The 2018 Tax Reform Bill and What’s Important to Know

The New Tax Reform Bill Doesn’t Impact Your 2017 Taxes

For individuals, the tax reform bill’s purpose is to:

  • Simplify the tax process
  • Preserve the mortgage interest deduction
  • Eliminate Obamacare’s individual mandate penalty tax
  • Increase the standard deduction
  • Provide more support to American families
  • Provide relief for Americans with expensive medical bills
  • Improve savings vehicles for education

Difference in Marginal Tax Rates and Brackets

One of the most widely discussed changes in the 2018 tax reform bill involves income tax brackets and marginal tax rates. Tax brackets refer to specific ranges of income and their corresponding tax rates. Marginal tax rates apply to different levels of income—the higher the income, the higher the tax rate. What this means to you is that your income is not taxed at one rate but at several different rates, depending on your income.

For 2018, the tax brackets have shifted, and almost all of the marginal tax rates have been cut. There will still be seven income tax brackets but nearly everyone will have lower income tax rated (on the same income) in 2018

Income Tax RateIncome Levels for Those Filing As:
20172018-2025 SingleMarried-Joint
10%10%$0-$9,525$0-$19,050
15%12%$9,525-$38,700$19,050-$77,400
25%22%$38,700-$82,500$77,400-$165,000
28%24%$82,500-$157,500$165,000-$315,000
33%32%$157,500-$200,000$315,000-$400,000
33%-35%35%$200,000-$500,000$400,000-$600,000
39.6%37%$500,000+$600,000+
    
      

Not only will taxpayers see lower rates, but the shift in tax brackets will also remove what used to be an unintended tax penalty for married filers. Under the 2017 tax thresholds, some married filers were pushed into a higher income bracket when they combined their income with their spouse’s. The new brackets double for joint filers, so any marriage penalty is effectively removed for 2018.

Difference in the Standard Deduction

Another important difference in the 2018 tax reform bill is that the standard deduction has almost doubled.

The standard deduction is an automatic reduction in a taxpayer’s tax obligation. Taxpayers have had the option of taking the federal standard deduction or itemizing their deductions—identifying which expenses they qualify for and calculating their deductions one by one. Itemizing is more time consuming, but it’s worth it if your itemized deductions exceed the amount of the standard deduction.

Changes to the Standard Deduction
Filing Status2017 Standard Deduction2018 Standard Deduction
Single$6,350$12,000
Married Filing Jointly$12,700$24,000
Married Filing Separately$6,350$12,000
Head of Household$9,350$18,000

 

At first glance, the increase in the standard deduction makes itemizing look even less worthwhile. But, the 2018 tax reform bill also eliminates the personal exemption—the amount a taxpayer gets to deduct from their taxable income for themselves and any dependents claimed on their tax return. Here’s an example of how this may work

In 2017, the personal exemption was $4,050 per person and dependent. In 2017, a married couple filing jointly with no dependents who made $100,000 received a $13,000 standard deduction and $8,100 in personal exemptions, leaving them with a taxable income of $78,900. In 2018, that same couple will receive a $24,000 standard deduction and no personal exemptions, leaving them with a taxable income of $76,000.

Essentially, the tax reform bill simplified this portion of the income tax process. In many cases, the increase in the standard deduction will make up for the elimination of personal exemptions, leaving most Americans with quite a bit more money in their pockets.

 
   
   
   
   
   

Difference in Child Tax Credit

In our current tax code, if parents make less than $110,000 jointly and $75,000 individually, they receive a $1,000 Child Tax Credit for qualified children under the age of 17. The 2018 tax reform bill increases that credit to $2,000 per qualified child and raises the income limits for the credit to $400,000 jointly and $200,000 individually. This means a lot more people will be able to receive tax credits for their children. Great news for parents!!

