Category Archives: Financial Planning

Convert The Dip…

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Many of you may be familiar with the “Buy the Dip” strategy certain investors use.  It means that when a security or general market takes a dip in price, they use it as an opportunity to invest more money at a lower price – taking advantage of a temporary discount.  In other words, they see it as being on sale.

Deciding whether to convert a traditional IRA or 401(k) into a Roth is often a complex decision.  The decision process must consider current and future projected income, tax rates, deductions, tax preferences and other related programs such as student financial aid and Medicare costs.   Frequently, when a conversion strategy is developed for larger accounts, it will be executed over several years, to avoid moving into high tax brackets and loss of other preferences and benefits.

When a conversion is executed, it is usually done by transferring the current assets from the traditional account into the new Roth account, rather than liquidating the assets and transferring cash.  The income that is recognized is the value of the assets on the date of transfer.  The value being transferred is taxable to the account holder in the year the transfer is made.  Often, the plan will include transferring the assets with the highest short-term appreciation potential first to reduce the income recognized at transfer time.

Now let’s circle back to Buy the Dip.  Once a decision is made to convert a certain value of assets in a given tax year, it is a smart strategy to transfer those assets when their value is low.  That means more assets can be transferred with the Financial Plan’s dollar limit for that year.

Next time your favorite investment in your traditional IRA or 401(k) takes a dip, instead of just buying the dip, Convert the Dip.  When it recovers in price, the gain will be tax free forever.

The Bottom Line:  Convert That Dip.

–Michael Ross, CFP®

I Don’t Know and Neither Do You…

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I Don’t Know and Neither Do You…

On November 5th we will all head to the polls  At stake is control of the Federal government for at least the next two years.  Hopefully, on November 6th we will know the results.

From a Tax and Financial Planning standpoint there are only 3 possible outcomes.  One party controls both the House and Senate and wins the White House (that’s 2), or we get split government.  The outcome will create many predictable events, laws and policies that are likely to affect the Financial Planning of almost everyone. 

Before I break down the different paths, I want to share some facts that are important to know.

 First, the individual portion of the 2017 Tax Cut & Jobs Act (TCJA) will expire on 12/31/25.  This means for 2026 the individual portion of the tax code will revert to the Obama era tax code.  Included in this are higher tax rates, lower estate and gift tax exemptions, higher capital gain taxation, and the elimination of section 199A – Pass through deduction  for small business owners to name a few biggies.

The party controlling the Senate will only need a simple majority to pass budget items (taxation and spending), unlike the usual 60 votes for almost all other legislation.

Regardless of who the winner is, there will always be some horse trading on minor items at the margin, those bi-partisan issues that they find some agreement on.

Now let’s take a look at the 3 possible scenarios and possible strategies:

A Republican Red Sweep.

  • The TCJA will be extended and made permanent.  I will guess pretty much as is.
  • The SALT deduction limitation may be amended, as it is not popular with Republican legislators from Blue states.
  • Tips and Social Security earnings may become tax free.
  • There may be some move to shore up Social Security, but through raising the retirement age (down the road), rather than through higher taxation.
  • Because changes are likely to be minor, most people will not have much planning to do in anticipation of tax code reform.  It is important to remember that personal income tax rates are not likely to decrease from these levels and will still have a future risk of going up from here.

Split Government.

