March 25, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for March 25, 2024

Navigating Tax Withholding – A Guide for Retirees

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss navigating tax withholding for retirees. When you retire, you have various sources of income, and you can choose to either withhold the tax on them, make estimated tax payments throughout the year, or do a combination of both.

 

Navigating Tax Withholding – A Guide for Retirees

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

Navigating Tax Withholding – A Guide for Retirees

Taylor Wolverton joined us on our podcast this week, and for those who don’t know, she’s our go-to person for everything taxes. This week we’re discussing tax withholding, which can change considerably when you retire.

While you’re working and earning a salary, your employer handles tax withholdings. When you retire and transition to multiple sources of income, it’s worth reviewing your tax situation to be sure you’re withholding enough to avoid any surprise payments and/or penalties due at the time you file your return.

What is Withholding vs Estimated Tax Payment?

There are two main ways to pay taxes (you can do a combination of both) which include:

  1. Withholding from income sources
  2. Making estimated tax payments

For our first method, taxes can be withheld from pensions, social security, IRA distributions, etc. Once you have your withholdings set up properly, this option requires the least amount of effort to maintain.

Estimated tax payments are another option and are due quarterly. At the time your tax return is filed, it’s common for your CPA / tax preparer to help you estimate how much you’ll need to pay every quarter with vouchers listing the amount to pay and when you need to pay it. You can go to IRS.gov and your state government website to make your quarterly payments.

The payment due dates are not even quarters and are:

  1. April 15th (for tax due on income received January 1 – March 31)
  2. June 15th (for tax due on income received April 1 – May 31)
  3. September 15th (for tax due on income received June 1 – August 31)
  4. January 15th (for tax due on income received September 1 – December 31)

The IRS requires taxpayers to ‘pay as you go.’ For example, if you sell highly appreciated stock before the end of March, the IRS requires that you make an estimated tax payment for the tax due on that sale of stock by April 15th of the same year. If you sold the stock during the month of November, your estimated tax payment would be due by January 15th of the following year. The potential consequence of not making estimated tax payments on time is underpayment penalties from the IRS which will be determined and reported on your tax return once it has been filed.

What You Need to Think About: Social Security

Social Security is something we review with our clients annually. You might receive your benefits immediately and your spouse years from now, so there may be a transition period for some families to consider.

The default withholding amount on Social Security is 0%. If you don’t make an election to have federal taxes withheld from social security, you may need to pay quarterly taxes on the income. We have an entire episode on taxation of social security benefits (listen to the podcast or read the blog post) if you’re interested.

Most benefits will be taxable on the federal level, but each state varies on whether they will tax social security benefits or not. The state of North Carolina does not tax social security.

If you want to withhold taxes from your Social Security, you can Google “form W-4V” or go to the IRS site (here). It’s an easy form to fill out and will allow you to start withholding taxes, with options for:

  • 7%
  • 10%
  • 12%
  • 22%

Once you fill out the form and submit it to the social security administration office, taxes will automatically be withheld. If you want to stop withholding taxes, you’ll fill out the same form again but ask for the withholding to stop.

It is not possible to withhold state tax on social security.

What You Need to Think About: Pension Income

Not everyone will have a pension, but if you do and want to begin withholding taxes from your pension, you’ll need to fill out Form W-4P. You’ll often receive the form from where your pension is coming from, such as the government or a union, but you can also find it publicly available online.

Unfortunately, the form is not as straightforward as the social security withholding form, and it’s more of a guide to approximate withholding taxes.

We recommend using the IRS Tax Withholding Estimator, which will help you fill out the form.

What You Need to Think About: IRA Distributions

An IRA is an interesting form of income because you contribute to your IRA for so long, and then in retirement, may begin withdrawals to cover expenses, and/or be forced to withdraw through required minimum distributions (RMD).

Clients turning 73 begin RMDs for the first time and will owe federal and state tax on those distributions. The amount of the RMD, the associated tax liability, and appropriate rate for withholding is a conversation we often have with clients.

If you’re starting recurring monthly distributions from an annuity, the most common default federal tax withholding is 10%. You can fill out Form W-4R to withhold an amount other than 10% or not withhold taxes at all.

What You Need to Think About: Income Not Eligible for Withholding

Some forms of income are not eligible for withholding. Some of these sources of income include interest (from a money market account, CD, checking account, and/or savings accounts) dividends, capital gains, sale of property, rental income, self-employment income, royalties, alimony, etc.

For a one-off income event such as the sale of property or sale of highly appreciated stock, you may consider making a one-time estimated tax payment.

However, if you have income not subject to withholding that recurs more regularly such as self-employment or rental income, you want to consider paying quarterly taxes before each due date during the year.

To review your situation in-depth and determine whether any adjustments to withholdings are needed, you will need to review all sources of income, determine the annual dollar amounts expected to be received, and review all current tax withholdings.

Every client’s goal is different. You may want a refund every year, or you might prefer to make a payment at the time your tax return is filed.

Your financial professional can help you set this up properly to align with your goals.