Changes in Child Tax Credit Thresholds
Filing Status2017 Child Tax Credit Threshold2018 Child Tax Credit Threshold
Single$75,000$200,000
Married Filing Jointly$110,000$400,000

 

 

More Changes for Taxpayers With Kids

If you have children, you may have a 529 college savings plan in place. This savings plan acts similarly to a Roth IRA for your kids’ college education. Funds within the account are invested and grow tax-free, but they can only be used for qualifying college expenses. The new tax reform bill changes this significantly.

Starting in 2018, if you have a 529 savings plan for your child, you can use it for levels of education other than college. For example, if you have children in private school, or if you pay for tutoring for your child in kindergarten through twelfth grade, you can use money from your 529 for these expenses tax-free.

While it may seem like a benefit to use a 529 plan prior to college, you should make sure—especially if you want to use the 529 plan sooner than you had originally intended. Taking too much out of a 529 plan early can have a negative effect on the compounding growth the account could experience if the money was just left alone.

Differences for Homeowners

Many people were disappointed in the mortgage deductions in the new tax reform bill. Here’s what everyone’s talking about:

Currently, if you itemize your deductions, the IRS allows homeowners to deduct the interest they pay on their primary residence and/or second home, up to a maximum of $1 million in original mortgage principal. This can include more than one loan—as long as the total is below the $1 million limit—and can include loans to refinance your home as well as mortgages to purchase the home. The new maximum in the tax reform bill is $750,000 in original mortgage principal. Not to worry, taxpayers with existing mortgages in between $1 million and $750,000 will be grandfathered into the old deduction.

Taxpayers are also currently allowed to deduct interest paid on home equity debt, up to $100,000. The Tax Cuts and Jobs Act has removed that deduction for 2018.

Difference in the Alternative Minimum Tax

The Alternative Minimum Tax (AMT) was put into place to ensure that top-income earners paid appropriate taxes. Basically, upper income taxpayers have to calculate their taxes two ways—once under the traditional tax system and once under the AMT—and pay whichever amount is more. Much of the AMT is fairly complicated, however, the AMT tax brackets are not. While the standard tax system has seven brackets, the AMT system has only two—26% and 28%. Below a certain income amount, the 26% rate is applied, and over that amount, the 28% rate is applied to the rest.

Once taxpayers have calculated what they owe in the AMT process, they can deduct an exemption from that amount. The problem is that these exemptions weren’t properly set up to account for inflation. So as time passed, more and more Americans were affected by the AMT—even those who it was never intended for, like the middle class. To address this issue, the Tax Cuts and Jobs Act makes the minimums for the AMT system much higher to avoid the average Joe from having to run their numbers twice. Here’s how the AMT exemptions are changing for 2018.

Changes to the Alternative Minimum Tax Exemption
Filing Status2017 AMT Exemption2018 AMT Exemption
Single or Head of Household$54,300$70,300
Married Filing Jointly$84,500$109,400

In addition, the income thresholds at which the exemption amounts begin to phase out are dramatically increased. Currently, these are set at $160,900 for joint filers and $120,700 for individuals, but the new law raises them to $1 million and $500,000, respectively.

So, what does this mean in plain English? The new tax reform bill significantly increases the exemptions for AMT. Therefore, if you’re one of the many Americans who has to use the AMT for your yearly taxes, you will be seeing increased standard exemptions and higher tax thresholds for the 26% and 28% tax rates. Yay!

Difference in the SALT Deduction

The SALT deduction is another deduction that was heavily deliberated before the tax reform bill was voted in. SALT stands for “state and local taxes” and refers to taxpayers’ ability to deduct their state income taxes and/or sales taxes, if itemizing deductions. In previous years, there was no limitation on the deduction of state and local taxes, which was an advantage to those living in high tax states like California and New York. The new tax reform bill keeps the SALT deduction but limits the total deductible amount to $10,000, including income, sales and property taxes.

The Estate Tax Exemption

The estate tax is a tax on inherited money and property. Currently, heirs pay a tax rate of 40% on any inherited property valued at over $5.49 million.

