows WHEN those booms or busts are coming, but we do know that they will happen sooner or later, and we want you to be prepared either way.
Nicholas Boguth, CFA®, CFP® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
The information contained in this letter 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 Nick Boguth, CFA®, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, 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. Individual investor’s results will vary. Past performance does not guarantee future results. 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.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.
Contributed by: Kelsey Arvai, CFP®, MBA
Contributed by: Michael Brocavich, CFP®, MBA
This year, Juneteenth will be observed on Monday, June 19th. The Center, Raymond James, and public trading markets, including NYSE, NASDAQ, Chicago Stock Exchange and bond, unit investment trust, options and mutual fund markets will all be closed in observance.
Juneteenth (which stands for “June nineteenth”) commemorates the day in 1865 that federal troops arrived in Galveston, Texas – months after the end of the civil war— to take control of the state and ensure that all enslaved people be freed. This came over two years after the signing of the Emancipation Proclamation. Although emancipation did not happen overnight for all the enslaved people in Texas, celebrations broke out among the newly freed, and Juneteenth was born. Slavery was formally abolished with the adoption of the 13th Amendment in December 1865.
Juneteenth signifies a historic day for Black Americans and is an important day for all Americans to observe as a part of our collective history. A landmark for social equity, we honor this day to commemorate Black freedom; reflect on how far we’ve come since; and acknowledge that work still needs to be done in the pursuit of social equity.
Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.
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.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Contributed by: Kelsey Arvai, CFP®, MBA
In May 2022, I wrote a blog about The Basics of Series I Savings Bonds (I-bonds). At the time of my blog, inflation had been steadily increasing, making I-bonds very attractive for a brief period. With inflation starting to slow, it may be time to review this investment. Here are a few factors to consider when considering I-bonds regarding your individual financial circumstances and investment goals.
Interest rates: I-bonds are affected by changes in interest rates. If interest rates rise, the fixed rate on I bonds may become less competitive than other investment options. For example, if you bought an I-bond between May 2022 and October 2022, you would have received six months of interest at 9.62%. For the next six months (November 2022 to April 2023), you received 6.48% of interest. The new rate for your bond beginning in May 2023 is 4.3%.
The minimum holding period for an I bond is one year; however, if you cash in the bond before a five-year holding period, the previous three months of interest is surrendered. As rates have steadily declined, now is the time to consider if it is time to cash in. Ideally, you would hold the bond for three months past the one-year mark to give up the lowest interest rate, especially if you purchased an I-bond between May 2022 and October 2022. For more information, you can visit Treasury Direct on their website.
As mentioned earlier, the current composite rate of an I bond issued from May 2023 through October 2023 is 4.30%. Other short-term and low-risk investment options, such as CDs and Money Markets, are currently yielding higher returns in the 4% and 5% range. Depending on your goals, the I bond may be less attractive.
Inflation: I bonds were designed to provide protection against inflation. If inflation is expected to remain low or decrease, the variable rate of the I bond may be lower, which could make other investments more attractive. With inflation starting to slow, moving into another investment option is something to consider.
Investment goals: If you need access to your money in the near future or if you have other investment goals that require liquidity, I bonds may not be the best option. Conversely, money market funds are highly liquid near-term instruments intended to offer investors high liquidity with low risk.
Diversification: It is generally a good idea to diversify your investments to minimize risk. If you have a large portion of your portfolio invested in I bonds, you may want to consider diversifying into other asset classes.
It is important to consult with a licensed financial advisor before making any investment decisions. Our Team of CERTIFIED FINANCIAL PLANNERS™ are happy to help; reach out to us at 248-948-7900!
Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.
The information contained in this letter 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 Kelsey Arvai, MBA, CFP® and not necessarily those of Raymond James. Expression 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. Individual investor’s results will vary. Past performance does not guarantee future results. 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.
Contributed by: Sandra Adams, CFP®
The year 2022 was a historically volatile market, with returns in both the stock and bond indexes ending in negative territory for the first time in many years. While 2023 has been positive year-to-date, we are not without continued volatility and concerns, including a possible recession, tax uncertainties, inflationary concerns, and the continuing military tensions abroad in Russia and Ukraine, amongst others.
I have a more significant number than normal of clients and prospective clients that seem "stuck" when it comes to making decisions about their money and investments in this market environment, almost appearing paralyzed by fear. The concern is that there could be greater harm in not doing anything in these situations than doing something. Let me explain.
The first situation is clients sitting in cash because that is where they feel their money is "safest." With these clients, as interest rates have begun to rise, they may still have cash sitting in bank accounts earning little to no interest and essentially "losing" buying power, as these dollars cannot possibly keep up with rising costs. Certainly, when markets are volatile, wanting to protect your hard-earned dollars from loss can be a top priority. However, not taking advantage of the rising interest rates on things like money markets, U.S. Treasuries, CDs, and instruments that can help earn extra interest on cash can harm a financial plan's long-term success. A commitment to slowly getting back into the market with a small amount of cash (via a dollar-cost-averaging strategy) can be a great way to ease someone back into a more traditional portfolio allocation once markets become more stable. In doing so, clients can get back on track to keep up with the returns they need to meet their long-term financial goals.