If you’re unsure about taxes in retirement, just reached retirement, or want to adjust your withholdings so that you’re not hit with a surprise tax bill, feel free to give us a call and we’ll be more than happy to help you through this process.

Schedule a call to speak with Taylor Wolverton.

March 18, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for March 18, 2024

Investing in Uncertain Times During Retirement – Election Edition

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the possible impact of the presidential election on your retirement investments. Political uncertainty causes increased volatility in the short term, and the idea here is to maintain security and peace of mind regarding your retirement plan.

 

Investing in Uncertain Times During Retirement – Election Edition

It’s that time that comes around every four years – presidential elections. There is one question that inevitably pops up: does the presidential election impact the stock market?  Retirement planning can provide peace of mind because you’ll prepare for the election’s influence on the market. 

Investing in Uncertain Times – Election Edition

It’s that time that comes around every four years – presidential elections. There is one question that inevitably pops up: does the presidential election impact the stock market? 

Retirement planning can provide peace of mind because you’ll prepare for the election’s influence on the market. 

The Short-term Effects of a Presidential Election 

Volatility in the short term is certain. You have economists and investors clamoring to figure out this one important question: if this candidate gets into office, what will their policies do to the market? News headlines are also all over the place, and these headlines and breaking news stories that happen every day will cause volatility. 

If you look back to the 1900s, we know that the election won’t impact markets in the long term. 

Where will the world be after the election year? Where will the U.S. be? Investors will be asking these questions all year, and it does weigh on the market. 

Long-term Effects of a Presidential Election 

Since 1900, data shows that in the long term, a party change does not impact the markets. We do have up and down markets across the board, regardless of who is in office or if there’s a party change. 

If we were going to wrap this up right here, we would say yes: presidential elections do affect the market in the short term. 

But we’re not going to be wrapping things up just yet. 

What Can We Do to Have a Portfolio That Is Agnostic to the Election and Economy? 

Investing in uncertain times is best when your portfolio is agnostic, meaning that the economy and election will have little-to-no impact on the performance. Of course, we’re not saying that this is the “perfect portfolio.” 

We’re going to describe to you a way that we recommend structuring your portfolio for peace of mind. 

If you were to go out and speak to 100 financial planners, you would find that there are two big camps for portfolio management: 

  1. Passive: A passive portfolio is created on the basis of risk tolerance and is adjusted once in a while as your risk tolerance changes. The market will not have much bearing on the portfolio allocation. 
  1. Active: An active manager will adjust the portfolio regularly based on the current market environment. 

Both camps will argue that either the passive or active portfolio is best. Our growth portfolio combines both camps to offer what we believe is a well-rounded portfolio that you can rely on during good and bad times in the market. 

Inside Look into Our Growth Portfolio 

Our “growth portfolio” cuts an account in half, with the first theme being the strategic core, and the second theme being the tactical portion. 

The strategic core model is equity-based, and we buy ETFs. Our theme for the strategic core is based on where the market is going in the intermediate term. The strategic core will be invested at all times and consider where the market is and where it could be going based on the fundamental analysis. 

Today, the strategic core is invested in equities that tend to do better un an economic slowdown or recession. 

But as the sentiment behind a recession continues to weaken, we plan to make a shift based on fundamental analysis.  

Our tactical side of the portfolio considers what’s working well right now: 

  • Large Cap stocks 
  • AI and Technology 

The tactical portfolio looks at what’s working right now and is more active. We might make a trade every 4 – 6 weeks based on the trend changes that we see. We find that the tactical side of the portfolio works very well to mitigate risk during times of market deterioration. 

If you go back to when the market wasn’t performing well in 2022, the tactical was invested in lower-risk assets, such as government treasuries. 

When the market is working well, the tactical is invested in equities, but when there is some pullback, we can adjust the tactical portion of the portfolio. 

Portfolios based on Risk Appetite  

If you’re in or very close to retirement, you want stability, right? You’ve worked hard and you can’t stomach the dramatic ups and downs of the market any longer. We have many folks come in and want a portion of their portfolios to provide stability that the stock market cannot provide on its own. 

For these folks, we created the “Moderate Growth Portfolio.” 

For a moderate growth portfolio, we take 24% of the portfolio and put it into structured bank notes. What we do is: 

  • Approach big banks: Morgan Stanley, Citibank, Barclays, etc. 
  • Structure an instrument based on an annual percentage coupon rate 

At the time of this article in March 2024, the coupon rate is about 9% annualized. The goal of this type of portfolio is to lower the risk even further for the portfolio to have some fixed income coming in. 

We can also reduce risks further with the addition of fixed-income investments such as bond funds. 

The idea is that the portfolio is based on fundamentals (i.e., strategic core), what’s working right now (i.e., tactical), and stability (i.e., structured notes and bonds). If you’re reaching retirement, a portfolio like this provides you with peace of mind that your retirement is secure. 

Using this type of portfolio allows us to minimize risks by not putting all your eggs in one basket. 