In the new tax reform bill, individuals have a $11.2 million lifetime inheritance tax exemption and married couples can exclude inheritances of $22.4 million. As you can probably imagine, this won’t leave too many families paying the estate tax.

What About Charitable Donations?

Under current tax law, you can deduct up to half of your income in qualified charitable donations if you itemize your deductions. That makes it a popular deduction for people at all income levels. The new tax reform bill has increased that limit to 60% of your income. Great news for philanthropic taxpayers!

However, donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.

What About Medical Expenses?

Another frequently used deduction is the medical expense deduction. Prior to the new tax reform bill, you could deduct unreimbursed medical expenses above 10% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken. The new tax reform bill has reduced that hurdle to 7.5% of your AGI. So, if your AGI was $100,000 in 2017, you could deduct medical expenses over $10,000. In 2018, if your AGI is $100,000, you will be able to deduct unreimbursed medical expenses over $7,500.

What About Health Care (Obamacare)?

The Affordable Care Act, otherwise known as Obamacare, remains in effect for 2017. However, the new tax reform bill removes the individual mandate penalty, meaning that people who don’t buy health insurance will no longer have to pay a tax penalty.

It’s worth noting that this change doesn’t go into effect until 2019, so for 2018, the “Obamacare penalty” can still be assessed.

Other Deductions That Are Disappearing

Other deductions that didn’t make it past the chopping block in the new tax reform bill:

  • Casualty and theft losses (except those attributable to a federally declared disaster)
  • Unreimbursed employee expenses
  • Tax preparation expenses
  • Alimony payments
  • Moving expenses
  • Employer-subsidized parking and transportation reimbursement

Don’t worry, teachers can still deduct classroom supplies!

But What Does It All Mean?

The one thing that’s clear through all of this is that taxes are complicated. Even the IRS is scrambling to keep up with all the changes in the new tax reform bill.

But what about tax software or online tax prep? Prior to the new tax reform bill, it might have been safe to rely on those options to file your yearly taxes. But with all the changes coming, there’s no guarantee these programs have caught up. If any year is the year to work with a tax advisor, it would be 2018.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

PLEASE! Call or email us before you spend $5,000 or more

Man on phone at computer

Almost every month I speak with a client who told me about a new house they bought, or a 401(k) loan they took or a service they paid for without running it by us. This is a mistake. I cringe when I have to point out there was a more cost efficient money decision that could have been made. If you’re planning on making a decision that’s more than $5,000 please call or email us. The worst thing that happens is we review your purchase plan and agree that you are going about it the best way.  Many times we help clients save a lot of money.

My favorite recent savings story involved a family looking to refinance their home.  Interest rates had declined more then 1.5% below their current mortgage rate which would allow them to save thousands of dollars.  They were also very close to having more than 20% equity in their home –  the threshhold where Private Mortgage Insurance (PMI) would not be required on their mortgage.  PMI is expensive. It typically costs 0.50% –  1.00% of the amount of the loan annually.  On a $480k loan that could be another $2400 –  4800 expense every year or $200 –  400 more on the monthly payment.  The monthly payment without PMI would be about $2,300 for a 30 year fixed mortgage with 4.00% interest.

The client called me and asked to make a withdrawal of $25,000 from his IRA. I asked what the withdrawal was for since it would trigger a 10% IRS penalty plus tax since the client was not close to age 59.5 (when the 10% penalty goes away). He explained how he would use the money to get under the PMI threshhold. He did some math and figured the breakeven point of this expensive withdrawal would be less than three years without the PMI. However, he did not consider that he was permanently reducing his retirement account – a big no-no outside of massive emergencies.

Rather than take the withdrawal we proposed that he roll $50,000 from his IRA into his new company’s 401(k) plan and set up a loan for the $25,000 his family needed to aviod PMI on his mortgage refinance.  The loan would have a 5% interest rate, but interest paid on 401(k) loans goes to to the borrower’s account so it’s not a necessarily a bad cost. Had he taken the withdrawal the client would have had to take out $33,333 assuming a 25% tax rate and he would have also owed the $3,333 IRS penalty.

