In a surprising move, Congress just repealed two controversial provisions of Social Security that impact millions of retirees who receive “non-covered” pensions that were earned while opting out of the Social Security system. With Biden’s pending signature, the Windfall Elimination Provision and Government Pension Offset will soon be relics of the past and a great set of trivia questions for finance nerds.

The Windfall Elimination Provision (WEP) started way back in 1983 and is all about retirees with non-covered pensions who also happened to earn some Social Security benefits elsewhere at some point in their careers. WEP’s goal was to prevent retirees with sizable non-covered pensions from appearing to be low-income workers in the eyes of the Social Security system.

By design, Social Security replaces more of a low-income worker’s earnings than it does for a higher-income worker. However, appearing to be a low-income worker – while also receiving a healthy non-covered pension – is not the same as actually being a low-income worker. To account for this fact, WEP worked to reduce a “pseudo” low-income pensioner’s Social Security benefit by about $500 per month. This WEP reduction is now gone.

The Government Pension Offset (GPO) is equally long-standing and is all about Social Security spousal benefits and survivor benefits. It was put in place to reduce or eliminate Social Security spousal or survivor benefits for people who also receive substantial non-covered pensions.

As a spousal benefit, you are entitled to the greater of your own Social Security benefit based on your work history or half of your spouse’s benefit. And, as a survivor benefit, you are entitled to the greater of your own Social Security benefit or your deceased spouse’s Social Security benefit. However, for people with non-covered pensions, they might not have earned much, or any, Social Security benefit on their own during their careers. 

Without an adjustment under GPO, these pension-receiving spouses would effectively be viewed as a “stay-at-home” spouse and would automatically be entitled to a benefit based on their spouse’s work record. But, of course, they would receive their own non-covered pension benefit, too.

To account for this appearance of “double dipping”, GPO basically plugs in a person’s non-covered pension “as if” it is their own Social Security benefit. Given the size of some non-covered pensions, GPO worked to reduce or eliminate any spousal and survivor benefits for many pensioners. This GPO reduction is now gone, too.

With GPO and WEP’s repeal, about 3 million affected retirees will begin to receive about $20 billion more in Social Security benefits. On top of that, they are also slated to receive a year’s worth of retroactive benefits. The details on how these retroactive benefits will actually find their way to retirees’ bank accounts is still being worked out. It’s a massive undertaking.

If you’re a business owner, you should know by now that there’s a new law that requires you to disclose your ownership details to the government. While this might feel like just another bureaucratic hassle, ignore it at our own peril. With big penalties and fines, this particular hassle deserves your attention! 

The Corporate Transparency Act (CTA) was passed way back in 2021 as part of an effort to combat money laundering, tax evasion, and other financial crimes. It requires that all incorporated businesses report their Beneficial Ownership Information (BOI) to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). That means most LLCs, S-Corps and C-Corps have to comply. For most, the deadline is right around the corner, by January 1, 2025. But if your business was new this year, you were required to file the report within 30 days of your start.

What’s driving all of this? Historically, shell companies have been used to hide illicit activities. In response, the U.S. is catching up to global standards, requiring transparency about who actually owns and controls businesses. While this does feel intrusive, the goal feels justified.

Fortunately, filing your BOI report is easy enough. FinCEN has an online portal (boiefiling.fincen.gov) and the process only takes about 15 minutes. Before you start, you’ll need some essential information: names, addresses and birthdates of all beneficial owners of your business, your EIN, and copies of IDs for everyone.

Not every business is required to file the report. If your company has over 20 employees, generates more than $5 million in annual revenue, the government already knows all about you. Similarly, nonprofits and truly dormant entities with no assets or activity can skip it. But, don’t just assume you are exempted. Check with your advisors.

Unless you are a true do-it-yourselfer, you’ve probably received a lot of mailings about this new filing requirement from your CPA and attorney. For many legal and capacity reasons, many CPAs are not handling these filings for their clients. Many are just referring their clients to attorneys. With the end-of-year deadline fast approaching, be aware that your CPA and attorney could be quite slammed. For most readers, you can certainly do the filing yourself, but if you’re in doubt, you should contact your advisors for some help. 

If you are rolling your eyes after reading all of this, let’s talk more about the penalties. The government isn’t messing around. Stubborn resistance could cost you $500 per day, up to $10,000, and could even lead to criminal charges. Clearly, it’s not worth the gamble for only 15 minutes of minor, emotional pain! Don’t let this slip through the cracks.  

This election has occupied my mind more than it deserved. My experience tells me to ignore the rhetoric and focus only on policy proposals. Yet, I’m equally aware that there is no truly reliable way to predict their impact on the economy and markets. I think most would agree, it’s an exhausting process that feels both wasteful and beneath us. Supposedly, it’ll be over very soon, right? One can only hope.

A few legitimate things have caught my eye, though. Namely, proposals that might impact inflation and future tax policy.

Voters seem confused about inflation. The post-pandemic fever broke and inflation has come down a lot. The global supply of goods and services simply caught up with the surge in pent-up demand after Covid. Inflation is now approaching the Fed’s official 2% target. The fight isn’t over yet, but it’s quite close.

Yet, many voters believe inflation remains sky-high. There’s clearly a fundamental misunderstanding. Declining inflation doesn’t mean prices are in outright decline. That would be called deflation. And believe me, deflation is not a desirable goal, especially for those who owe money. Lenders hoping to be paid back someday don’t want to see deflation, either. Low and steady inflation is the goal for a good reason.

Speaking of debt and inflation, Donald Trump’s campaign is filled with proposed tax cuts. He’s called for zero tax on tip income, zero tax on overtime, the elimination of taxes on Social Security benefits, interest deduction for car loans and large tax cuts for corporations. Recently, he even floated the idea of eliminating all income taxes. All these proposals are expected to be funded by higher tariffs on imports from China and others and faster economic growth. However, trained economists are clear that tariffs are ultimately inflationary and act just like a tax hike.

Kamala Harris has proposed some tax cuts and targeted tax credits, as well. Her proposals are standard fare for a Democratic candidate. These include higher tax credits for those with children, tax credits for business start-ups and first-time homebuyers. Not to be beaten in Las Vegas, however, she also called for the elimination of tax on tips. Her proposals are balanced by higher taxes on corporations and high-income households and, also, faster expected economic growth.

Naturally, neither campaign has informed the public about the cost of their tax proposals’ impact on future federal deficits and our debt burden. It’s about getting the votes, first. Yet, with the 2017 tax cuts expiring in a little over a year, I do think voters deserved a much deeper discussion about tax policy. But, alas, this isn’t the world we live in today.

Despite all the noise, tension and fury, I’ll now add to the unbelievable cacophony of calls, texts, and mailers that we’ve all been receiving: Go vote. It does matter.

Q: This election has me worried about the stock market. Is it rational for me to take my required minimum distribution (RMD) from my IRA now rather than wait until the end of the year? Having some cash on the sidelines seems wise to me. 

A: First, it’s almost impossible to know what the stock market will do after the election. If I had to guess, its short-term move will likely depend on which party controls which branches of government. Even then, the margin of victory in the Senate and House will also matter. One thing feels likely; no party will have much control.

But, really, the election is irrelevant to your question. Nothing is stopping you from selling investments to raise cash for your RMD. Whether you actually take your RMD now or wait until later in December doesn’t need to be part of the decision to raise cash. After you raise some cash in your IRA, the timing of the actual distribution from your IRA doesn’t really matter from a portfolio management perspective. 