The second situation is clients who were relatively aggressive in their investment accounts prior to 2022 (i.e., in their former employer 401k accounts), and now that their accounts are down, they are afraid to make any changes in the portfolio allocations "until" the market comes back. Again, this is an example of seeming paralyzed by fear. It could take many years for the current account to come back, and the question is, are we in the right allocation for your current situation to be leaving it there? If not, perhaps it is better to move on and reallocate to a more appropriate allocation, or if appropriate, roll the 401k over to an IRA and have someone more actively watch it for you on an ongoing basis.
Positive markets are indeed much easier to invest in and to make decisions around. However, when we have volatile markets, we cannot get stuck and be paralyzed by fear, causing our financial plans to fail in the long run. If you or someone you know is feeling stuck and needs to talk to someone about options, please reach out to one of our financial planners for a conversation. 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.
The information contained in this letter 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 Sandra D. Adams, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, 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. Individual investor’s results will vary. Past performance does not guarantee future results. 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. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.
Contributed by: Nick Defenthaler, CFP®, RICP®
Several years ago, after starting a new relationship with a newly widowed client, I received a confused phone call from her. She had received communication from Medicare that her Part B & D premiums would be significantly increasing for the year. To make matters worse, she also noticed when filing her most recent tax return that she was now in a much higher tax bracket. What happened? Now that her husband was deceased, she was receiving less in Social Security and taking fewer withdrawals from her retirement accounts. Her total income had decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she was a victim of what’s known as the “widow’s penalty.”
Simply put, the widow’s penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse’s death.
When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. Additionally, they will lose any other income tied only to the deceased spouse, such as employment income, single-life annuity payments, or pensions with reduced or no survivor benefits. Depending on how much income was tied to the deceased spouse, the surviving spouse’s fixed income could see a sizeable decrease.
At the same time, the surviving spouse starts receiving less income, and they find themselves subject to higher taxes.
With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married filing jointly in the year following their spouse’s death. In 2023, that means they will hit the 22% bracket at only $44,725 in income. Married filers do not reach the 22% bracket until they have more than $95,375 in income. Unfortunately, even if income remains the same, widowed tax filers will inevitably pay higher tax rates on this same income level.
Tax brackets are not the only place surviving spouses are penalized. Like the client in my story above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Specifically, single filers with a modified adjusted gross income of more than $97,000 are required to pay a surcharge on their Medicare premiums, whereas there is no surcharge until a couple who is married filing jointly reaches $194,000 of income. This means that a couple could have an income of $120,000 and not be subjected to the Medicare IRMAA surcharge, but if the surviving spouse has an income of $100,000, their premium will increase by almost $1,000 per year. In this same example, the widow would now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying $3,600 more in federal tax!
Short of remarrying, there is no way to avoid the widow’s penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.
For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse’s lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.
Several years ago, I was working with a couple (we’ll call them John and Mary), and after several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John’s passing. Several months after her husband’s passing, I met with Mary and suggested we convert over $100,000 from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes along with the significant medical deduction that was only present the year John passed, Mary only paid an average tax rate of 10% on the $100,000 we converted. As we stand here today, Mary is now filing single and finds herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates are set to expire at the end of 2025!)
The widow’s penalty should be on every married couple’s radar. While it’s possible that while both spouses are living, their tax rate will always remain the same, as we’ve highlighted above, unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning could help to dramatically reduce the impact this penalty could have on your plan.
Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.
Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.
The information contained in this blog has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Contributed by: Mallory Hunt
Three to five years ago, we would be singing a different tune, talking about capital gains and how to minimize your tax drag during the bull market. These days, we may be looking at capital losses (like those likely carried over by many investors after 2022) from this tumultuous market. Given the recent market downturn, tax loss harvesting is more popular than ever. While investors can benefit from harvesting losses at any time, down markets may offer even greater opportunities to do so. Investors who hold securities in taxable accounts (i.e., not your retirement accounts) can harvest losses that may benefit them in a couple of different ways depending on their specific situation. So let's look at the ins and outs of the unsung hero and how to use it to your advantage.
Tax loss harvesting is an investment strategy that can turn a portion of your investment losses into tax offsets. The strategy is implemented by strategically selling stocks or funds at a loss to offset gains you have realized or plan to realize throughout the year from selling other investments. The result? You only need to pay taxes on your net profit or the amount you have gained minus the amount you have lost. In turn, this reduces your tax bill. When and if capital losses are greater than capital gains, investors can deduct up to $3,000 from their taxable income. This applies even if there are no investment gains to minimize for the year, and harvested losses can also be used to offset the taxes paid on ordinary income. If net losses for a particular year exceed $3,000, the balance of those losses can be carried forward and deducted on future tax returns.