This brief 15 minute conversation saved $11,667 in tax and penalties!

Not every situation results in such large savings, but even if its a few hundred dollars isn’t it worth the call?

Question: What purchase or expense do you have coming up that you would like to run buy us?

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

High Income Earners — You Can Potentially Fund a Roth IRA

Do you like paying taxes? No, of course not. So then having access to an account that will be tax-free1 in retirement sounds awesome —That’s the Roth IRA — But you’re married and your modified adjusted gross income is over $196,000 ($133,000 for singles). The IRS doesn’t allow you to contribute to a Roth IRA. Do you know what to do?

In order to answer that question let’s look at how people save for retirement. Most Americans use a 401(k) or 403(b) plan for retirement savings. If you’re a high income earner, then you are likely making the maximum employee contribution of $18,000 (2017) to your 401(k) or 403(b) plan because you can afford it and because you need to shelter income from taxes this year.  As a general rule deferred taxation is better than tax now, especially when you make a lot of money. If your income is all W-2 wages that pre-tax savings may be your only tax saving move.

Our clients who earn really well almost always have more money to save. We see people do the next logical step and accumulate cash in the bank or invest in a brokerage account. But what is the goal of these funds? Sure you need a cash emergency fund and you probably want some additional money if you decide to buy a big ticket item like a home or a boat. Beyond that though it’s likely additional savings is for your retirement.

Here’s where a rather misunderstood part of many retirement plans comes in handy — after-tax contributions. Currently almost half of 401(k) plans in existence allow for additional after-tax contributions. Does yours?

Your initial reaction might be, “why would I ever put after-tax money into my retirement plan when I already maxed out my deductible contribution?”

First, after-tax contributions to your retirement plan have the opportunity grow tax-deferred just like pre-tax contributions. Second, after-tax contributions can be withdrawn anytime because you already paid the tax so you have some flexibility.

The game changer however, comes from IRS Notice 2014-54 which allows you to roll over after-tax savings in your 401(k) or 403(b) directly to a Roth IRA! Voila`, you now have access to the Roth IRA that was previously unavailable because of your income level.

Some important rules to do this correctly exist of course. The generic way to do this is — upon severance from your company — you roll the entire 401(k) balance out of the plan. Pre-tax contributions and gains roll directly into an IRA. After-tax contributions roll directly into a Roth IRA.

IMPORTANT: You must notify your plan administrator of your intentions to have a separate check for pre-tax money and another separate check for after-tax money so that distributions are reported correctly to the IRS.

 

Sounds good, what’s the potential amount?

As an example, let’s assume you’re married filing jointly with a combined income of $315,000. Your individual wages are $215,000 and your employer matches 3% of income. In 2017 the employer limit for 401(k) and 403(b) plans is $54,000.

 

$54,000   2017 employer limit

-$18,000  Your employee savings

-$6,450                    3% employer match

= $29,550                potential after-tax savings you can make

 

In this example you could save $29,550 to the after-tax portion of your 401(k) in 2017!

If you love saving money or make a lot more than the example, then you should certainly discuss with your financial planner whether contributing after-tax to your retirement plan makes sense.

Finishing the thought on this example, you would certainly have your spouse make the maximum employee contribution of $18,000 before beginning after-tax savings because the pre-tax savings is valuable in the current year. Let’s also assume a 3% employer match of $3,000 on your spouse’s $100,000 of income.

Your personal savings would be $65,550 ($36,000 pre-tax & $29,550 after-tax) — 20.8% of your working income of $315,000. The employer matching is an additional $9,450 bringing 2017’s savings to $75,000 — 23.8% of your working income. And all of that savings enjoys tax-deferred growth potential until you take it out.

 

How can I be confident this is for me?