Now, if you haven’t yet completed your IRA donations for the year, I’d say waiting to process your RMD is a wise move. Get those donation checks out the door first. It’ll lower your tax bill. 

Q: My Social Security number has apparently been leaked and floating around somewhere on the “dark web.” Of course, this makes me uncomfortable. What should I do now? 

A: This is an irritating reality in today’s world. Besides closely monitoring your banking and credit card transactions, there are a few other things you can do to mitigate the possible impact. 

First, I suggest you freeze your credit files with Transunion, Experian and Equifax. It’s a bit of a pain to do, but it prevents a bad actor from opening a new credit card or applying for a loan in your name. If you can’t do this yourself, ask someone to help you.

Next, consider visiting or calling your local Social Security office and ask them to block any online access using your Social Security number. This move will prevent someone from going online to change your current direct deposit information. If you ever need to change your banking information with Social Security, you’ll just need to visit the local office to make the change. 

Finally, to prevent a crook from fraudulently filing a fake tax return using your Social Security number, you can also get an Identity Protection PIN from the IRS. Your PIN will then be required to e-file your tax return. It might be a little cumbersome to manage as a new PIN is issued to you each year. And, your new PIN is accessible online. It’s only mailed to you if you are a confirmed victim of tax-related identity theft. 

Q: I want to help my grandkids by setting aside some money for their college educations. Currently, I’ve just opened an investment account in their names. Is there a better way to do this?

A: There is a better way. My suggestion is to open a 529 college savings plan directly with the State of Michigan (go to www.misaves.com).

To start, the money you contribute to a 529 plan might enjoy a state income tax break. The maximum tax benefit is ~$200 for a single person or $400 for a married couple. It’s not huge, but it’s something.

Next, a 529 plan’s investments enjoy some major tax benefits. The income earned in the account is never taxed if the money is used for qualified education expenses. The list of approved is very encompassing. IRS Publication 970 spells them out.

Plus, you won’t lose control of the money in the plan. Most importantly, your grandchildren won’t automatically get the money at age 18. This is in direct contrast to your current setup.

Now, if it turns out that one of your grandchildren isn’t college-bound, you can always change the beneficiary designation to another family member. Of course, you can even take the money back, but know that the earnings portion is subject to tax and there is a 10% penalty on those earnings, too.

Finally, if there is money left over in the 529 plan, and it’s been open for at least 15 years, new rules allow for the money to roll into a Roth IRA for your grandkids. There are many rules around this, but it’s a very interesting feature to keep in mind.

Q: I’m growing tired of sending in my quarterly estimated tax payments. It seems there must be an easier way to get the government their money. Any suggestions?

A: Quarterly estimated tax payments can be a bit of a pain. After all, who likes deadlines? Fortunately, there are some alternatives that might make this easier.

One option is to make your estimated federal tax payments through four automatic, scheduled draws directly from your checking account. This can be set up right on your previous year’s tax filing. Ask your tax preparer about it. However, Michigan tax payments will still need to be made the traditional way.

There is another option for those who are drawing from their retirement accounts, receiving a pension payment or even collecting Social Security. If this describes you, you can have the correct amount of federal and state income taxes withheld directly from these income sources. It takes a little math and a good tax projection, but it’ll eliminate the need for quarterly estimated tax payments.

Q: I’m working on my estate plan. I want to leave money to charity after I pass, but I’m worried about how the money might be spent by them in the future. How can I make sure my donations will be put to good use, even after I’m gone?

A: Given your concerns, you might consider the use of a “testamentary” donor-advised fund (DAF). The word, testamentary, simply means that the DAF is created upon your death, not before.

A donor-advised fund is a tool for your charitable giving where you get to “advise” on where the money should  go in the future. While you no longer have true, legal control over the money you’ve donated, a DAF effectively allows you to choose the charities to support and the timing and amounts of the donations.

Upon your death, you can name other people (let’s say, your kids) to assume your role in advising on future donations. Having them oversee future donations might alleviate your concerns about the future use of the money. The key thing is to explain your wishes and then hope they listened!

Q: We are considering selling one of our homes. We’ve heard there’s a capital gains exclusion, but we’re not exactly sure how it works. How do we qualify for this tax break, and what should we do now to make sure we can use it?

A: To start, the capital gain exclusion is only for your primary residence. Legitimately establishing your primary residence does take some specific steps that might be a bit cumbersome. Frankly, given the size of the tax benefit, it’s purposely designed to be somewhat difficult to use, especially if you are just trying to work the system.

When you sell your primary residence, you are entitled to a capital gains exclusion of up to $250,000 each. As a married couple, this works out to a $500,000 capital gain exclusion. However, there are specific tests that you must pass to use this gain exclusion.

In short, your property must have been your primary residence for two of the past five years. To help you prove it was your primary residence, there are some tell-tale signs that can help support your claim.

Among them, the property’s address should be used on your tax returns, voter registration, financial accounts, utility bills and your car registrations. Also, it would make sense for this property to be taxed as your primary residence, not as a second home, obviously. Finally, consider having some proof that you are actually a part of the community, such as participation with local organizations.

Bottom line, the overall facts and circumstances of your life, routine and general habits should align with the claim that you are, in fact, selling your primary residence.

Q: We have decided to sell our home, but we haven’t done this for a long time. With the National Association of Realtors (NAR) new commission changes, will this change our strategy for setting our listing price?

A: With this spring’s lawsuit settlement, the NAR’s new real estate commission policy just took effect. Understanding its impact is wise, but it honestly might not result in much of a practical change. 

The NAR’s new policy results in two changes in how buyers and sellers deal with their agents. The end result is greater transparency through clearer disclosure.

Under the old system, through the MLS listing system, the buyer’s agent (and, often, not the buyer) would see how much of the commission the seller’s agent was willing to share with them. This behind-the-scenes practice is no longer allowed.

Under the new system, the buyer’s agent now needs to present a written agreement to their client that spells out their commission and must be signed before showing any property to them. Buyers will know what their agent will be doing for them and what they will be paying them for their services.

These are good changes, but beyond greater transparency through clearer disclosure, it might not make much of a difference with the true economics.

Let’s say you list your home for $600,000. Under the old system, you might have paid a 5% commission to your agent. You would receive proceeds of $570,000, after the commission expense. And, your agent would have then turned around and shared part of their $30,000 commission with the buyer’s agent. That was the behind-the-scenes part.

Now, unless an agreement is struck openly between the two agents on commission sharing, the seller and the buyer will each have to pay a commission to their own agent. As the seller, let’s say that commission is 3%. And, let’s say the buyer agent’s commission is 2%. Yes, it’s the same 5% in total, but the buyer and seller are each paying their own part.

So, how will this new commission arrangement affect a deal? Well, obviously the buyer won’t just blindly pay more than $600,000 for your home, with their 2% commission cost added on top. To offset their commission expense, they’ll actually want to negotiate a lower price of $588,235, to be exact. And, if you agree to sell your home for $588,235, then your own agent’s 3% commission will reduce your net sales proceeds to $570,588. As you can see, that net amount is awfully close to the same $570,000 you’d get under the old, less-transparent 5% commission-sharing setup.  

While this new policy change might feel like much ado about nothing, in all practicality, I think the real estate industry will be commensurately more transparent. In my book, that’s always a win.  