We try to combine tried and true strategies so that if one is not working great, the other can help support the portfolio. 

If you want to learn more about our investment strategies or how we can help you minimize risk in your portfolio, feel free to reach out to us and schedule a call. 

March 11, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for March 11, 2024

How To Keep Your Mobility in Retirement

In this Episode of the Secure Your Retirement Podcast, Radon and Murs speak with Mercedes Fernandez about keeping mobility in retirement. Mercedes is the founder of Movement, lead Geriatric Physiotherapist, a certified senior fitness instructor, and an authorized CPR/First Aid responder. Listen in to learn the most common mobility issues in older adults and the good habits you can develop to reduce them as you age. You will also learn how maintaining movement with simple stretches and following the right instructions with mobility aids and exercise can diminish pain and prolong your mobility ability.    

How To Keep Your Mobility in Retirement

As you get older, changes go well beyond the monetary side of things. Mobility in retirement is one such change that can have a dramatic impact on a person’s life. We spoke with Mercedes Fernandez, Geriatric Physiotherapist and Adapted Exercise Expert, on the show this week to discuss this very topic.  

How To Keep Your Mobility in Retirement

While we focus on finances and investing to help people in retirement planning, we try to have experts on our podcast to discuss lifestyle changes, too.

As you get older, changes go well beyond the monetary side of things. Mobility in retirement is one such change that can have a dramatic impact on a person’s life. We spoke with Mercedes Fernandez, Geriatric Physiotherapist and Adapted Exercise Expert, on the show this week to discuss this very topic.

Mercedes focuses on the study of human body movement. She grew up with her grandfather and works primarily with older adults. She saw that this field primarily focused on the young generation and not those who are older or elderly.

Her purpose is to help older adults stay mobile, get rid of the aches and pains, and still have the mobile freedom that allows them to live an independent life.

What are Some of the More Common Mobility Issues for Older Retirees?

Neck pain, lower back pain, and upper trapezoid pain are the most common areas Mercedes sees in older adults. For some folks the pain comes from walking with a cane or walker, but it can also come from sitting on the couch too much, looking at phones more often, or other reasons. Stretching can help to alleviate the tightness that often leads to neck issues.

StretchLab is a franchise that many people are using to help with mobility. They have flexologists that offer assistive stretching to alleviate tight muscles and the pain it eventually causes.

Simple stretches help ease pain and discomfort that many people don’t even realize is abnormal until they stretch on a regular basis. You can even do some of these stretches when:

  • Sitting in the car
  • Watching television
  • Standing at the counter

If you do have a mobility device or are considering one, you’ll want to read through the next section carefully.

Mobility Devices and the Risk That They Pose

You may have seen mobility or assistive devices on television and think, “Well, how hard can it be to use these?”. You need a little help with mobility, and one of these devices seems like the perfect fit for you.

But if you use them improperly, it can lead to Kyphosis, which is the rounding of your upper back or what many people call “hunchback.”

Using the incorrect device or the correct device improperly can impact your:

  • Posture
  • Tightness
  • Mobility

For example, when you see someone with a walker, pay close attention to how they reach for it. Often, the person will have the walker too low and will need to lean slightly down to pick it up and move it. Over time, the person will begin to hunch over to use the walker. Their feet may eventually become out of alignment and will try to keep up with the rest of their body in motion, which is a recipe for an eventual accident.

If you’ve considered ordering a walker on Amazon, it may be more convenient at first, but keep in mind there is no one to help you get started correctly.

You’ll also find that the world isn’t as accessible as it could be, so you’ll see some people dragging their walkers up a flight of stairs, which is a major safety hazard.

If you do need a mobility device, speak to a professional who can set it up correctly for you so you’re not hunching over and show you how to use it properly to reduce the risk of falling.

Hazards Inside of the Home

Little things that are hazardous are overlooked until something happens. You may have items of sentimental value in your home near walkways or sitting areas. Imagine if you use a walker or cane. Now, there is a possibility that as you navigate these tight spaces, your device could get caught or slip on them. As your mobility changes, consider the placement of your special items so they don’t become a safety risk.

Bathroom rugs are notorious for this because if you use a cane and lean on it, the rug slips and so do you.

You may also realize that it’s harder to:

  • Reach the cabinet above your exhaust fan in the kitchen
  • Pots and pans in the bottom cabinet

Unfortunately, homes aren’t always set up for mobility caution. Even if you’re 50 – 65 and you don’t currently have issues with walking or balance, it’s worthwhile thinking about prolonging your mobility and setting your home up properly now.

You should consider installing grab bars in the bathroom in case you get dizzy or lose your balance. Carpets or rugs that slip can have adhesives put on them to prevent unexpected movement. In the kitchen, something as simple as moving your heavy pots and pans to an easier location can make a dramatic improvement in your day-to-day life.

Preventing Mobility Issues or Prolonging Your Existing Mobility

You may be 65 and walk great with no balance issues at all, but in the future, a simple injury can change this in an instant.