The devil’s in the details and you need to make sure you evaluate this information against your personal finances.  If you have investment or other income this will further complicate your tax planning. If you don’t have the time to evaluate your savings strategy fully or just want to talk it through with a CFP® Professional give us a call or schedule a free 15-minute phone appointment through the Contact section on our website.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

1The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs.

Consider Taking These Steps Immediately Regarding the Massive Equifax Data Breach

If you have been captivated with the hurricanes pounding the South and Southeast you may have missed the most impactful story to you regarding one of the big three credit bureaus, Equifax.

Equifax had an unprecedented data breach that they have stated affected 143 Million Americans. The estimated population is 326 Million Americans — that’s over 43% of us!

Between May and July 2017 computer thieves accessed people’s names, Social Security numbers, birthdates, addresses and driver license numbers. Equifax also stated that 209,000 credit card numbers were stolen.

So what do I do?

  1. Visit www.equifaxsecurity2017.com/potential-impact/ and check whether Equifax believes that you were part of the breach. The site will as you for your last name and the last six digits of your Social Security number to run the check.
  2. Decide for yourself whether you want to accept Equifax offer for a year of free credit monitoring. There was language in their terms of acceptance notice that indicates that accepting any product from Equifax could make you only eligible for arbitration and waive your right to participate in a class action law suit. This language has been removed and Equifax has stated that they will not deny anyone their full rights in conjunction with this data breach but it’s a bit hard to trust them right now. We are not attorneys so we cannot advise what your rights are, just be aware and read up before making your decision.
  3. If you do not elect Equifax free year of credit monitoring, consider obtaining credit monitoring from a third party. A quick Google can provide you a list of companies. You should also check with your credit card companies because some offer a subscription for free.
  4. Check your credit reports from Equifax, Experian, and TransUnion for activity that you do not recognize— it’s FREE once every 12 months — at www.annualcreditreport.com.
  5. If you do not anticipate needing to do something, such as apply for a loan or credit card, anytime soon, consider placing a credit freeze on your files with all three credit bureaus. You can do this online with each bureau. Depending on the state you live in there may be a small fee for each and there may also be a small fee to lift the credit freeze. If you may need to access your credit in the near term, consider whether you want to go through the steps to temporarily unfreeze your accounts at each bureau when you apply for credit.
  6. If you don’t do the credit freeze, consider using a fraud alert on your credit bureau files. This lets companies that need to check your credit that you might be a victim of identity theft and that they should pay close attention to verifying that anyone applying for credit in your name is really you.
  7. Check your existing bank and credit card accounts regularly for charges or transactions you do not recognize.
  8. File your taxes as early as possible — Tax scammers are people who attempt to file tax returns as you in order to collect your refund check before you can or people who try to use your Social Security number to get a job. If you get any IRS letters act on them promptly for your personal security.

If you have more questions about what this breach means to you shoot us an email or call us.

 

Are Your Stocks and Bonds in the Right Accounts?

Financial Advisor at Computer

“It’s not how much you make, but how much you keep.” Are your investments set up with this wisdom in mind? Many of the people we meet with who manage their investments themselves often have their stocks, bonds and other investments in the wrong accounts.

Having your investments in the right accounts is a simple concept when tax treatment of investments and accounts is reviewed.

To help you determine if you have your investments in the right accounts let’s see how you will be taxed on savings accounts, corporate bonds, municipal bonds, and U.S. stocks. While there are many other types of investments, these are some of the most common ones that you are likely to have in your investments.