Over the first few trading days of August, investors have again been reminded that markets don’t just rise. From Thursday, August 1 through Monday, August 5, stocks have declined about 6%. While this level of decline feels  somewhat “pedestrian”, it has certainly attracted attention.

It’s important to note that the media is always looking for reasons to explain the movements of financial markets. When stocks rise, it’s caused by some recent optimistic factor. When stocks declined, it’s attributed to some downbeat headlines. As humans, we seek explanations for everything.

This time, general recession fears have been pegged as the proximate cause for the market’s recent decline. In part, these fears have been driven by a few items.

The July jobs report was a bit weaker than expected. This report was joined by another negative reading of a closely-watched index of manufacturing activity. And, finally, investors are growing impatient with the Federal Reserve. There is a growing concern that the Fed is already “behind the curve” and has waited too long to cut interest rates to avoid a recession.

Recession worries have been constant since the Fed quickly raised interest rates in the spring of 2022 after their very slow response to the post-Covid rise in inflation. They steadily raised interest for about 18 months. Since August 2023, however, they’ve paused and have vowed to watch how things unfold.

The economy has continued to grow through it all. Yes, the latest job report showed a decline to only about 115,000 new jobs in July. But, the statistical margin of error of the jobs report is wide. Monthly reports should be viewed with some perspective. Over the past year, the US economy has added about 200,000 new jobs per month. Over the past six months, the monthly average is about 190,000. And, over the past three months, the monthly average was about 170,000. Yes, the jobs picture is slowing. But, things certainly don’t appear to be falling off the proverbial cliff.

Now, with inflation readings having steadily and significantly fallen since hitting their peak in late 2021, the Fed is expected to begin cutting rates at their September meeting. And, with the unemployment rate now finally rising after staying stubbornly low in face of substantial interest rate hikes, there is sufficient reason for the Fed to cut rates to help support the economy.

Without sounding like a Pollyanna, my current take on the recent stock market decline is investors are behaving like a person who shoots first and asks questions later. The fact is, as hard as we may try to explain the inexplicable, nobody really knows what causes markets to suddenly rise or decline.

The list of services of a wealth manager is always expanding. The job now goes well beyond the basics of investment management, tax planning, and estate planning. Notably, I’ve now committed to conducting online financial security audits, starting with my most vulnerable clients.

These audits cover four key elements: (1) Managing Passwords, (2) Identifying Scams, (3) Protecting Your Credit, and (4) Tapping Trusted Contacts. While nothing is fail-safe, the layering of these four elements works to lower the risks of falling victim to online fraud.

Password Management: There are many different ways to manage your passwords, ranging from using a simple notebook to using a password management software. Regardless of your chosen method, there are three principles that need to be followed. First, you should use different passwords for your key finance-related logins. Second, you should change your passwords regularly. Third, you should always use two-factor authentication for all your financial accounts and your primary shopping websites.

Scam Identification: Criminals are always looking for new ways to separate you from your money. Their primary goal is to get you to divulge your sensitive personally-identifiable financial information, such as your Social Security number, your credit card and bank account information, or your login credentials. In the end, your awareness and constant vigilance are the only realistic methods to avoid falling for a suspicious email, text, call or mailing. Given this, repeated reminders of the types of scams out there are the only defense. As silly and as simple as it may seem, you should consider having a list of common scams near any device you use to access your most sensitive, online accounts.

Protecting Your Credit: As I wrote about in a recent column, one way to limit the damage after you inadvertently divulge some of your sensitive personally-identifiable information is to freeze your credit reports. This process is a little bit time-consuming, but it can be accomplished in less than an hour with help. Freezing your credit file can help stop any attempts to open new loans in your name.

Trusted Contacts: Perhaps most important, you should identify key people in your life willing to act as a second set of eyes for you. Whenever you are in doubt, just pick up the phone and ask for their take on what to do (or not do!) Your trusted contacts should be included on your list posted next to your computer or devices. Reaching out to your trust contact just might provide you with enough pause to save you a lot of pain and worry.

Jason P. Tank, CFA, CFP®, EA is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com

Q: I’m nearing retirement, but I’m worried about Social Security’s financial health. How likely is it that I won’t receive my full benefits? What should I be doing now to protect myself from potential benefit cuts?

A: Your concern is all-too-common, especially as the health of the Social Security system is increasingly viewed through a political lens. That really is a shame.

In May, the trustees of the Social Security system published their 2024 annual report. Each year, their report only shows subtle changes in the financial picture. Given the inherent, long-range set of assumptions used in their analysis, it’s a system that isn’t designed for abrupt changes over time.

Now, it’s true the Social Security “trust fund” is projected to be “depleted” in 2033. That’s the headline that gets the most attention each year. However, the term “depleted” is too strong. This simply means that, with no changes, the excess revenue that the Social Security system has accumulated over past decades will officially be used up. If there are no changes made to the level of benefits paid or the payroll taxes collected, in 2033 Social Security payroll taxes will only be sufficient to pay about 80% of the promised benefits.

On the surface, an immediate 20% in benefits is not a comforting thought. But, of course, the supposition that absolutely no changes will be made is wildly unrealistic. It’s just not going to happen. Too much is at stake and the solutions are too obvious.

Changes to Social Security will undoubtedly be made to both the long-term funding model and the benefit side of the equation. Fortunately, the changes that will be made will only need to be relatively minor. “Fixing” Social Security is akin to navigating a ship across the ocean. Small course corrections can lead to a vastly different destination. Long-range financial projections for Social Security are highly impacted by very small tweaks.

According to the most recent report, if the only dial to turn was Social Security’s funding model, all it would take to reset its course is to boost the dedicated payroll tax rate from the current 12.4% of wages (combined employer and employee contributions) to a level closer to 15.7% of wages.

Naturally, there is another dial to turn besides raising payroll taxes. Small changes to the benefit formula could take multiple forms. For example, making a change in how the annual cost-of-living adjustments are calculated is a particularly gentle way to alter the system’s long-run trajectory.

If I had to guess, I expect our elected officials to form a non-partisan “blue-ribbon commission.” That seems just like the kind of politically easy route they love to take when decisions simply must be made. But, don’t hold your breath quite yet. We still have a few election cycles ahead of us! 

Q: I’ve been having trouble managing every password in my life. Is there a service you can recommend that will help me keep track of them all and also keep me safe online?  

A: There are multiple ways people deal with the nuisance of passwords, ranging from unsafe to cumbersome. I believe the best solution is to use an online password manager like LastPass. The worst solution is to use the same password for every website or service. 

An online password manager can be used across all your devices and it will allow you to easily create complex passwords to ensure enhanced security. With one master password to remember, along with a second layer of added security known as two-factor authentication, it effectively lifts the burden of password management. 

Q: Unfortunately, I fell for an online “phishing” scam. I’m now worried that someone could open a credit card or take out a loan in my name. What should I do to limit the damage?

A: You should create accounts with each of the three credit bureaus and place a credit freeze on each of them. This will block all future credit inquiries, effectively making it impossible for fraudsters to open a card or borrow money in your name. 

Transunion, Equifax and Experian have now made this process much easier to set up and free. The old process was too complex and carried a cost. Today, it’s free. If you haven’t frozen your credit files, you should do it now.

Q: My father died last year at 70 and I inherited his IRA. I’ve read some confusing advice on how much I need to distribute from my Inherited IRA each year. Can you clear it up for me and explain the tax implications of my inheritance?