Mercedes recommends that you keep moving. Walk more, sit less. A little exercise is good for you, no matter where you are. Wiggle your toes, lift your ankles, squeeze your bum (it’s good for your back) and even moving your neck side to side will help you remain mobile. Make sure to stretch often.

Even small things, like practicing reaching above the stove can help. If you don’t like lifting weights, that’s completely fine. You just want to keep moving and stretching as much as possible every single day.

Working With Mercedes and Her Process

To learn more about Mercedes, her process, and other resources on this topic, looking at her website is the best option. She offers customization for special groups, such as those who have had a stroke or brain injury. An exercise or health plan is created based on your:

  • Goals
  • Needs
  • Medication
  • Limitations

She also works with caregivers to assist them with helping aging parents or loved ones.

You’re aging every day, and the small changes that you make today can help you stay mobile in retirement. If you would like to reach out to Mercedes, click here to access her website.

And as always, if you want to discuss anything retirement-related with us, feel free to schedule a call with us or explore one of our books on Amazon.

March 4, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for March 4, 2024

Retirement Tips For Gifting and Loaning Money to Children

There are tax and financial implications when it comes to gifting, but you can do it right when you understand all the legalities. Listen in to learn the importance of understanding the purpose of gifting money to your kids to help you structure it and think of the implications. You will also learn how to navigate the legalities of loaning money or co-signing a house with your kids.  

Retirement Tips For Gifting and Loaning Money to Children

You’ve done well in retirement planning and you’re living a good life.  You may have plans to leave money to your heirs, and many of our clients want to learn about providing gift donations, too. Why? Gift donations may be used more immediately, so clients get to see how their gift donation plays out while they’re still alive. If your gift is used to buy your grandchild…..

Tips For Gifting and Loaning Money to Children

You’ve done well in retirement planning and you’re living a good life.  You may have plans to leave money to your heirs, and many of our clients want to learn about providing gift donations, too.

Why? Gift donations may be used more immediately, so clients get to see how their gift donation plays out while they’re still alive.

If your gift is used to buy your grandchild their first car or for a downpayment on a house, you might want to join in on the celebration. You may want to loan money to your child at a nominal interest rate or even co-sign on a house for them.

We’re going to tackle a lot of these things that you might be thinking of after you secure your retirement and want to help others in your life.

What is the Purpose of the Gift?

There are a million reasons to consider a gift donation. Sometimes, you want to help a child who needs some financial assistance. You might want to give them money every month, or you give them money outright.

Do you want your child to pay this money back?

Keep in mind that you need to maintain your own financial stability, too. Your financial plan may look great, and you run the numbers and you find that you have funds to consider a gift donation.  In one scenario, let’s say the need for a gift donation is not urgent and you decide not to make a gift donation. Keeping those funds would give you and your financial plan an opportunity to have higher earning potential and possibly greater financial stability down the road.

Another scenario to consider is you give your children money right now and without the prerequisite that they’ll be able to give it back if you need it. If you’ve reviewed your financial plan and gifting money with this prerequisite is not something you are comfortable with, it may be best to wait. Most folks want to avoid a situation where a gift donation now puts them in a hard financial position that would affect their children in the future.

Carefully reviewing your financial plan before making a gift donation will help secure your retirement.

Potential Tax Implications of Your Gift

Gift donations may have a tax implication, which is something you really want to consider, too. Consider asking:

  • Will there be taxes due from this gift donation?
  • Will the money exceed the annual gifting amount?

In 2024, you can make a $18,000 gift donation without any tax implications per donee. For example, if you have three kids, you can gift $18,000 to each child. If you exceed this amount, you need to fill out an extra document and attach it to your tax return to document how much you are gifting over your lifetime.

If you leave behind more than the current estate tax limit of $13 million, documentation will be more important.

For most people, you can gift $18,000 without issue. You:

  • Will NOT owe estate tax on the gifted amount
  • Will NOT owe federal tax on cash gift donations
  • May be subject to federal and state tax if you sell stock to gift the proceeds of that sale
  • Will owe federal and state tax if you withdraw from your IRA to gift money

Be strategic and be aware of the gift’s source of funds, because you might be hit with a Medicare surcharge (IRMAA) or move into unfavorable tax brackets. Another good reason to review your financial plan before gifting money.

When it comes to the donee, there are no tax implications for receiving a gift donation.

Family Dynamics and Your Legacy

For a family example, we’ll discuss a family with 2 children. Child 1 needs some financial help now. Child 2 doesn’t currently need financial help, so they will not receive a gift donation now. If Child 2 finds out that you’ve been giving Child 1 $18,000 a year, Child 2 may not feel like this is fair at the time of inheritance.

One option to address this is to document the gifts that you’ve been giving and reduce it from the Child 1’s inheritance to balance things out a bit.

Let’s look at some example numbers for this family:

  • $1 million estate (pre-gifting)
  • $200,000 gifted to Child 1
  • $800,000 estate (post-gifting)

In this case, for a “fair” inheritance, Child 1 would receive $300,000 and Child 2 would receive $500,000. Reviewing your financial plan and your estate plan documents on a regular basis is important to keep these numbers up to date.