With the proceeds of the investments sold, similar (but not identical) holdings are usually purchased to help ensure your asset allocation and risk profile stay unchanged while you continue to participate in the market. These newly purchased investments are typically held for a short period of time (no less than 30 days) and are then, more often than not, sold to repurchase those holdings that we sold at a loss initially. Do take heed of the wash-sale rule to ensure the proper execution of the strategy. This rule prohibits investors from selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale. The IRS provides a substantially identical definition and, unfortunately, has not been very clear on what is determined to fall into that category, leaving a lot of gray area. If the same investment is purchased before the wash sale period has expired, you can no longer write off the loss. However, the opportunity is not lost as the loss will be added back to the cost basis of the position, and the opportunity to harvest the loss at a later date is still an option.
Keep in mind that your capital gains taxes on any profits are based on how long you have held an asset. Long-term holdings held for one year or more will be taxed at long-term capital gains tax rates (0%, 15%, or 20%, depending on your taxable income and filing status), which generally tend to be lower than short-term capital gains tax rates. Short-term assets held for less than one year will be taxed at the same rate as your ordinary income (10%-37%). Investors in higher tax brackets will see the most significant benefits from tax loss harvesting as they will save more by minimizing taxable gains.
If you want to harvest losses, transactions must be completed by the end of the year you wish to realize the losses. For example, if you want to harvest losses from 2021, transactions would have needed to be completed by December 31, 2021.
In the end, tax loss harvesting is one way for investors to keep more of their investment earnings. According to researchers at MIT & Chapman University, tax loss harvesting was calculated to yield, on average, an additional 1.08% annual return each year from 1926 to 2018*. Overall, this is a time-tested strategy and potentially helpful tool, particularly during down markets. Consider speaking to your Financial Planner about how they implement this strategy, and always consult a tax advisor about your particular tax situation.
Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.
While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
The information contained in this letter 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 Mallory Hunt, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, 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. Individual investor’s results will vary. Past performance does not guarantee future results. 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.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.
Contributed by: Sandra Adams, CFP®
When we hear the term widow or widower, we picture someone older – someone deep into their retirement years. The reality is, according to the U.S. Census Bureau, the average age of a widow or widower in the U.S. is currently 59-years-old. In my recent experience with clients, I have seen the statistics become reality. Clients becoming widowed well before their retirement years has, unfortunately, become increasingly common. The issues involved with this major, and often unexpected, life transition are not simple and are hard to go through alone.
If you are one that is left behind, there are several action steps that should be taken to get back on your feet and feel financially confident. In most cases, this is the woman (according to the U.S. Census Bureau, 32% of women over age 65 are widowed compared to 11% of men). There is no timetable for when these steps should be taken – everyone grieves in their own time and everyone is ready in their own time to move on and make sound financial decisions at different times. No one should be pushed into making financial decisions for their new normal until they are ready.
The first step is identifying sources of income. For young widows or widowers, you may still be working, but may have lost a source of income when your spouse passed away. Looking at where income might come from now and into the future is important. For young widows, life insurance is likely the source of the replacement for lost income. If you are closer to retirement, you may also have Veteran’s benefits, employer pension benefits, savings plans, home equity, income from investments, and Social Security.
The second step is to get your financial plan organized. Get all of your documents and statements put together and review your estate documents (update them, if needed). A big part of this is to update your expenses and budget. This may take some time, as your life without your spouse may not look exactly the same as it did with him/her. Determining what your new normal looks like and what it will cost may take some time to figure out. And it won’t be half the cost (even if you don’t have children), but it won’t be 100% or more either – it will likely be somewhere in between. Figuring out how much it costs you to live goes a long way toward knowing what you will need and how you will make it all work going forward. Your financial planner can be a huge help in this area.
The third step is to evaluate your insurances (health and long-term care). These costs can be significant as you get older, and it is important to make sure you have good coverage. For younger widows, those that are still working may have health insurance from their employer. If not, it is important to make sure you work with an agent to get counseling on the best coverage for you through the exchange until you are eligible for Medicare at age 65. And for long-term care, if you haven’t already worked with a financial planner to plan coverage and are now widowed – now is the time. Single folks are even more likely to need long-term care insurance than those with a partner.
The fourth step is to work on planning your future retirement income. Many widows don’t think enough about planning for their own financial future. What kinds of things should you be talking to your adviser about?
Income needs going into retirement
The things you would like to do in retirement/their retirement goals (travel/hobbies, etc.)
What financial resources you have now (assets, income sources, etc.)
Risk tolerance
Charitable goals, family gifting goals, etc.
You can work with the adviser to design a tax-efficient retirement income plan to meet your goals with appropriate tools based on tax considerations and risk tolerances, etc.
And the fifth step is to evaluate housing options. We often tell new widows not to make big decisions, like changing homes, within the first year or two. However, many decide that they want or need to move because the house they are in is too big or they just need to make a move. Housing is roughly 40 – 45% of the average household budget – decisions need to be made with care.
For all widows, going it alone can be difficult with a lot of decisions and time spent alone. For many, it is going through the process of redesigning retirement all over again, now alone, when it was meant to be with your long-time partner. And learning to live a new normal and planning the next phase of life that looks entirely different than the one you had planned. With the help of a professional financial adviser, the financial side of things can be easier – the living part just takes time.
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.
Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Sandra D. Adams and not necessarily those of Raymond James.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.
The information contained in this blog has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