  • The TCJA will expire and higher tax rates will go into effect for individuals and pass though small businesses for 2026.
  • It is not likely that there will be much modification to the reversion other than the aforementioned horse trading.  There could be some trade-offs between taxation and spending as well.
  • As tax rates will be going up, there are some general strategies that could benefit many people although because everyone is different there may be tradeoffs for some.
  • You will have two tax years (24 & 25) to plan implement these strategies.  That is an advantage allowing income acceleration to be spread out avoiding tax bracket creep.
  • Some specifics:
    • Accelerate ordinary income where possible.  Paying taxes at a lower rate will usually be worth more than the time value savings of deferral.
    • Consider recognizing capital gains while the rates are lower.  From a tax perspective, it may be time to sell your business or other assets such as highly appreciated stocks or investment real estate.  Exercise stock options.
    • Convert your traditional IRAs to Roth’s.  Change your 401(k) contributions to a Roth.
    • If you have assets in the $12 Million+ range, you might consider gifting some of them while you can take advantage of the higher gift tax exclusion.  You might also consider selling the assets, paying the lower cap gains rates and gifting the cash, so your heirs don’t have to pay higher rates at a future date.
    • Defer losses.  They will be worth more when rates are higher.
    • Defer charitable donations.  They will be worth more when rates are higher.
    • Analyze whether it may be prudent to convert your closely held pass through business to a C Corporation which will pay tax at 21%, in light of the expiration of the QBI.

A Democratic Blue Sweep.

  • The Democrats would likely attempt to raise taxes beyond the pre-2018 Obama rates.
  • Some of their proposals include:
    • Increasing the Medicare surtax from 3.8% to 5%.
    • Eliminating the cap on Social Security taxes (FICA).
    • Eliminating or capping the step up in basis on inherited assets.
    • Taxing some capital gains as ordinary income.
    • Unlike the other two scenarios, raising corporate taxes as well.
  • The strategies would be largely the same as under split government, but even more critical for many taxpayers.

It’s important to remember that today anything is possible.  On November 6th, we will have a good idea about what is probable.

The Bottom Line:  On November 6th, we will all know.

–Michael Ross, CFP®

Back To School…

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Do you have a college student headed back to school, or going for the first time?  If so, this might apply to you.

Most people know that their aging parents should have a few documents as part of their Personal Financial Planning.  A Health Care Proxy, which allows someone to make medical decisions for them if they become incapacitated and they can’t.  A HIPAA Authorization, which would allow a medical practitioner to discuss their care with someone else.  A Durable Power of Attorney, which would allow someone else to handle financial and business affairs on their behalf if they are unable to, or wish someone else to do it on their behalf.

Aging parents often appoint one or more kids to do this so the powers are there in case they are needed or wanted.  What about College Students, or Young Adults?

You may not have thought about this, but when your child turned 18, you lost most of the legal power you held from the time they were born.  You no longer automatically have the power to make legal, financial or medical decisions on their behalf. 

Your child may be hundreds or thousands of miles from home.  While some of the aging parent fears, such as strokes, dementia, falls, etc. don’t apply much with young adults, things do happen.  We don’t want to think about it, college students sometimes get in serious accidents, or legal trouble.  When they do, they may not be in a position to make or execute decisions for themselves. 

Having these documents and the powers they grant to you can be priceless in a crisis situation, saving critical time or even avoiding a judge making a decision.

These documents are fairly standardized, and although they can vary from state to state, they can be modified and adapted to meet your needs.  If your child is attending school in another state, most states will accept documents properly executed in their home state, but you might want to inquire.

It’s a simple process to execute these.  Most attorneys will handle this for a nominal fee.  There are self- serve template documents as well, but a mistake could be a problem when you really need them.  Your child must agree to granting these powers to you. 

If you have a child on the fence, it might be helpful to let them know that they can rescind these powers at any time.  It’s also a good opportunity to push them further into the adult world.

The Bottom Line:  Welcome to the real world.

–Michael Ross, CFP®

Beware A Banker Bearing Gifts…

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The other day, I got a glossy advertisement in the mail.  It was from a local bank that was offering me a “Premier Relationship.”  If I deposited $500K or more into a Premier Checking Account by May 21st, and kept the money there for at least 90 days, I would get a bonus of $3,500.

It sounds good so far.  They also promised waive a monthly $35 fee (which sounds steep to me), give me no ATM fees, and 24/7 phone support.  I read the fine print, got my pencil and a calculator out, and started working the numbers.