A: In 2020, Inherited IRA required minimum distribution rules changed. Essentially, there are now two sets of rules: one for non-spousal beneficiaries who inherited an IRA from someone already required to take minimum distributions (RMDs) and another for those who inherited from someone too young to start their RMDs.

Since you inherited an IRA from your father, and he was under the starting RMD age of 73, you don’t have to distribute money from your Inherited IRA until the end of the 10th calendar year following the year of his death. By the end of the 10th year, you must fully distribute the entire account balance and pay any tax due. 

Timing those distributions for the lowest tax obligation is the ultimate goal. You should seek expert tax advice on how to best manage the tax implications of your Inherited IRA distributions. Waiting until that final 10th year is likely a bad plan as it may cause much higher taxes. 

Most memories of the Great Financial Crisis have faded. Except the lingering effects of zero interest rates. For 13 years, savers received no interest on their cash savings. Then, in a blink, we experienced a surge in post-Covid inflation and the Fed raised rates. Suddenly, cash feels really good. Does it feel too good?

Today, it’s easy to get over 5% interest on your cash savings. Checking accounts pay far less. That portion won’t earn much. After all, banks have to make money, too. For your excess cash, most banks have finally stepped up to the plate to keep your money.

If you have excess cash sitting around that is earmarked for some relatively near-term purchase, the advice to follow is not for this money. But this part is definitely for you. For your near-term money, take a quick look at what you’re earning on your excess cash in your bank accounts. If you aren’t earning close to 5% interest on it, you’re essentially donating money to your bank. That’s never a good plan.

For your cash without a near-term purpose, it may be time to develop a plan to invest it for the longer-term. Why? Because the days of earning over 5% in cash are probably approaching an end. The Fed is expected to lower rates as their fight with inflation is reaching the endgame.

To start 2024, when inflation was falling quickly, investors had thought we’d have already seen some rate cuts in the late-winter, early-spring. But, the Fed hit the pause button as the decline in inflation hit a temporary speed bump. Now, the current expectation for the first interest rate cut is at the Fed’s September meeting. A second and possible third rate cut is expected in November and December. Fast forward to summer 2025, investors are now betting that rates will be about 1% lower than today.

While this might not seem like much of a cut in rates, these expectations aren’t really factoring in the possibility of a recession. In that event, the Fed will very likely speed things up. With that, today’s comfy 5% cash savings rates will be in the rear view mirror and the question of what to do with excess cash will become more urgent.

Naturally, the time for the sense of urgency is before interest rates get cut or a possible recession is underway. Shifting some cash into medium-term, high-quality bonds might help you to “lock in” today’s interest rates. Certainly, this transition isn’t easy to consider while making 5% without any real risk. That sense of uneasiness is, perhaps, a subtle sign to begin moving outside of your comfort zone.

You collected all those confusing tax forms. You dumped your pile of papers on your tax preparer’s lap. You even signed your tax returns. You’re done, right? Not quite yet.

Now that the chaotic rush has come and gone, it’s time for you to make sure you didn’t inadvertently leave Uncle Sam a tip he didn’t deserve. Here are three things to review that might result in some money back.

Qualified Charitable Donations (QCD): Using your IRA as a charitable donation tool is a tax-smart strategy. After you reach age 70 ½, you can donate to charity directly from your IRA without owing any taxes on the distribution. Remember, your IRA balance has not yet been taxed and Uncle Sam is waiting in the wings to get a piece of the action. However, when you donate some of your IRA to a qualified charity, it’s tax-free!

Unfortunately, it’s common for IRA donations to end up being taxed anyway. How is this possible? Because the tax form that summarizes your IRA distributions – Form 1099-R – doesn’t automatically subtract out your donations. You have to manually subtract them. If you donated some of your IRA last year, review Box 4a and Box 4b on your federal Form 1040 to see if you actually got credit for making those IRA donations.

Homestead Property Tax Credit: Some homeowners qualify for a special Michigan income tax credit that effectively rebates back some of their property taxes. If your home’s taxable value is less than $154,400 and your total household income was below $67,300, you are eligible for the Michigan Homestead Property Tax Credit of up to $1,700. Your very first step is to check your property tax bill to see if the “taxable value” of your home is below the threshold. If it is, you can then move onto step two to see if your household income is low enough to receive this tax credit.

Tax Loss Carryovers: If you switched your tax preparation software or even hired a new tax preparer last year, be sure to check that your unused tax losses were successfully carried over to your 2023 tax return. Missing your tax loss “carryovers” is especially easy to do.

To ease your mind, review your 2022 federal tax return and check for a negative figure on Line 16 on the top of the second page of your Schedule D. If you showed a loss that’s larger than $3,000, you should pull out your 2023 federal tax return. See if that negative figure was carried over onto either Line 6 and/or Line 14 on this year’s Schedule D. If your tax loss carryovers are missing, an amended federal and state tax return just might be in your future!

Technology is a blessing and a curse. We’re living in a moment where these cross currents are increasingly obvious. It’s probably not a coincidence that AI is exploding at the precise moment online threats are peaking.

Long gone are the days of using paper and getting mail. Today, everything has moved online. And, accessing information online requires layers of security. The ongoing battle to keep us safe online has left many seniors in the dust. I cannot overstate how difficult technology is making things for our aging population.

Here are some examples many seniors face daily.

You get an email alerting you to a possible suspicious charge on your credit card. Did you just accidentally call a scammer, instead? You search Google to find the login page to review your money. Did you just log into a fake website and expose your login credentials? A warning about a software update just popped up on your screen. Did pushing that help button just give a criminal access to my computer? How exactly do you access that six-digit text code when you’re still talking on the phone? Why is my Face-ID not working anymore? Didn’t I use my fingerprint to login into that app before?

The worry and hassle trickles down the family tree. I’m certain I’m not the only one who moonlights as a tech support and cybersecurity consultant. Sadly, not all seniors have access to local or distant family members willing or able to help. Don’t get me started on just how difficult it is to deliver tech support on a phone.

A better solution is screaming to be created. Admittedly, it’s a pipe-dream. Nonetheless, the thought of it gives me a feeling of hope!

What’s desperately needed by seniors is a trusted team of “tech-navigators” designed to ensure online safety and minimize frustration. It’s not deep tech-support, it’s simply tech-navigation. Even so, this trusted team needs to be highly-vetted (deep background checked, not Best Buy) and endorsed by already established and trusted entities, such as local senior centers or municipalities.

Now, it certainly wouldn’t be cheap to deliver a high-quality and trusted tech-navigator service. But I sense the peace-of-mind would feel almost priceless to all concerned. I suspect family members, if needed, would help subsidize the cost. But, let’s be totally honest, the cost to protect our seniors against technology’s advances should be borne by the very businesses that benefit most from it.

At the top of this list sits big-tech, and the banks, credit card companies and brokerage firms. While they will balk, they deeply understand the phrase, “It’s just a cost of doing business!” Technology is both a blessing and a curse, yes. But, it’s also inflicting a heavy cost.

Q: I read your recent column about Michigan’s new retirement income tax law. With the new law officially going into effect after the start of the 2023 tax season, should I file my taxes later this year?

A: You are right. Due to some esoteric legislative procedures, the new tax law didn’t officially become law until February 13, 2024, even though it was passed way back in March 2023 and applies to the 2023 tax season.