How Can You Help a Child Buy a Home?

Co-signing is something that we don’t recommend. If you co-sign for your child to get the home, you’re still financially tied to the home. If the child defaults on the home, you may have to step in and buy it or deal with the credit ramifications of it all.

If you have reviewed your financial plan and don’t mind paying for the home if your child defaults, this is obviously something that you can opt to do.

Co-signing comes with a lot of risks and is the least desirable option.

Some other options for helping a child to buy a home are loaning or gifting the child money. We had a client who wanted to loan their child $10,000 for a downpayment, and this was the easiest option. If your gift remains under the current $18,000 gift limit, you can write a check to the child and your spouse can do the same.

But if the gift is higher than the exclusion, then you need to do some planning.

If you loan $100,000 (not a gift), you will need to:

  • Structure the loan properly
  • Keep legal documents on the loan
  • Require monthly payments

Loans are a way to avoid potential tax implications tied to gifting. However, you do need to meet a minimum interest rate, which your tax professional can help you determine.

If you charge 0% interest, the government will view it as a gift, and require additional documentation to file with your tax return.

You can charge an interest-only payment, or you can amortize it. In your loan agreement or estate planning documents, you can have a stipulation that upon your death, the loan is forgiven. Loaning money offers you:

  • Potential source of income from interest
  • Easier loan option for your child over banks or credit unions

You might be able to give your child a loan without closing costs and at a favorable interest rate compared to today’s market. But, as with a mortgage or other loan, you do want to keep an interest in the home if your child doesn’t repay the money to maintain the legitimacy of the loan agreement.

Step-up in basis is something to consider, too. Let’s say that you have your own house and a beach house. If you gift your beach house while alive, you need to think about the potential capital gains tax on the property for the donee.

If you would like to chat with us about gift donations further, feel free to reach out to us.

Click here to schedule a free consultation with us to discuss gifting in your unique situation.

February 26, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for February 26, 2024

Harnessing the Power of Step-Up in Basis in Retirement

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss how to harness the power of step-up in basis when it comes to inheritance. You will also learn the importance of having a conversation with a financial professional to evaluate the risk associated with holding one investment for basis purposes.  

Harnessing the Power of Step-Up in Basis in Retirement

Step-up in basis is something that the average person only needs to deal with once or twice in their lifetime. If you’re not sure what this means or how it relates to retirement planning, don’t worry: we’ll explain in detail. There are two main scenarios in step-up in basis you may want to focus on…

Harnessing the Power of Step-Up in Basis

Step-up in basis is something that the average person only needs to deal with once or twice in their lifetime. If you’re not sure what this means or how it relates to retirement planning, don’t worry: we’ll explain in detail.

There are two main scenarios in step-up in basis you may want to focus on:

  1. You inherited property or stock.
  2. You own a highly appreciated asset and want tax efficiency on the future disposal of the asset

What is Basis?

Basis is a tax term that the IRS and tax professionals assume everyone understands, but many don’t. “Basis” is your original purchase price of an asset. Let’s say you purchased a stock for $100. Your basis is $100.

If you purchase a real estate property for $300,000, this initial purchase price is your basis. Real estate does have a few additional nuances to determining cost basis, but for simplicity, this example works.

Cost basis is required when determining the gain or loss of a stock or other security; the difference between the sale price of an asset and the basis, or purchase price, of an asset is your gain.

Understanding your basis is crucial when talking about a “step-up.”

What is Step-up?

Let’s say that you purchased a property for $100,000 and have owned it for quite some time. Then in today’s market, you sell the property for $500,000. The difference between the purchase price and sale price means that you have a $400,000 gain.

If, instead of selling that same property, you decide to gift the property to your child (or anyone else), your child’s basis will be the same $100,000 basis that you had before you gifted the property. If your child decides to sell that property, they will have to pay taxes on the property’s appreciation in value beyond the $100,000 basis.

If you keep the property rather than selling or gifting it during your lifetime, and then your child inherits that property after you pass away, that is when a step-up in basis occurs. Instead of your original $100,000 basis carrying over to your child, their basis in the property will now “step-up” to the current market value of the property at the time of your death. Thus, if the value of the property at the time of your death is $400,000, your child (or whoever inherits the property) will have a basis of $400,000.

This difference matters. In the scenario where your child receives the property as a gift and later sells it for, let’s say $425,000, they will owe tax on the difference between their $100,000 basis and the $425,000 sale price which is a $325,000 gain. In a scenario where your child inherits the property and later sells it for $425,000, they could owe tax on the difference between their stepped-up basis of $400,0000 and the $425,000 sale price which is a $25,000 gain. The table below shows a side-by-side comparison of the example numbers in these scenarios.

Gifted Property Inherited Property
Basis $100,000 $400,000
Market Value at Sale $425,000 $425,000
Taxable Gain $325,000 $25,000

 

The more the property appreciates in value beyond the time of a gift or inheritance, the higher the potential taxable gain will be. But an inherited property with a stepped-up basis is more favorable as it will likely reduce what the potential taxable gain could be compared to a gifted property with a carryover, or transferred, basis.

