Front Street Wealth Management

Fee Only, Proactive Wealth Managment

Three Simple Things for 2022

by

Every new year brings a goal to do things just a little bit better. To me, better often means simpler. And, the simplest things are the most automatic. Here are three simple and automatic things to consider for 2022.

Change your RMD Mechanics: I have to admit, it was very nice not having to deal with required minimum distributions (RMDs) for my clients in 2020. Nonetheless, RMDs returned in full-force last year. With that, it has spurred me to further systematize our internal process in an effort to maximize my clients’ charitable giving options.

For those of you who have reached the age of RMDs and don’t need to dip into your IRA to pay your everyday bills, consider the following setup.

Establish the level of cash you need to live your life and just have that money come directly from your after-tax investment or savings accounts. Next, get a checkbook issued for your IRA. Set this dedicated IRA checkbook aside and only use it for your charitable giving throughout the year. Your IRA donations will reduce your RMD dollar-for-dollar and will help to lower your tax bill. Then, when the end of the year approaches, simply distribute the rest of your RMD into your after-tax investment or bank account.

With this simple process in place, you won’t even have to think about your RMD during the year and, perhaps best of all, you’ll enjoy the nice tax break that comes from making charitable donations directly from your IRA.

File an Extension: I don’t know about you, but I’m extremely busy at the start of the year. This makes the traditional tax filing deadline of mid-April a time-management burden for me. Now, perhaps you’re not busy at all, but instead just want to enjoy some warm weather away from your tax files! In either case, you might consider filing for an extension and pushing off your tax deadline to a more convenient time.

Of course, filing for an extension is not the same as taking a tax holiday! By April 18th, you still need to pay what you owe. To get that part done, you can just do a rough calculation and send in the money with your request for your tax filing extensions. Then, by mid-October, you can do the nitty-gritty math and officially file your taxes.

Don’t Forget to Rebalance: Last year was yet another good one for the stock market. That’s worthy of celebration. However, once your personal celebration ends, try to return to reality and stay disciplined about your investments and the risks you’re taking.

As most of you know, the single most important thing you can do is to periodically rebalance your portfolio’s asset allocation. After the past few years of stock market gains, there is a pretty good chance things have gotten out of whack.

While benign neglect often feels pretty good, it only lasts for a little while. Rather than overthink the market and the economy, simply eliminate the guesswork by making portfolio rebalancing your automatic routine.

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Q&A: Social Security and Crypto

by

Q: I’d love to settle my mind. Most of my friends have already filed for Social Security benefits. They were worried it’ll eventually go away. But, my financial advisor continues to recommend that I keep waiting to file for mine. What are your thoughts?

I’d really like to give you a short-and-sweet answer. Unfortunately, without knowing your personal circumstances, that’s simply impossible. But, here are a few things to help guide your thinking.

Social Security isn’t going away anytime soon, in my view. For those over 55, the promised benefit shown on your latest Social Security statement is very, very, very likely to arrive in your bank account soon enough. Yes, that’s three “verys.”

How can I sound so certain? First, no politician wants to pull the rug out from under your planning that’s already in its later stages. Second, no politician wants to lose the votes of those who actually vote.

As your advisor likely explained, for every year you delay, you get an 8% lifetime benefit hike. Importantly, if your benefit is larger than your spouse’s, your surviving spouse will also enjoy your boosted benefit amount upon your death. As long as one of you lives for about 14 more years, each one-year delay is likely worth it. Naturally, this is a mortality question that only you can answer.

In addition, delaying your filing might open up tax planning opportunities while you wait. Uncovering them takes some detailed financial modeling. To name a couple, strategic Roth conversions and harvesting long-term capital gains come to mind.

Finally, to settle your mind, don’t forget that your friends may have very different financial circumstances from you. It’s never really safe to assume we’re all alike.

Q: Everywhere I look, I see more and more about investing in Bitcoin and other cryptocurrencies. It seems a lot of younger people now view them as legit investments. Yet, I don’t own any cryptocurrencies in my portfolio. Should I?

Over the past year, interest in cryptocurrency has certainly grown. If you ever tune into CNBC or read a financial publication, I’d bet real money that you’d hear about the latest wild moves of Bitcoin or Ethereum or whatever other crypto that sprouted up. It’s like crack cocaine for the financial media!