Given this, along with some very slow tax software updates, it may affect those who filed their state tax return before February 13th. Specifically, it impacts those born in 1953, 1954, 1955 and 1956.

Fortunately, the State of Michigan has said tax returns filed under the old law will be reviewed using the new law. You won’t need to file an amended return to get the new law’s benefits. If all goes according to plan, they will just send you a tax refund, if needed.

Q: We’re concerned with my mother’s ability to safely handle her online access to her financial accounts. We are worried about her falling for “phishing scams” that might allow a scammer to gain access to her accounts. What can we do to make things safer for her?

A: For uninitiated readers, a phishing scam is when you are tricked into giving out your login credentials or other personally-identifiable information. This could be a fake email asking for you to update your online profile or even doing a simple Google search that takes you to a fake website.

My general advice falls under the headings of training and prevention.

On the training front, I’d suggest you set up bookmarks on your mom’s browser that links her to the official websites for her financial accounts. Also, try to have her only use her iPad or iPhone’s official apps to get into her accounts.

One scam I recently heard about describes credible-looking, but fake, websites that trick account holders to sign in. When their login fails, it warns them that their account has been compromised and directs them to call for “help.” How would the account holder find such a fake website? By searching directly on Google for their bank or brokerage firm or by clicking a link in a fake email. Using the official app or by clicking on their browser’s bookmark can help.

On the prevention front, you might consider attaching your cell phone number as her two-factor authentication device. If she falls for a phishing scam, at least you’ll be there to block the attempt.

Finally, if she works with an advisor, see if they can set things up to prevent online money movements or trading activity. It’s possible to make her online account basically for viewing purposes only. When she needs to do something with her money, she’d just call her advisor.

For the 2023 tax season, Michigan has a new tax law for retirement income. It’s being “phased in” over four years. Let’s try to break it down.

Like the old law, the new law is based on birth years.

Group A: For those born on or before 1945, there is no change. These retirees get to deduct their retirement income up to about $60,000 (single) / $120,000 (married) for 2023. Think, pension benefits and IRA distributions.

This is where things start to get just a little more complicated.

Group B: For retirees born in 1946 through 1952, you get to deduct $20,000 (single) / $40,000 (married.) For tax season 2023, effectively there is no change, either.

Things still feel simple enough, so far.

Group C: For retirees born after 1952 and 1956 (to be included in this group, you must reach age 67 by the end of the tax year), you also get to deduct $20,000 (single) / $40,000 (married). But, there’s a catch! The deduction is reduced by the taxable portion of their Social Security benefits as well as their personal exemptions.

The “catch” adds a wrinkle of complexity.

Group D: For those born in 1957 and 1958, the old law provided zero deduction. For the 2023 tax season, they’ll benefit under the new law as shown below. Please note, younger groups will have to wait for the 2024, 2025 and 2026 tax years to see the benefits.

Up until now, I have been describing the old law. The reason for that review is the new law requires us to basically “overlay” it on top of the old law to figure out which is better. How’s that for complexity!

For the 2023 tax season, under the new law Group B and Group C will be entitled to 25% of the deduction amounts that’s been afforded to Group A all along. If the new law works out to be better than the old law, they can choose the new law’s “25% phased-in” deduction. That works out to be about $15,000 (single) / $30,000 (married.)

For Group B, the old laws’s deductions of $20,000 (single) / $40,000 (married) are clearly better than the new law’s 2023 phase-in deductions. 

For Group C, the old law had that “catch” (see above to review.) As a result, the new law might work out better for them. It all depends on the level of their Social Security benefits and retirement income received.

For Group D, the old law gave them no deduction at all. In this case, the new law’s deduction is clearly better.

Fortunately, next year we get to do this all over again! Except, at that time, we’ll have a “50% phase-in” to overlay on top of the old and we’ll introduce Group E into the mix. Thankfully, we can save that added complexity for another day!

Jason P. Tank, CFA, CFP® is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com

Q: Unfortunately, we just realized we totally forgot to pay our estimated quarterly tax payments last year. We’re afraid to ask, but how do the penalties and interest charges work? 

A: Things happen. Here is a quick rundown using rough figures for tax season 2023. 

The federal government is much more lenient than Michigan. The IRS’ combined penalties plus interest rate works out to about 8% on your unpaid tax that is due. Thankfully, your unpaid tax debt isn’t subjected to that rate for the whole year. You are only expected to pay your total tax due in quarterly installments, thus the name “quarterly estimated tax payments.”

Now, Michigan is downright mean if you fail to send in your estimated payments. The interest rate charged is also about 8% in 2023. But, if you didn’t send any of your estimates, they slap you with a huge add-on 25% penalty on each estimated amount that’s due. They will lower that penalty to “only” 10% if you paid even one tiny estimated tax payment during the year. 

Q: I’ve been holding a large amount of cash in my investment portfolio for some time now. Recently, I’ve been advised to shift some of that money into bonds. It makes me really nervous. Your thoughts?

A: Your bonds vs. cash conundrum is widespread. Your advisor is thinking soundly, in my view. Yes, today you can get over 5% on your cash with little-to-no risk. But, it’s logical to assume this won’t last. If you wait until interest rates start dropping, you might kick yourself for not locking in current yields.

If the economy slows with the continued slowdown in inflation, we should expect the Fed to cut rates. Many expect that to start as soon as their meeting in late March. And, markets are expecting that you’ll see rates about 1% lower by September. So, your advisor is channeling Wayne Gretzky by skating to where the puck is going to be, not where it is now. 

Q: We’ve done Roth conversions in recent years. Our motivation was to take advantage of today’s low tax rates. With the election looming and deficits booming, it seems like we’re headed for higher taxes. Is that a valid enough reason to keep doing Roth conversions or is there more to it? 

A: Roth conversion analyses require both financial know-how and a pretty good crystal ball. If your current tax burden is temporarily lower than it will be in the future, converting some of your pre-tax IRA balance to a Roth is a no-brainer. But, if you are purely focused on making a good guess about future tax hikes, things get more challenging. 

If forced to answer in a blanket manner, I’d err toward considering Roth conversions; when done methodically and in moderation. Our tax code is often quite complex and sometimes Roth conversions have unintended consequences. especially if not done carefully. This is fresh fodder for a future column.

Q: I’m turning 73 later this year and understand that I’m now required to take money out of my IRA. Should I do it right away or wait until later in the year?

A: Honestly, your timing for your required minimum distribution (RMD) is quite personal. The deadline for taking your RMD is technically December 31, but you can certainly do it anytime during the year.

If you need the cash for living expenses, I’d say just go ahead and take the money out of your IRA when you need it. If you tend to get really busy, near the end of the year, it might be wise to get it done earlier. But, if you don’t urgently need the money and usually donate to charity late in the year, consider satisfying your RMD in December after you’ve completed your direct-from-IRA donations.  

Q: We’re still not earning very much on our cash sitting in the bank. We’ve finally noticed some decent savings rates on CDs. Should we invest in them now?

A: The short answer is, yes, you should absolutely be earning interest on your cash savings. Luckily, you now have some choices.

Besides purchasing CDs at your bank, which can be convenient, you might think about transferring your surplus savings into a brokerage account. Money market rates currently sit at about 5.25%. With an electronic link established, you easily zap money back and forth between your brokerage account and bank account.

Ultimately, if you’re earning less than 5% on your cash, it’s time to act.