Put simply, a step-up in basis helps relieve inheritors of what could otherwise be massive capital gains taxes.

Example of Step-up in Basis and Stock

Many people hold Tesla, Apple, NVIDIA, and other stock as part of their portfolio. For this example, you purchased $100,000 worth of stock many years ago, and today it’s worth $500,000. You might be receiving dividends, and this may be all you really need in terms of income from the stock.

If you were to sell all the stock today at a $400,000 gain, this would trigger substantial capital gains tax. Another option aside from selling could be to hold onto that stock with the plan to pass it onto your beneficiaries as their inheritance. With this intention, you do need to have faith in the company for it to at least maintain its stock value or ideally continue to increase in value; be aware of the risk that the stock’s value may decline by the time your beneficiary does inherit it.

Let’s say you choose the second option to continue holding the stock, and by the time your heirs receive the stock, it is worth $1 million. By doing so, you avoid the capital gains tax that you would have paid if you liquidated the stock during your lifetime. And your heirs inherit the stock with a stepped-up basis of $1 million.

Your heirs could sell the $1 million in stock at the time they inherit it without a capital gains tax.  If they hold the stock in their own portfolio, they will not owe tax until the stock appreciates above their $1 million basis.

Dividend Reinvesting

Dividend reinvestment is one strategy that we see a lot of people engage in. What this means is that if you buy a dividend-paying stock, each dividend you receive will purchase more of that same stock. Each dividend purchase creates basis in that stock.

To correctly calculate the gain at the time the stock is liquidated (sold), you need to know the basis on each of these buys. Currently, most custodians do keep a record of basis for you that can be viewed on most statements or online in your account. As long as the custodian has a record of the basis, it will also be reported on the tax form generated for that account.

In contrast, when your children or someone else inherits the stock from you, your basis is no longer relevant because the inheritor’s basis will be the stock’s value at the time it is received.

How to Determine Basis at Inheritance

The IRS is easy to work with when dealing with step-up in basis. Your basis is the value of the inherited asset on the day of death. For stock or other securities, you can use historical values and all the data that is available on stock price value for a given day.

Real estate will need to be appraised for value at the time of death.

Should You Hold Something for Step-up in Basis or Diversify Because of Risk?

You may or may not want to hold an asset for the purpose of step-up in basis. Perhaps you need the money and want to sell the investment. You may also see that the investment’s value is likely to decrease soon, so you decide selling while the price is high is optimal.

Ideally, you should speak to financial professionals to understand the risks and benefits of selling versus holding.

You may have a $1 million portfolio and the stock in question is worth 10% of your total portfolio. If the stock has a good run and now accounts for 20% or 30% of your total portfolio value, you’re increasing your concentration risk by continuing to hold it. A significant decline in the value of that particular stock can negatively impact a substantial part of your portfolio, so it’s something to think through.

Diversifying by selling some or all that concentrated stock will likely require you to pay taxes, but it may be a better option long-term because it allows you to safeguard your total portfolio by spreading your dollars out. Speaking to your financial professional(s) on this topic can help with your decision, because your situation is unique, and you may not want to carry such a high risk.

If you want to talk to us and have us evaluate your situation, we’re more than happy to schedule a call with you.

Click here to schedule a call with us to discuss your step-up in basis situation.

February 20, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for February 20, 2024

Closing the Gap Strategies for Coping with Medicare’s Doughnut Hole in Retirement

In this Episode of the Secure Your Retirement Podcast, Radon and Murs have Shawn Southard, our in-house Medicare expert, talk about Medicare’s doughnut hole. Learn about the four stages of how Medicare Part D works, plus strategies you can take yourself to avoid the doughnut hole.  

Closing the Gap Strategies for Coping with Medicare’s Doughnut Hole in Retirement

A doughnut hole is part of Medicare prescription drug plans. It is found in either standalone Medicare Part D plans or Part D plans that are bundled within Medicare Advantage plans. The doughnut hole is a temporary limit on what the plan will pay for the cost of the drugs. Technically, the doughnut hole the “coverage gap” stage of Part D plans.

Closing the Gap Strategies for Coping with Medicare’s Doughnut Hole

Shawn Southard, our in-house Medicare specialist, joined us on our latest podcast to discuss Medicare’s Doughnut Hole. If you don’t know what this means or how it relates to you, don’t worry – we’ll explain everything.

What is Medicare’s Doughnut Hole?

A doughnut hole is part of Medicare prescription drug plans. It is found in either standalone Medicare Part D plans or Part D plans that are bundled within Medicare Advantage plans. The doughnut hole is a temporary limit on what the plan will pay for the cost of the drugs. Technically, the doughnut hole the “coverage gap” stage of Part D plans.

What is Part D?

Medicare started in 1966, and up until 2003, there was no prescription coverage until Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act. Basically, the Act went into effect in 2006 to help beneficiaries cover the cost of prescription drugs.