  • Savings Accounts — Each year your bank pays you a stated interest rate
    • The interest fully taxable at your current tax bracket
  • Corporate Bonds — Each year the bond issuer pays you a stated interest rate
    • This interest is fully taxable each year at your current tax bracket
    • If you sell the bond before maturity the difference between what you lent the bond issuer initially and the sold value is a capital gain or loss
    • If you owned the bond less than one year, the capital gain is fully taxable at your current tax bracket
    • If you owned the bond for a year or more the capital gain is taxed at a special rate lower than your current tax bracket and will range from 0-20% based on your annual income
  • Municipal Bonds — Each year the municipality issuer pays you a stated interest rate
    • When you purchase these correctly the interest can be tax-free on your Federal and state tax return
    • It may also be tax-free if your city has a local tax
    • If the bond is sold before maturity the difference between what you paid initially and the sold value is a capital gain or loss
    • If you owned the bond less than one year, the capital gain is fully taxable at your current tax bracket
    • If you owned the bond for a year or more the capital gain is taxed at a special rate lower than your current tax bracket and will range from 0-20% based on your annual income
  • U.S. Stocks — Stocks can have two investment return components — dividends and capital gains
    • Stock that qualifies for special tax treatment have dividends that are taxed like long-term capital gains at the preferential tax rates stated above
    • Gains in stocks held less than a year — short-term — are fully taxed at your current tax bracket
    • Gains in stocks held a year or more — long-term — receive the special tax rate that ranges from 0-20% based on your annual income

Now that we have reviewed how some of your most common investments will be taxed in a regular account, let’s also review how the tax treatments of two other account structures may affect how much of your retirement savings you keep. Tax rules for these account types supersede the tax rules of individual investments. We are happy to help you figure this out. Give us a ring.

  • 401(k), 403(b), and Traditional IRA — Monies deposited in these accounts are saved pre-tax
    • money grows inside the account tax-deferred
    • when any money is withdrawn (after age 59.5) every dollar is fully taxable at your current tax bracket
  • Roth 401(k), Roth 403(b), and Roth IRA — Dollars deposited in these accounts are saved after tax
    • money grows in the account it is tax-deferred
    • when any money is withdrawn (after age 59.5) every dollar is fully tax free on the Federal level and in most cases state tax free (Consult your tax advisor for your state’s tax rules)

Funding a Roth type account typically makes a lot of sense when your income today is lower than your future earnings will be — typically your early career years. Paying tax at a lower rate when you know that your future tax rate is going to be higher, is simply to your advantage mathematically. And by funding a traditional 401(k), 403(b), or IRA account you can defer taxation. If you have additional savings beyond IRS limitations for saving into tax-qualified plans, it will naturally spill over to a savings or investment account — a very good thing.

Putting it All Together

Households with high income should pay extra attention to the amount of cash savings they accumulate since interest from savings accounts will add directly to their tax bill. Also, cash reserves greater than a recommended 3 to 6 months of expenses warrants considering additional tax relief investments. We help our clients evaluate municipal bonds and tax-free money market funds that fit their investment comfort level every day. We often find our top earning clients are sitting on “too much cash” — either because they like the feeling or because they are earning it faster than they can think about investing it.

Corporate bonds larger investment return component is current year income. We can defer that income to a later date by placing these investments in a 401(k), 403(b) or Traditional IRA. If we have a Roth type account, then placing high income paying corporate bonds in it can turn an annually taxable investment into one that is potentially tax free.

Because qualifying stocks receive preferential tax treatment on dividends and because tax is deferred on capital gains until the stock is sold, placing stocks in a regular investment account ‘makes more sense’ than a tax-qualified account where it would actually be increasing taxation on investment growth.

How can I use this info to keep more of my money?

OK, so create a list of your accounts by tax status — and asset type — to identify opportunities to relocate assets to accounts that will get a further benefit from a tax perspective.

There is some good news: if you find that you have more bonds in regular accounts and more stocks in tax-qualified accounts then the cost to relocate assets may be reasonable. Because high quality bonds often trade rather close to their purchase price, selling may only cost you a commission or fee with low capital gains release. In tax-qualified accounts selling stocks to buy bonds has no tax implication so only the cost of a trade would apply.

If you don’t have the time to do this exercise on your own or simply want to ensure that you are set up right, please reach out to us at Rightirement Wealth Partners. You may schedule a 15-minute phone meeting on our website or call in or write. We look forward to speaking with you.

