Category Archives: Financial Planning

Are Trump Accounts A Good Choice???

Posted on by
Reply

When I was growing up, it was common for children to get a gift of a savings bond from relatives for milestones like your birthday or other occasions.  The cool relatives gave you games and toys.  Most of my peers that received the bonds couldn’t wait to turn 18 and be able to cash them in to add to their car fund.  I was not so fortunate.  The accrued interest on the bonds was taxable at redemption.  There were no other gimmicks or restrictions.

The Trump Accounts went live this week.  Before every parent goes gaga let’s take a closer look at them. 

If you are the parent of a child who is or will be born in the years 2025 through 2028, the US Treasury will put $1,000 in the account for each child and Michael Dell is going to add some additional funds if you live in a neighborhood that isn’t considered rich.  It’s free money, so accept it – you can’t lose on that.  Of course, the Treasury is borrowing this money, so your kids and even their kids will have to pay it back in their taxes.

For them and the rest of the nation’s youth, you can now contribute up to $5,000 per year until the child reaches 18.

Some of the rules are:

  • Your contribution is with after tax funds.  No deduction.
  • Interest and gains are tax deferred and paid on withdrawal.
  • Generally, no withdrawals are allowed until age 18.
  • The accounts turn into a traditional IRA at age 18.
  • Like IRA’s, most withdrawals prior to age 591/2 will be subject to a 10% penalty
  • They allow penalty free withdrawals for educational expenses and first-time house purchases, like regular IRAs.
  • Withdrawals of interest and gains are taxable as ordinary income.

So, is this a good deal for your kids?

  • The account holder gets only a deferral of income taxes which is only the time value of money on the tax that accrues each year. 
  • The restrictions are numerous.
  • Distributed gains are all ordinary income, which is taxed at the highest marginal rates, rather than capital gains and dividends which are taxed at a lower rate.
  • IRAs are currently not reported on the FASFA, so it’s likely Trump Accounts will not impair financial aid eligibility.

Everyone is different, but in general, I would say most kids will do better if you put funds in a UGMA account, trust, or just keep them in your name and give them the funds as a gift when they turn 18 or even a bit older.  The tax benefits of the Trump Accounts are marginal at best and penalizing at worst. They will have much more freedom and flexibility in other investment vehicles.

At that point they receive the funds the child will have the option of putting the funds in a Roth IRA, using as much of it as they wish toward a home purchase, or even start a business.  Of course, there is always the dream car at the local dealership.

The Bottom Line:  Trump Accounts May Not Be As Good As Advertised.

–Michael Ross, CFP®

A Gift From The IRS…

Posted on by
Reply

A Gift From The IRS…

Were you assessed Failure to File, Failure to Pay, or Estimated Tax Penalties, or Underpayment Interest by the IRS associated with the tax periods from January 20, 2020 through July 10, 2023?  If so, you may be eligible for a refund.

In a recent landmark court case, Kwong v. United States, the US Court of Federal Claims ruled that the Federal Disaster Declaration in effect during that period prohibited the IRS from levying those penalties and interest on taxpayers.

The IRS will not automatically send refunds.  You must file Form 843 by July 10, 2026 to protect your right to this refund.  You will need to obtain your tax transcript from the IRS to get the exact information needed to complete the form.  The transcript can be requested online at irs.gov. 

It is possible to complete this yourself, although your tax preparer may have an easier time of it.  It’s also important to note that the IRS has appealed this decision, so processing these forms will certainly be delayed and may never happen depending on what the appeals court rules.

You have your assignment and only two weeks to complete this by July 10th.  Get cracking.

The Bottom Line:  Don’t Miss The Deadline.

–Michael Ross, CFP®

Convert The Dip…

Posted on by
Reply

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…

Posted on by
Reply

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…

Posted on by
Reply

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…

Posted on by
Reply

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…

Posted on by
Reply
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…

Posted on by
Reply

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…

Posted on by
Reply

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…

Posted on by
Reply

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.