As part of the Act, there is a penalty if you don’t enroll in a prescription drug plan when you turn 65 or retire.

There is a 1% penalty for every month that you didn’t enroll when you were supposed to be enrolled. The penalty is monthly for as long as you are enrolled in a Part D plan, which could be the rest of your life. For example, if you don’t enroll in a Part D drug plan for 2 years (when you were first eligible to enroll), you will have a 20% Part D late enrollment penalty. This penalty is monthly and will be in effect for as long as you are enrolled in a Part D plan. The 24% late enrollment penalty is based on the national average Part D premium, which in 2024, is $34.70. This penalty is added to your drug plan premium automatically by Medicare. 

Even if you don’t take prescription drugs, be sure to enroll in a Part D prescription drug plan to avoid the late enrollment penalty. 

Medicare Part D plans have 4 stages. Theses stages are the same for standalone Part D plans and Part D plans that are bundled into Medicare Advantage prescription drugs plans.

  1. Deductible Stage. If your plan has a deductible, you start here. You are paying 100% of the drug cost up to your deductible amount. The maximum for Part D plans in 2024, is $545. Depending upon your zip code there could be several Part D plans that do not have a deductible.
  2. Initial coverage Stage. The initial coverage stage is reached when your deductible has been met or if your plan does not have a deductible. In this stage, you pay roughly 25% of the cost with co-pays and co-insurance. The co-pay depends on one of the five tiers in the drug plan. Tier 1, the lowest tier, are drugs that are preferred generics that either have zero ($0) or a co-pay of a few dollars. Depending on your medications and their tier, you may be paying more. The initial coverage stage starts when your out-of-pocket costs reach $546 and goes to $5,030. Note: if your plan does not have a deductible, you start at the initial coverage page. You reach the doughnut hole stage after reaching the $5,030 out- of-pocket limit.
  3. Coverage gap stage. This is the “doughnut hole”. It is reached when out-of-pocket drug costs exceed $5,031 and goes to $8,000. In this doughnut hole stage, for brand name drugs that you take, you’ll pay no more that 25% of drug costs and the drug manufacturer pays 70% of the drug costs.  This 95% (25% paid by you and 95% paid by the drug manufacturer) goes towards getting you out of the doughnut hole quicker. 95 % is True Out Of Pocket (TrOOP). If you are doughnut hole stage and taking generic drugs, you pay no more than 25% of the drug costs. NOTE: only the amount you pay (25%) goes towards TrOOP.
  4. Catastrophic Stage. This is the doughnut hole exit point. This state is reached when you have pay $8,000 out of pocket for your drugs. Moving forward, you pay $0 toward any additional prescription-related expenses. But, at the end of the plan year, out of pocket costs reset back to zero. Restarting at Stage 1 starts at the beginning of the year.

If you’re in Medicare’s doughnut hole for one year, and your drug regimen stays the same, there is a strong possibility you will be in the doughnut hole next year.

Inflation Reduction Act

Under the Inflation Reduction Act, there is some very promising news. One of the changes in 2023 was that you paid just 5% when you hit the catastrophic phase and now you pay 0% in 2024. In 2025, the next stage of the Inflation Reduction Act, it   will put a cap on TrOOP at $2,000.

If the Act remains as it is, in 2025, people will reach the catastrophic phase when they spend $2,000 out of pocket. For Medicare Beneficiaries who reach the doughnut hole each year, this is a significant change that will provide immense financial relief.

In 2026, Medicare will begin negotiating the prices of 10 brand-name drugs downward. While manufacturers are fighting back against this, many Federal judges are siding with Medicare.

Are There Other Strategies to Navigate Medicare’s Doughnut Hole?

Yes, there are generics that your doctor may be able to offer you. Generics will help you save on costs. Doctors may be able to work with you to find drug alternatives that can push your costs down.

If you’re really struggling economically, you may be able to qualify for:

  • Extra help
  • Low-income subsidies

Anyone on these programs will never go into the doughnut hole and will have their costs significantly reduced.

If you want to talk to Shawn about your Medicare, call our office at (919) 787-8866.

February 13, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage. Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for February 13, 2024

Beneficiary Best Practices in Retirement – A Yearly Check-In

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Nick discuss beneficiary best practices and what’s discussed in a typical beneficiary’s meeting. Things can change in a year, and that’s why we believe it’s important to update or change beneficiaries annually.  

Beneficiary Best Practices in Retirement – A Yearly Check-In

Nick Hymanson, a financial planner who is also part of our team, joined us on our latest podcast to discuss something very important: beneficiary best practices. If you work with us, you know that this is something that we have covered during our financial planning strategy meeting.

Annual Financial Planning Strategies- Beneficiary Best Practices

Nick Hymanson, a financial planner who is also part of our team, joined us on our latest podcast to discuss something very important: beneficiary best practices. If you work with us, you know that this is something that we have covered during our financial planning strategy meeting.

What is a Financial Planning Strategy Meeting?