You can definitely put me in the camp of skeptics. It’s just far too volatile to be categorized as a reputable investment.

Bitcoin’s price fell about 40% in a span of months earlier in 2021. That drop was followed up with a price spike of 70% just a few months ago. Back in 2018, Bitcoin fell about 70% only to be followed by a quadrupling in early 2019.

As math geeks already know, while price surges of 70% and 400% seem exciting and lucrative, these moves only just recovered the 40% and 70% declines that came before them. It takes bigger gains to make up for losses. My advice is to turn down the volume on CNBC and think about something else.

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

A Bit of Math Goes a Long Way

by

I’m in the mood for a little math. Perhaps memories of college are flooding into my mind as I watch two of my kids gear up for this semester’s finals. Once a math major, always a math major, I suppose!

Let’s start with the electric-vehicle maker, Rivian Automotive. Regarding Rivian, here are three numbers to ponder. One hundred eighty. One billion. One hundred billion.

One hundred eighty is the number of vehicles Rivian Automotive produced through October of this year. In comparison, General Motors sold 4.7 million vehicles in the first nine months of 2021. Ford Motor sold 2.8 million vehicles over that same period.

One billion is the loss posted by Rivian in the first half of this year. Through September, General Motors logged a profit of $8.1 billion and Ford earned $5.6 billion.

One hundred billion is the current market value of Rivian, just following its initial public offering this past month. In comparison, General Motors’ market value is only around $90 billion and Ford’s is near $80 billion.

To be fair, Rivian Automotive is just a start-up. And, clearly, investors are hoping it turns into the next Tesla with its wildly overvalued stock worth over $1 trillion. But, remember, we’re talking about a company that’s made one hundred eighty vehicles and already has a one hundred billion dollar market value? It’s good to do some math.

Shifting gears, here is another number to contemplate. Eight and a half percent.

We are now in the open enrollment period for gaining health insurance coverage through the Affordable Care Act (ACA) marketplace. Just like this year, the formula for calculating health insurance premium subsidies is more generous than in years past.

Prior to 2021, you didn’t get any premium support or subsidy under the ACA if you made more than four times the official poverty line. For example, as a family of four, you’d lose all premium subsidies if your household income exceeded about $106,000, even if only by one single dollar.

At that level of income, it implied that a family of four could really afford a health insurance plan that currently costs about $20,000 per year and sports a $5,000 deductible to boot. Good luck with that, of course. In a demonstration of bad policy, if this family’s income came in just one dollar under the qualifying income threshold, they were provided a hefty premium subsidy of about $10,000. The program was designed with a truly steep “income cliff.”

For 2022, as it was in 2021, this income cliff will once again be waived. As a result, there are no income thresholds to consider with regard to receiving health insurance premium subsidies through the ACA marketplace. And, just like last year, the official “affordable” amount for health insurance is now set at a maximum of 8.5% of your family income. For lower income families, the maximum affordable premium is even less.

For a family of four, this 8.5% figure caps their health insurance premium at about $750 per month, instead of having them pay the full $1,500 monthly cost for the ACA Marketplace’s “benchmark” silver health plan. And, with their subsidy in hand, if they chose to buy a bronze plan, they could likely cut their monthly premium nearly in half again. With this premium savings, they could then contribute to a health savings account (HSA) for later use and additional tax benefits.

All around, it seems like a good idea to do some math as you head into 2022. I’m just glad I don’t have finals to stress over in the next few weeks. I promise I’ll try really hard not to gloat to my kids!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Inherited IRAs: A Ticking Tax Bomb?

by

In the real world, stretching hurts. Since I’m only about six months away from turning 50, I know this firsthand. Fortunately, I hear it’s not too late to work on it. In the world of money, however, it is in fact too late to stretch.

Prior to the start of 2020, people who inherited an IRA were allowed to slowly pay tax on the money. They could spread out their annual required minimum distributions from an inherited IRA over their lifetime. In some cases, beneficiaries were able to “stretch” the tax they owed over many, many decades.

However, starting on January 1, 2020, the rules for many IRA beneficiaries changed dramatically. To be precise, things changed for people who are not considered to be an “eligible designated beneficiary.” So, what does that mean, exactly?

You are not an eligible designated beneficiary, unless you fall into one of the following special categories.