Q: Last year, I donated money directly to charities right out of my IRA for the first time. I’m unsure of how to get the tax benefits. Will my donations be included on my usual tax reports from my brokerage firm, or do I have to keep track of it all?

A: It’s fantastic that you’ve used the smart tax planning tool of giving directly to charity out of your IRA. With the standard deductions today, most people aren’t able to deduct charitable donations funded from their regular checkbook. Using your IRA is a great way to support your chosen charities and still enjoy a tax break.

Whenever you take money out of your IRA, your brokerage firm will provide you with a Form 1099-R showing you all the dollars withdrawn in the prior year. That’s true whether you donated every penny to qualified charities or happened to spend it all on a family vacation. If it came out, it’s shown on your Form 1099-R.

So, to get the tax break, it’s absolutely up to you to inform your tax preparer about your total direct-from-IRA donations. If you fail to communicate, or they don’t ask you, you could end up paying taxes that you don’t owe. And, that’s never good!

I’m in full Santa-mode. Believe it or not, I’m still making a list and checking it twice. Thankfully, I’m not talking about my last minute shopping. Instead, I’m reviewing my year-end financial tasks for my clients. Here’s some of what’s on my mind. It might prompt you to review your own list.

Tax Loss Harvesting: If you have realized capital gains this year and want to offset them, scour your portfolio for some losing investments to sell. For those who own mutual funds, look for December capital gain distributions that might have gone unnoticed. If you have an advisor, just ask them if some tax loss harvesting is right for you.

Roth Conversions: As a refresher, a Roth conversion is when you shift money out of your regular, tax-deferred IRA and put it into a forever, tax-free Roth IRA. You’ll want to consider a Roth conversion when you determine the resulting tax bill now will be lower than future projections. Obviously, figuring this out takes some analysis, but there’s still a little time before the end of the year.

College Savings: In Michigan, you get a state income tax deduction for the contributions you contribute to a college savings plan (known as 529 Plans.) If you don’t pay state income taxes (and many retirees don’t), you might consider gifting the money to your kids to help them save for their own children. Naturally, December 31st is the deadline for this tax year.

Property Taxes: This is not a real December 31st deadline, for most readers. If you don’t itemize your deductions, your property taxes aren’t going to show up on your tax return anyway. But, if you do happen to itemize or if you own a rental property, you should talk to your advisors to see if prepaying your property tax bill is a good tax planning move.

Contributions to IRAs or HSAs: Here’s some relief, you don’t have to worry about December 31st when it comes to making your IRA contributions or funding your health savings account. April 15th is your true deadline for these types of contributions.

Required Minimum Distributions: This is a very real December 31st deadline! Remember, required minimum distributions (RMDs) apply for anyone with an IRA who has reached age 73 or has inherited an IRA from someone else. Of course, the RMD rules for inherited IRA is more complex and is worthy of some tax planning.

IRA Charitable Donations: This one is really, really important. Charitable donations made directly from your IRA need to be completed by the end of the year. These charitable donations will count toward your required minimum distributions (RMD) from your IRA. But, not if a donation check is just sitting uncashed, it won’t count.  

Q: My husband and I are interested in giving our children some money for the holidays. We figure it’s better to do it now while they need it. But, we’ve heard there is a limit to how much we can give and we don’t understand the tax implications of our gift to our kids or to us.

A: A gift of cash is tax-free to your kids. Keep in mind, if you give appreciated stock, any unrealized capital gain is shifted to them and they’d owe capital gains tax upon the sale of the shares.

In 2023, you can give up to $17,000 (increasing to $18,000 in 2024) to any person without having to report it on your tax return. Now, if you give more than $17,000 to anyone, you will need to file Form 709 to report the amount over the annual gift limit. And, the amount over the limit will count against your current tax-free lifetime gift “allowance” of about $13 million. You can multiply that by two as a married couple.

As you can see, most people don’t have to worry about taxes on gifts; giving or receiving. The only thing is whether or not you need to file a Form 709 to keep track of amounts over the annual gift limit.

Q: We have rental property that loses money each year from a tax perspective. But, when I look at my past tax returns, our rental loss doesn’t seem to show up. If I remember correctly, our tax preparer said it’s because we make too much money. If that’s the case, will we ever benefit from those tax losses?

A: It sounds like you are running into the limit on passive activity losses due to your income level. The tax code loves complexity, but I hope this explanation will simplify it a bit for you.

If your modified adjusted gross income or MAGI is below $100,000, you are allowed to deduct up to $25,000 of your rental losses. But, if your MAGI is above $100,000, $1 of your rental losses get “held in suspense” for every $2 of income above the limit. As you’ll see, by the time your MAGI reaches $150,000, the entire $25,000 passive loss deduction is disallowed and is effectively held in “suspense” for later use.

So, when will you ever get to use those suspended rental losses? When your MAGI dips below $150,000, you’ll get to use some of them. And, regardless of your income, if and when you decide to sell the rental, your suspended losses will be unlocked. So, they are not “lost” losses, they are just suspended deep in your tax return on Form 8582.

Jason P. Tank, CFA, CFP® is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com

Another year will soon enter the history books. If I had to pick one word to best describe the stock and bond markets in 2023, I’d choose the word, vicissitudes. Fittingly, this word was often used by Warren Buffett’s mentor, Benjamin Graham, in his seminal book, The Intelligent Investor. Vicissitudes; a change or variation in the course of something. 

About a year ago at this time, the stock market was 25% to 30% off its peak. To make matters far worse,  bonds were also experiencing one of their deepest bear markets ever, down around 15%. Together, it resulted in one of the single worst periods for balanced portfolios. In all practicality, there was almost no place to hide. Doom and gloom had descended upon the scene.

With such negativity already baked into the cake, it left open the possibility that things might actually turn out better than feared. As we all know now, inflation basically peaked at this darkest moment, declining from around 8% to just about 4%. By the end of July, the stock market breathed a heavy sigh of relief by rising a whopping 30% off its low and the bond market returned almost 5%, too. 

At this point in time, the worries of a looming recession this year began to fade. Inflation was in steady decline, as they had hoped it would be, and the economy was seemingly cruising along relatively unharmed by so many rate hikes. This was the case even in the face of a mini-crisis in banking that was uncomfortably reminiscent of the ’08 financial crisis. Goldilocks had confidently entered the scene. 

Then, as if right on cue, the progress on inflation stalled out with the economy inconveniently picking up steam. In response, the Fed shifted its tone to one of cautious vigilance and signaled the possible need for still more rate hikes to avoid the mistakes of the ‘70s. Almost overnight, longer-term rates jumped higher and stocks fell over 10% and bonds dropped 5%. The lights dimmed and Goldilocks exited stage left.

Naturally, the show never really ends. Over just the past few weeks, Fed officials are seeing signs of the long-awaited economic slowdown and the most recent inflation report showed some renewed progress. They have calmed investors’ nerves by publicly signaling they might actually still be in pause-mode. In truly knee-jerk fashion, just like that both stocks and bonds have almost fully rebounded from their post-summer swoon.

Now, if anything is true, 2023 certainly shows how impossible it is to forecast markets. Nonetheless, if I were forced to make a forecast, I’d say it’s wise to count on the continued vicissitudes of markets to darken the stage a few more times. After all, we all know that Goldilocks is a fairy tale. 

Q: We are thinking about tax planning before the end of the year. For the past couple of years, our tax preparer mentioned making “Qualified Charitable Donations” from our IRA, but we feel too uninformed. Please explain.