The actual interest on the account is 0.01% APY – yes you read that right.  The $3,500 bonus is only 0.7% simple interest if I kept the money there 90 days or more.  So on an annualized basis (assuming I could get future bonuses), the compounded interest rate would be under 3%.

For comparison, a 90 day T Bill will currently yield an annualized rate of over 5.3%, and that’s state income tax free (if you are in one of those states that imposes such a tax).  Amazingly, I bet there are people that are flocking to take advantage of this.  Don’t be one of them!

This is another great reason to have a competent Financial Planner who won’t let you make mistakes like this.

The Bottom Line:  This is an offer you can refuse. 

–Michael Ross, CFP®

Just Give Me The Best Deal…

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Hotel entrance sign

When I relocated my business to Florida in 2014, I kept a small office in New York to service my NY clients.  Up until that point, I had never done much business travel – just a conference here and there.  Once I was based in Florida, there was a need for me to travel to New York from time to time to see clients located there.

I made it a point to book my hotel stays using Hotels.com.  They were easy to use and they offered a 10% rewards program.  For every 10 nights I booked, I got a rewards voucher for a free night at the average room cost for the 10 nights.  Over the years, I had accumulated 6 nights – I would imagine the value of the vouchers was over $1,000.  As a bonus the vouchers would be tax free.

When the pandemic hit, like most people I stopped traveling to New York.  With the rise in the acceptance of Zoom, I decided to close our New York office and meet with those clients via conference call. I would only travel up to in person meetings in the most necessary or critical situations.  As you might expect, my hotels.com bookings plummeted.

In the back of my mind, I always intended to use my 6 vouchers.  This week I decided to check on their value, and incorporate that into a potential family trip in March.  When I logged on, I learned the previous rewards program had been terminated and rolled into a new program with Expedia (a sister company) and some Airbnb clone they are associated with.  Much to my dismay, I had about $25 in the kitty.  I recall no notice of this change being sent out.  It’s important to remember that these companies don’t exist primarily to make their customers happy.  They exist to reward their shareholders.

It’s not worth getting angry.  I am sure buried in the fine print their lawyers had written rules that allowed them to do this.  The airlines are infamous for doing this also.  There is a lesson here…

Cash on the barrel!  Find the best deal and don’t worry about non vested rebates.  Under these circumstances I would have been better off using sites like Priceline and Hotwire and gotten a slightly better deal on the rooms I booked.  Going forward I will not make purchase decisions based on points, miles or vouchers.  Just give me the best deal.

The Bottom Line:  Learn From My Mistakes.

–Michael Ross, CFP®

George Washington Had It Right…

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Lying to a client or prospect is never good in business, but it’s an especially bad way to start a relationship.  I received an email today from “Victoria Lopez” at “Growth Titan”.  The subject said:  “Michael, just pinged your Linkedin”.  It opens with “I messaged you on Linkedin to arrange a call, but thought this might be better”.  Of course I received no such message or connection request in LinkedIn.

Victoria is in the lead generation business.  I am inundated on a daily basis with pitches from firms that want to set up appointments for me with prospective clients.  It’s not a service I am interested in.  I guess Victoria is just trying to get everyone’s attention.  Unusually for me, I did open her email.

Once I realized she opened with a lie, I had no interest in anything she had to say.  Even if she was selling something I needed or wanted, how could I trust her?  Would you?  It’s also an industry that doesn’t have the best reputation.  Stories of the same lead being sold to multiple customers are common and many are not screened for whether they are a match to what the person or firm on the other side of the desk does or the type of clients they work with.  In other words, bad apples give the industry a bad rap.

This got me thinking about my own profession.  In the broadest “big-tent” category of “financial services”, there is a well deserved lack of trust.  There are squadrons of sales reps pushing all types of financial products and services.  Most are held to a suitability standard – meaning the product or service has to be something that you might need or benefit from.  Consumers end up with purchases that have little value to them, cost too much, and are far from the best solution to their problem, to name a few shortcomings.  They often get the “this is the greatest thing since sliced bread” sales pitch and a stack of legalese disclosures that they don’t understand and hence usually don’t read.  Any questions they do ask are often glossed over.  Bad apples again give everyone a bad reputation.