First, the rules didn’t change for surviving spouses. Second, beneficiaries who happen to be within ten years of the age of the deceased IRA owner still get to use the stretch option. Next, the old rules still apply for beneficiaries who are disabled or chronically-ill. And, finally, beneficiaries who are still minors get the stretch option until they reach adulthood.

However, if you don’t fit the definition of an eligible designated beneficiary, your ability to do a lifetime stretch has been lost.

As background, Congress passed the SECURE Act in very late 2019. Incredibly, it passed in a bipartisan manner with 71% of the vote in both the House and the Senate!

The SECURE Act stipulated that new, non-eligible designated beneficiaries must distribute their entire inherited IRA within a ten year period. The clock starts ticking at the start of the year following the passing of the old IRA owner.

And with the death of the stretch option for so many beneficiaries, a new world of tax planning was born. To illustrate why proactive tax planning matters, let’s go through an example.

Samantha, age 48, inherits a sizable $1.5 million IRA from her father. Naturally, she leads a full and busy life. She doesn’t really like to talk about money all that much. Worse yet, she procrastinates on things she doesn’t like. In short, she’s not all that different from most people!

Samantha decides to invest the $1.5 million on her own. Things go along just fine for about seven years and, at age 55, she decides it’s time to really start planning for her eventual retirement. During her initial meeting with her new financial advisor, she hands over her big pile of investment statements and a couple of recent tax returns.

After some study, her advisor realizes she needs to break some difficult news to Samantha. While the good news is Samantha’s inherited IRA has grown to over $2 million, the truly terrible news is that it now needs to be fully distributed – and fully taxed – within three short years. Samantha’s ten year clock was ticking away like a tax bomb and she simply didn’t know it.

Of course, I’m certain Congress didn’t intend for this to happen to people. But, perhaps we can now see why there was such bipartisan support for the elimination of the IRA “stretch” option for many beneficiaries. After all, there are trillions of dollars currently held inside IRAs that are just waiting to be passed to the next generation. As you can see, there is some real planning to be done!

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

There’s Still Time for Year-End Planning

by

It certainly feels that 2021 is flying by faster than usual! As soon as they went up, our Halloween decorations will be packed away and, incredibly, Christmas will be here. Before it’s too late to think calmly, here’s a short checklist for some year-end financial planning.

Have you checked your beneficiary designations lately? There is a common misunderstanding that deserves highlighting. It’s important to remember that your beneficiary designations for your IRAs and other retirement plan accounts don’t automatically follow the distribution plan you’ve laid out in your trust. These accounts should be viewed as separate ,which means every so often it’s smart to review all your beneficiary designations.

Have you already met your health insurance deductible? If you have, it’s a good time to take care of additional health care needs you’ve been putting off. Once the calendar turns, your out-of-pocket deductible resets back to zero. For that matter, if you’ve been contributing to a “use-it-or-lose-it” flexible spending account through your employer, it’s also time to set up that eye exam or dental work. Prepare to be put on their cancellation list, of course!

Have you reviewed your charitable giving for 2021? Under the current tax law, most people don’t itemize their deductions anymore. Instead, the super-sized “standard” deduction is used by about 90% of taxpayers. Due to this, in a typical year most people don’t get any tax break for their charitable giving. But, for the past two years now Congress has added a special opportunity to get a charitable donation deduction, even if you don’t itemize on your tax return. For 2021, single filers can get a tax deduction for up to $300 in cash donations to charities and couples can deduct up to $600.

Beyond this year’s special above-the-line deduction, if you’ve reached the age where you have to take required minimum distributions from your IRA, remember that you can also meet your requirement by donating some of it directly to charities. These charitable IRA distributions will not count as taxable income. Brokerage firms can issue you a dedicated IRA checkbook to make this process much easier.

Do you know about the special 0% tax bracket? Yes, amazingly, this actually exists! However, it can be a little bit difficult to understand. If your taxable income happens to fall inside the 12% tax bracket, your dividends and realized long-term capital gains are not subject to federal taxes.

To help visualize how this works, picture a stack of bricks that represents all of your taxable income. Your dividend income and capital gains always sit on the very top of this stack. As long as your full stack of taxable income sits under about $40,000 for single filers and about $80,000 for married filers, those top bricks won’t be taxed at all. If you’ve still got some room, or can create more room, inside the 12% tax bracket, look to harvest some of your long-term capital gains at a zero federal tax rate. That’s a deal that’s too good to pass up.