A: Your tax preparer is giving you good advice. Making qualified charitable donations (QCDs, for short) directly out of your IRA will both lower your tax bill and help your favorite charities. It’s a win-win for everyone but Uncle Sam. Actually, I suppose that makes it a win-win-win!

To explain why donations from your IRA are smart, we have to go back to the Trump-era tax cuts. Starting in 2018, the standard deduction essentially doubled in size. Suddenly about 9 out of 10 taxpayers no longer itemize their tax deductions. Given this, the vast majority of people also no longer enjoy a tax break when making charitable donations.

The doubling of the standard deduction really left only one other avenue to enjoy a tax deduction for your charitable giving. For some, I should say. For those over the oddball age of 70.5, you are allowed to donate directly from your IRA and it won’t be counted as taxable income as it normally would be coming out of a (never been taxed) IRA.

Better yet, once you reach the age of 73, your IRA donations will count as part of your required minimum distribution (RMD.) Theoretically, you could give away all of your RMD to charity (up to a current annual limit of $100,000) and not have to pay a dime of taxes on any of it.  

Q: I am hearing mixed signals about bonds. On one hand, bonds have been a drag in my portfolio over the last two years. On the other hand, now their current yield is looking really nice. Which side of the coin should I focus on?

A: Bonds keep coming back up, no pun intended. Normally, bonds should be one of the most boring things in your portfolio. Lately, bonds have been anything but boring.

As I wrote a couple months ago, bonds that were originally issued during the super low interest rate environment are now selling at depressed prices. For long-term bonds, I’d say they are selling at highly-depressed levels. Naturally, those old bonds are less desirable since they only pay paltry levels of interest until they mature. So, price is the great equalizer that puts those old bonds on a level playing field with newly issued bonds that come with much higher rates.

My advice is to fight against your tendency to look backward. With the 10-year US Treasury selling at yields near 5%, a level not seen in about 16 years or so, bonds appear quite attractive and should be a healthy segment of any balanced portfolio.  

Q: Our son and his wife are looking to buy a home in Traverse City. Our advice to them is difficult to give and certainly for them to receive. Perhaps that’s due to our long memories of the reasonable home prices of yesteryear! Any advice you can give them and us would be appreciated.

A:  Giving advice to others is often hard, especially when it’s unsolicited! But, as a parent, I know it’s nearly impossible to remain silent. Hopefully, your son and daughter-in-law will take any advice you offer as heartfelt. Acknowledging that you may have some preconceived notions of what you see as value will demonstrate your sincerity.

Younger adults face a totally different environment than the generations of homeowners before them. With 30-year, fixed rate mortgage rates skyrocketing from a bit above 3% to now over 8% in just two years time, buying an identically priced home results in a 70% higher monthly payment. Adding insult to injury, since just before Covid hit, home prices have jumped over 40% nationally.

Taking these two facts in combination – higher rates along with higher prices – homebuyers today face more than a doubling of their housing costs compared to just a few years ago. This indirectly feeds into higher rental rates for those who are unable to even consider buying a home. There really is no way to escape the situation as everyone, in the end, needs a roof over their head. And, honestly, there is no way for society to ignore the situation, either. But, solutions are hard to come by.

I’m afraid my advice will feel awfully basic.

Before buying a home, your son and daughter-in-law need to be confident that their income is very secure. Their higher mortgage obligation will no doubt place a strain on the rest of their budget. The greater share of their income dedicated to their housing cost will impact their ability to spend on other things like travel, entertainment and eating out, let alone funding their other necessities.

While living close to both work and play is really attractive, considering a home outside of town might afford them the money to actually enjoy the amenities of our area. This is a real trade-off.  But, you should know that this advice might smack of hypocrisy coming from someone who was lucky enough to buy a home in town years ago before the surge in prices.

Our area is wonderful in so many ways, but it’s obvious that the access to this wonder is not spread evenly among us. While I imagine you have full perspective, it’s always important to recognize that your son’s challenge in deciding where and when to buy a home in our area is a truly fortunate problem to have. It might be a lot tougher for many others.

Q: Back in 2013, I inherited my younger brother’s IRA. He was 73 when he died. I was 6 years older than him. Since 2014, as advised by my bank, I’ve taken out my required minimum distributions (RMD) based on my life expectancy, not his. However, this year my bank has calculated my RMD based on my brother’s life expectancy, not mine. Can you clear this up for me? 

A: You’ve presented a rather interesting case. The quick answer is your bank is now finally giving you correct advice regarding your required minimum distribution or RMD. I emphasize the word, finally, because for the past 9 calendar years you’ve distributed and paid tax on more than was required. This is both unfortunate and irreversible. 

To start, the rules did change in 2020 for many IRA beneficiaries. Prior to 2020, non-spouse IRA beneficiaries were allowed to “stretch” their RMDs over their life expectancy. After 2020, most non-spouse IRA beneficiaries are now forced to distribute their inherited IRA balance within 10 years. 

Since your brother died in 2013, you get to keep using the old “stretch” rules. At first blush, the bank would appear correct in using your life expectancy to calculate your RMD. However, there was an added wrinkle that your bank overlooked. Given that your brother had already begun taking his required minimum distributions each year, your subsequent Inherited IRA distributions should have been based on his younger age, not yours. 

Let me demonstrate the impact. Since he was 73 years old at the time of his death, his life expectancy using the IRS’s life expectancy table (which was updated in 2021) was 16.4 years. The rule states that for all subsequent years, you need to subtract 1 year from his original life expectancy and then divide each year-end account balance by that adjusted life expectancy figure. 

For 2014, your first divisor should have been 15.4 or one less than his original life expectancy of 16.4. Now, fast forward all the way to 2023. Your RMD this year should be calculated as your 2022 year-end account balance divided by 6.4, which is now ten less than his original life expectancy. Yes, this is a hefty 16% of your account, but it’s much better than being forced to distribute a truly massive 35% of the account using your age. In the end, I’m very glad the bank is now getting it right.

For interested readers, you can review the Inherited IRA distribution rules on page 10 of the IRS Publication 590-B or by visiting www.FrontStreet.com/InheritedIRA. This link will automatically forward you to an IRS page that does a good job of explaining the rule.

Q: I was talking to a friend the other day. She told me I am allowed to rollover some of my IRA to my Health Savings Account. Is this really allowed? Please explain.

A: Your friend is absolutely right. But, as is the case with most things in the world of money and taxes, there are some key things to understand and a few rules to follow.

If you are eligible, once in your lifetime you are allowed to do a rollover of part of your IRA into a Health Savings Account, most often referred to as an HSA. Note the three phrases, if you are eligible, once in your lifetime and part of your IRA.

To be able to do an IRA-to-HSA rollover, you have to be enrolled in an HSA-eligible health plan during that tax year. HSA-eligible plans are also referred to as  high-deductible health plans. To prevent wasting your time, be sure to investigate your health plan first to see if you can even consider a rollover.

If you do qualify, make sure you’re pretty confident you’ll be enrolled in an HSA-eligible health plan for a full 12 months following the date of your IRA-to-HSA rollover. If you fail this one-year eligibility test, you’ll end up having to pay income tax on the IRA distribution. Adding insult to injury, if this happens and you are under age 59.5, you’ll even have to pay a 10% tax penalty for taking an early withdrawal.