 

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investorís yield may differ from the advertised yield. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.

No investment strategy assures a profit or protects against loss. Investing involves risks including possible loss of principal.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 1/2 may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA withdrawals may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

An investment in the money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

 

Common Financial Planning Mistakes

Man Holding Face in Despair

One of the many reasons Bill and I founded Rightirement Wealth Partners is to share valuable knowledge with as many people we can reach. Blogging is a natural extension of this goal and what better way to begin than by sharing some of the common financial planning mistakes. If some of these hit home and you’re a person who is more comfortable working through problems as a team reach out to us for a complimentary 15-minute phone consultation.

  1. Failing to review your corporate benefits package in its entirety. Many of the significant money saving opportunities we discover for our clients comes from simply reading all their benefit plan documents. It’s true, these documents are bland and feel like a chore to read however they are chock full of financial opportunities. Many plan documents are summarized up front and then detailed out in the back. At the very least, read that summary.

    Some common overlooked savings opportunities are inefficient use or lack of use of Flexible Spending Accounts, Health Savings Accounts, and pre-tax transit programs, such as TransitChek. Some overspending can occur if paying for accidental death and dismemberment insurance, carrying vision coverage on family members who have no eyesight issues. We also see people take supplemental life insurance coverage without comparing the rates against the cost of a matching private life insurance policy.

  2. Never writing down a budget. The word ‘budget’ for many people is similar to the word ‘diet.’ It means painful restriction from fun and enjoyment of life. However, the original definition of diet was only “the kinds of food that a person habitually eats.” It was non-judgmental. By extension ‘budget’ is an estimate of income and expenditure for a set period of time. It’s non-judgmental! Take a short amount of time to write down what you spend each month. Chances are you can document 80% of it right off the top of your head. Perhaps you will surprise yourself and may even want to make a change. Bill and I both recently modified our cable and mobile phone bills just to save some previously wasted dollars. It didn’t hurt at all, in fact it felt good.

    Don’t forget to write down those expenses that you only pay a few times a year, such as auto & home/renter’s insurance and holiday and birthday gifts. We have seen many people share with us that the credit card buildup from the holidays is what that tax return is for. It’s a strategy that works, but the better one is to plan for it ahead of time. Writing it out, helps you work it out, and pretty soon savings becomes a fun game rather than a fear or a chore.