My space in the tent is very different.  As a Financial Planner and Wealth Manager I work differently.  Federal and State regulations, as well as those of the CFP Board of Standards who issued my certification as a CFP®, require me to work as a Fiduciary.  It is the highest standard in dealing with my clients.  If you are not familiar with the Fiduciary Standard – you can read more here: http://www.financialconnectioninc.com/fiduciary-standard 

I realize my most important value to my clients is my fiduciary duty – an unwavering dedication to putting their needs and interests first in all cases.  In a world full of sharks, I will always be their lifeboat.

The Bottom Line:  There is always room in my lifeboat.

–Michael Ross, CFP®

Don’t Assume…

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When I was in High School, my health teacher (and lacrosse coach) once wrote the word Assume on the blackboard.  He said “when you assume, you make an Ass out of U and Me”, as he separately underlined the three parts of the word.  You could have heard a pin drop – even in a class where we had watched a film of a baby being born.  Teachers didn’t say Ass back then – at least not in class, although on the lacrosse field his language was frequently a bit more colorful.

Once we all got over the shock, I realized there was wisdom on the blackboard.  What he was really trying to convey is Knowledge Is Power.  However, I doubt if he had written that on the board, I would remember it decades later.  I also now realize if he had trademarked the U as a synonym for You, he would have made a killing when texting was ultimately invented.

It involves getting a verification confirmation via snail mail, so it can take a few weeks.  However, once you are registered you can log on and get your info any time, which you should do annually, even if just to check the accuracy of their records.  It’s important to know where you stand and incorporate reality into your planning.

I am sharing this wisdom to emphasize the importance of knowing the facts of where you stand financially.  This is a cornerstone of the Financial Planning process.

One assumption many of our clients and friends often make is what their Social Security benefit will be when they begin to collect.  While claiming strategy is often a complex decision, your estimated benefits should not be a guess.  An inaccurate assumption here can really harm your retirement plan.  It’s information we will collect from every Financial Planning client.  Whether you retain a Financial Planner or do it yourself, you can get this information.

The Social Security Administration sends out an annual statement (SSA-7004) to all taxpayers over the age of 60.  That’s a bit late to start incorporating that info into your planning.  Everyone can get one by going here:  www.ssa.gov/myaccount.  The registration process is cumbersome as it combines government bureaucracy and inefficiency with the financial sectors fraud paranoia.  You will need a Drivers License, and verifiable street and email addresses.  The DNA sample requirement proposal did not pass the Congress. 

It involves getting a verification confirmation via snail mail, so it can take a few weeks.  However, once you are registered you can log on and get your info any time, which you should do annually, even if just to check the accuracy of their records.  It’s important to know where you stand and incorporate reality into your planning.

The Bottom Line:  Knowledge Is Power In Your Financial Planning.

–Michael Ross, CFP®

Goals Are Important…

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Goal setting is one of the cornerstones of Financial Planning.  Sometimes something in my own life reminds me just how important.  While this isn’t Facebook, please allow me to share.

I have always been a runner.  It was necessary in my younger athlete days for stamina and great for my health as I have aged.  I also find I do some of my best thinking while I am running – if I could only remember everything I think of when I get back. 

About three decades ago, I started logging my running.  I can still look up every day I ran, where, how far and how fast.  The only goals I would set were how far, or how fast on a daily basis.

As 2020 came to a close, I noted that in all the years I had never run more than 320 days – meaning I always averaged one day or more a week off.  Those would be rain days, snow days (up north), illness, injury, business travel, or just plain laziness/lack of motivation.  I decided that I would try to run every day in 2021 – not missing a single day.  It quickly became an obsession and I just ran on those days I formerly would have skipped a day or week or more.