In the financial planning strategy meeting, we cover:

  • How your accounts did this past year
  • Beneficiary updates
  • Daily living changes
  • Expenses and income
  • Budgets 

We look at your financial plan as a whole during the strategy meeting. A lot of people think that the most important part of retirement planning is the end goal, but if you don’t know where you are right now, it’s challenging to navigate your way to retirement.

You need to know your milestones ahead and what to do with Social Security, Medicare and your estate plan.

Your estate plan is where beneficiaries really come into the equation. If you have a “will,” you may assume that you have everything in order and you know who is getting what. The problem is that you have a variety of other accounts that have beneficiaries listed, such as your 401(k), IRA, life insurance and even your bank accounts.

When the terrible time comes and you need to put the estate in process, proper beneficiaries on your accounts will make the lives of your heirs much easier.

What We Do to Prepare Before Discussing Beneficiaries with Our Clients

Our team reviews all your investment accounts and will call insurance companies to verify:

  • Primary beneficiaries
  • Contingent beneficiaries 
  • Percentage allocations

You may have multiple people listed as a primary or contingent beneficiary, or you can have one or two. We’ll gather information on all your financial and insurance account beneficiaries and separate them by account to make it easier to determine who is the beneficiary on what accounts.

We then present the accounts in the meeting to help you understand if your account needs to be updated.

Why do we review beneficiaries annually?

Of course, we have a lot of real-life examples of accounts that people seemingly forget to update during crucial life moments.

  • One client got divorced and didn’t remember to fix all the beneficiaries. It doesn’t matter who he is married to today. If he passed, the account would have gone to his ex, even though he is remarried.
  • Someone has a child who is in a lawsuit, so maybe you don’t want money to go to this individual based on the current circumstances.

A quick, annual review of your beneficiaries can help you better manage them because life changes can impact who you want to be named as a beneficiary on your accounts.

Common Example of Husband and Wife

Couples who have an individual account will, in most cases, have their spouse being 100% beneficiary of their accounts. If the person isn’t alive when the other person passes, the account would then go to the contingent beneficiary, who can be one or more people.

For example, if you’re married and leave your wife as the primary beneficiary and she passes before you, the contingent beneficiary would be “next in line.”

Joint accounts work a little differently.

On joint accounts, you’re both co-owners of the account, but you can have beneficiaries listed on the account.

Spouse and Three Kids

While you’re free to do as you wish, it’s most common for a person to leave their spouse as the primary beneficiary of their accounts. You should also list your kids as contingent beneficiaries so that if your spouse is no longer living, the account will go to your children.

It’s most common to offer an even percentage to each child, in this case, 33.33% share to each of the three children.

In certain cases, one of the children may receive 0.01% extra to make an even 100%.

Spouse and Two Kids Who Each Have Children

Every scenario is a bit different, and we really want to illustrate the importance of following beneficiary best practices. If you’re like most couples, you’ll:

  • Name your spouse the primary beneficiary
  • Name your children as contingent beneficiaries

Let’s assume that each of your children has a child, so you have two grandchildren. Your eldest child dies. What will happen to your grandchild? Does all the account go to the sole, living child?

You can put measures in place that allow you to pass the funds to your grandchildren. You can even pass the funds to children who may not be born at the time of naming your beneficiaries.

A strategy to use is called Per Stirpes.

What Per Stirpes does is allow for the funds, which you name for Child 1, to flow down their family tree if they pass away. You don’t even need to list the grandchildren on the account when using per stirpes.

Per capita can also be used, which means that the account goes to your kids only. In this case, if you have two kids and one passes, the other child will receive 100% of the account. You can also opt to give one child 75% of the account or 10% – it’s up to you. Certain clients opt to do this when one child makes significantly more money than another or they have a medical condition.

Children do have a right to disclaim their inheritance, which, if the benefit goes down the lineage, can have its tax benefits. Perhaps your child wants their children to inherit the money, so they disclaim their portion, and it goes to your grandchild.

If your grandchild doesn’t make any money or is in a lower tax bracket, this can be beneficial.

Annually, you need to review and update your:

Major life changes are a good time to review these documents, too. If you get married, divorced, have a child or grandchild, it’s a good time to look through your beneficiaries and be sure that everything is in order.

Schedule a 15-minute call with us if you would us to help you review your beneficiaries.

February 5, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for February 5, 2024

Preparing To File Your 2023 Taxes in Retirement

In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss how to prepare to file for the 2023 taxes. The first things you should be looking at include your different sources of income and tax forms connected to that income. Listen in to learn the importance of working with a professional tax preparer to avoid misreporting different income taxes.

 

Preparing To File Your 2023 Taxes in Retirement

Taylor Wolverton sat down with us to discuss prepping your taxes in 2023. Taylor helps our clients with a focus on tax planning, and she shares a wealth of information in our recent podcast that you’ll find invaluable. Waiting until the last minute to file your taxes is stressful. The earlier you begin, the less anxiety and stress you’ll experience. What do you need to be thinking about when preparing to file your 2023 tax return?