  3. Sitting on too much cash. Bill is Italian and he swears to me that cash hording is in the Italian blood. Don’t get me wrong, cash is and always will be king. The best investments at some point need to be sold to raise cash for a goal or opportunity. However, opportunity cost can be quite expensive as well. If you have a reasonable cash reserve of 3-6 months of your bills set aside, then you should be investing surplus. If you are conservative investing may be a certificate of deposit or a ‘high-yield savings’ account that generates more than the 0.10% interest (or less!) that many banks will pay street level customers. If you have a longer term goal and do not mind some fluctuation, then you can consider bonds or stocks or other investments. The point remains that given a reasonable amount of time you can probably have your money work for you.
  4. Not coordinating investments with your spouse. I’ve caught the tail end of the time when one spouse traditionally handled the money. Bill has mostly worked with clients where each spouse does their own investing and has separate checking and savings accounts. Whatever way you want to work it is fine. What consistently surprises me is the vast majority of new clients we see are working toward the same financial goals together, but they have never compared their investment accounts to see if their investment plans are targeting their financial goals. Often we see spouses who have opposing comforts around stocks and retirement accounts will reflect it. One spouse will be full stock in the 401(k) and the other spouse will be in a fixed account. Combined they have little idea what their expected investment return range might be, and worse planning for future goals is hit or miss when they lack a target.
  5. The common thought that having a mortgage is good because the interest is deductible. It’s true that few people have the resources to easily pay off their mortgages quickly, but a few simple practices can accelerate the pay down. What amazes me is the percentage of people I have met throughout my career that believe that it is in their best interests to maintain a mortgage balance even if financially they can afford to pay it down or off. Simply put, paying interest to a bank costs money. No matter the deduction for said interest it only represents a percentage of the interest paid out. Sure, in this low interest rate environment there can be an argument of opportunity cost if cash were invested instead of paid to debt service. Regardless, it is simply false that maintaining a mortgage balance for the interest deduction is a financially positive decision.
  6. Believing that saving enough in your retirement plan to get the match is sufficient to prepare for financial independence later. Please understand that 401(k)s were not designed with the employees’ best interests in mind. They were created to transfer the financial responsibility of retirement income away from the company and toward the employee thereby saving the employer cost. Logically, the 401(k) match you may receive has not been designed to fund your retirement. A minimum target for retirement savings is 10% of earnings. A common match percentage from an employer is 3%. That is not even a third of this minimum goal. I personally advocate for a 20% savings rate. If you can’t reach this goal, then having a plan to move toward it is in your interests. Just know that most of your retirement savings will come from your efforts.
  7. One Million Dollars of life insurance is enough. Ok, it could be. It also may not be. When we work through protection planning with our clients who have children still in grade school, more often than not we find that more insurance is needed. A lot of people still believe that one million dollars is a lot of money. A general rule of financial planning is that 4% is a reasonable withdrawal rate from a lump sum of money to have it last decades. Using that rule a $1,000,000 lump sum could provide an income of $40,000. If you live in New York like we do, after income tax, that amount isn’t going to cover all the bills. It is unlikely to allow for retirement savings for a surviving spouse. It does not provide a sufficient lump sum to carve off for college tuition. Each family has different needs, and we help them calculate what an optimal amount of life insurance is. Take a moment to consider whether your life insurance will help your family complete the goals you have now.
  8. Disability insurance is a scam to earn insurance commissions. I have only had one client go on long-term disability claim and sadly she succumbed to cancer. I have had clients hire us after a disability. None of those families would say they wish they had less disability insurance. Few of them had adequate coverage. If you plan ahead you can save a sufficient cash reserve to last multiple years without earned income, but few people do this and realistically it doesn’t make a lot of sense if the goal is to avoid paying an insurance premium. Perhaps it was a simply a sales tactic taught to me by a veteran when I was a rookie financial planner but it holds true. Paying a premium of about 1% of your income to ensure that you can protect the rest of your after-tax income if you are hurt or sick and out of work makes sense. Most people already do this to protect their home, their cars, and their life. It’s likely that your biggest asset is your ability to earn an income for decades of your life. If that fails, most of your family’s financial goals will too. A competent financial planner can determine your needs and then from a position of knowledge you can choose whether you will insure your income.
  9. Believing estate planning is only for the really wealthy. An estate is all the money and property owned by a person at death. Estate planning is a fancy term for planning ahead of time what you would like to happen with your money and property. I can tell you what you do not want happening with your money and property; your family having to figure it out through the courts unnecessarily. On average I work through 3 or 4 estates with clients annually. Usually it is an elderly parent who passes away, but I have helped on estates of much younger people. People who pass without a will leave a mess for the surviving family members. If you pass away without a will when your children are in their prime working years, the time commitment necessary to finalize an estate is a burden. Fortunately, I have not experienced two parents dying with surviving grade school children. It is very important for parents that they not only have wills, but also guardianship provisions and custodians named in the event of a tragedy. I have only been able to identify two reasons people do not write out an estate plan; cost and fear of discussing one’s own mortality. I do not have an easy solution for the latter, however I assure you the cost associated with preparing an estate plan is peanuts compared to the costs of not having one if you need it.

If you would like additional information on any of the above topics, please email or call us. Sure we would welcome new clientele that fits our business, but we write this blog with the hopes that we can help many more people than we could reasonably help individually. If possible we will help you locate a professional in your area who can help too.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.

CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above.

They generally should be part of a diversified portfolio for sophisticated investors.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.