At the end of the year I had successfully completed my goal.  I decided to do it again in 2022.  Another success.  This year I realized that I would soon have run for 1,000 consecutive days.  That day was today!  I ran every day through thunderstorms, in the dark on those early start days, with minor injuries, and even when I finally caught Covid a few months back.  We didn’t get one, but I’m pretty sure I would have gone for it had we had a hurricane.

This process reminded me how powerful goal setting can be.  My goal was defined, reachable, measurable, and I kept pushing it higher.  I made myself accountable.

It reminds me how important goal setting is with my Financial Planning clients.  Financial Planning is a process.  Goals are where you want to go.  Once you establish that, discipline and execution are how you get there.

Successful Financial Planning demands definable, reachable and measurable goals.  It is the motivator to be disciplined and sometimes do the things that are not easy, like living within a budget.  If you are willing to set goals, and be disciplined and accountable, you are a candidate to succeed in your Financial Planning journey.  Are you ready to try?

What Are Your Goals?

The Bottom Line:  Goals are important both in life and your Financial Plan.

Attention Florida Homeowners…

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If your home is currently insured by Citizens Insurance (the State run company), you may be one of the 304K policy holders that will receive a “takeout” letter from Citizens.  This will contain an offer from a private insurer to take over your insurance from Citizens on October 17th.

If the offer is over 20% greater than your current Citizens premium, you can opt to stay with Citizens.  You need to notify them by October 10th if you wish to stay.

If the offer is less than 20% greater than your current Citizens premium, your insurance with Citizens will end on October 17th.  If you do nothing, the takeout insurer will become your new insurer on that date at the new premium.  You also have the option to find another carrier on your own, but you will need to notify Citizens by October 10th.  An insurance agent representing the new company you select should be able to do the notification for you.

It is important that you do not ignore this letter.  As a closing thought, I’m not sure why they would do this during hurricane season.  The chaos of so many new policy holders having claims just days after the switch date would be insane.

The Bottom Line:  Read the takeout letter, and explore your options.

–Michael Ross, CFP®

Resist The Temptation…

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It’s finally time to get a new car.  The supply shortages have eased and there is inventory. 

But, a few things have changed…

Prices are much higher, and interest rates have skyrocketed.  The average new car sells for over $45K and interest rates are in the 8-10% range.  Even used cars are far more expensive.

If you have a 401(k) plan, you may be able to take a loan from your plan to finance the new car.  Most 401(k) plans allow for participant loans.  Some rules and rates are set by your individual plan, but regulations say a plan loan cannot exceed 5 years or $50,000.  You also must make level payments at least quarterly.

There are some alluring advantages to using a plan loan to finance a vehicle purchase.  Interest rates are often lower than bank sourced auto loans.  You are paying interest to yourself, in a period where your portfolio may not be growing much due to market and economic conditions.  It doesn’t affect your credit score, and there is no lean on the vehicle title.  What’s not to like?

The plan loan comes with a big risk.  If your employment terminates for any reason, the entire loan balance becomes due.  Depending on the plan, it’s usually immediately or at months end.  It does not matter, why your employment terminated.  Whether you quit, got fired, or laid off, it’s all the same – the balance is due.

If you do not repay the loan, it will be considered a plan distribution.  That means it becomes taxable income, subject to ordinary income tax and a 10% penalty if you are under age 59 1/2.  Depending on your financial situation, that can range from an annoyance to a nightmare.  It carries risk under good economic times, and can influence a decision on whether to switch jobs.  Now that the economy faces some risk of a recession, a layoff is not when you want a large bill, either loan repayment or tax.

Everyone has their own financial situation and plan.  Depending on yours, you may be better off resisting the temptation of a plan loan.

The Bottom Line:  Evaluate all the risks of a 401(k) plan loan.

–Michael Ross, CFP®