Now, once in your lifetime you are only allowed to rollover up to the maximum HSA contribution amount for the year. In 2023, a single person can contribute up to $3,850 to an HSA and a married couple can contribute up to $7,750. If you are over age 55, you can tack on another $1,000. And, if you want to rollover the maximum amount allowed, just know that any other contributions made to your HSA during that same year need to be factored in. Please note, if you are married, you and your spouse can each do an IRA-to-HSA rollover.

Why is this IRA-to-HSA move such a good thing? Well, given that your IRA is most likely funded with pre-tax money, eventually you’ll have to pay income taxes on your IRA money. That was the trade you made when you took the tax deduction on your taxes. With this one-time, limited size IRA-to-HSA move, you are able to transform money that enjoyed a tax break into money that will never be taxed. Of course, that’s only true if you end up having health care expenses. No worries, that’s a bet I’m sure we all can make!

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 [email protected] and at www.FrontStreet.com

Q: For the first time ever, my tax preparer has asked us to make estimated tax payments each quarter. Can you help me understand why this is important?

A: Having to make estimated tax payments for the first time can be a little perplexing. Most people are used to paying their taxes through some sort of automatic “tax withholding” mechanism, such as your wages, IRA, pension, or Social Security.

Some people, however, receive income that isn’t subject to any tax withholding. Of course, the government still expects you to pay taxes on that income evenly throughout the year. Examples of this type of income might include self-employment income, rental income, interest, dividends or capital gains.

Generally-speaking, to satisfy the government, you need to pay at least 90% of your tax obligations for the year or, alternatively, 100% of your prior year’s tax. If you fail to pay these minimum levels of taxes, you could end up paying both interest and penalties.

To avoid this, you should follow your tax preparer’s advice and use your vouchers to pay those estimated quarterly tax payments by the due dates.

Q: With last year’s decline in bonds rivaling the drop in stocks, I’m really wondering if they even make sense for me. What’s the upside of keeping them in my portfolio?

A: When you invest in bonds, you are basically acting as the bank. You are lending money on set terms; the interest rate you’ll earn and when you’ll get your money back. These things are written in stone, so to speak, and normally this makes bonds a much steadier segment of a balanced portfolio.

Like stocks, however, bonds also trade in the open market. This means that bonds can and do fluctuate in value. Last year, bond prices declined way, way more than usual!

In quick fashion, the Fed hiked interest rates. This made your stale, old bonds far less attractive than brand new bonds with their glimmering higher interest rates. As a result, investors did some math and, voila, your bonds fell in value. In fact, they declined  just enough to put your old bonds on financially-equal footing with those brand new bonds.

Now, the bigger and faster the change in interest rates, the greater the price change for your old bonds. The change in interest rates was both very large and very fast.

But, given the set terms of bonds, you should know that the expected total return for your bond portfolio is now significantly higher. For this reason, I think the benefits of holding bonds as part of a balanced portfolio are even greater than before. And, yes, I’m fully aware that this feels like small consolation!

Believe it or not, this year is now officially halfway over! This means you don’t have a ton of time left to think about your planned charitable giving. To spur you along, here are some old giving methods along with a new one that just might fit the bill

Appreciated Securities: If you own a stock that has significantly appreciated in value, you might consider donating some shares directly to a qualified charity. With your donation, you will avoid ever having to pay the capital gains tax. Better yet, your chosen charity won’t get taxed, either. And, if you itemize your deductions on your taxes, you stand to receive a tax break. Of course, given that so many people now opt for the super-sized standard deduction, it’s important to consult your tax advisor to see if your donation will actually result in a tax break.

Donor-Advised Fund: To help you get a tax break, you might consider “bunching up” multiple years of your planned giving through a donor-advised fund. From your new donor-advised fund, you can then take all the time you need to donate the money. Think of this as setting up your very own foundation on the cheap and with very few administrative headaches. Most brokerage firms make donor-advised funds really easy to start.

IRA Donations: For those over the age of 70 ½, you are allowed to donate directly to charity right from your IRA. Normally, when you take money out of your IRA, it’s taxed as ordinary income. However, if you donate the money directly to a qualified charity, you get to exclude those distributions on your tax return. For those who face required minimum distributions each year, using your IRA as a charitable tool is an especially tax smart way to give.

Charitable Gift Annuity: While these have been around for some time, a new version of charitable gift annuities is worth highlighting. To begin, with a charitable gift annuity, your charity gets the money right away and they simultaneously agree to send you periodic payments in return. After some fancy figuring is done, you are entitled to a tax deduction for a portion of your donation. Starting in 2023 under a new tax law, people over age 70 ½ can also establish a charitable gift annuity using their IRA. Importantly, unlike a normal charitable gift annuity, 100% of your donation is deductible on your tax return and it also counts toward your annual required minimum distribution. For some people, this new IRA charitable gift annuity might open up some particularly interesting tax planning opportunities.  

Q: I’ve heard a recent law, known as Secure 2.0, created some interesting possibilities for leftover money held in 529 plans for college savings. Namely, the new law seems to allow you to rollover the unused 529 plan balance into a Roth IRA. How does this work?

A: Among the many changes that Secure 2.0 created to enhance retirement savings, Congress did establish some new rules for college savings plans, commonly known as 529 plans.

Starting in 2024, leftover 529 plan balances can now be rolled over into a Roth IRA for the plan’s named beneficiary. However, the new law lays out a number of rules that diminish the planning opportunity.

To start, in order to be allowed to do a 529 plan-to-Roth IRA rollover, you’ll need to have started the college savings plan at least 15 years prior. Naturally, to get this countdown started, you should open a 529 plan for your kids or grandkids as soon as possible.

Next, you are limited in the amount that can even be rolled over into a Roth IRA. The overall limit for a 529 plan-to-Roth IRA rollover is $35,000.

Further, you aren’t allowed to do this amount as a one-time rollover. Instead, the annual rollover limit is set at the normal IRA contribution maximum. Today, that annual IRA contribution limit is $6,500. To reach the $35,000 lifetime limit, it will obviously take multiple years of planning.

And, finally, the only dollars that are eligible for a 529 plan-to-Roth rollover are those that have been invested in the 529 plan for at least five years.

Q: With our federal debt continuing to grow, it seems that tax rates are going to increase in the years ahead. It’s got me seriously thinking about doing some substantial Roth conversions. What factors should I consider before pulling the trigger?

A: I must admit, it’s difficult to argue that tax rates are going to decline in the future! Given this, Roth conversions should certainly be top-of-mind.

But, a comprehensive Roth conversion analysis isn’t as straight-forward as simply guessing about future tax law changes. There are multiple considerations and peculiarities that can substantially raise the cost of Roth conversions.

For example, you should be aware of the possible tax effect that Roth conversions can have on the taxation of your Social Security benefits.

In addition, in the case of large Roth conversions, you’ll also need to watch out for a lesser-known wrinkle lurking in the tax code called the Net Investment Income Tax.

And, of course, another important consideration is pushing your income so high that it results in you having to pay higher premiums for your Medicare Part B benefits.

It is summertime in Traverse City. The sun is blazing, the water is warming up, and like clockwork, members of your family are at your doorstep. With all of them within earshot, now might just be the perfect moment to bring up the importance of estate planning. Try to ignore their groans when you raise the topic in the middle of your family picnic

Estate planning often carries the connotation as something that’s only for the wealthy. That’s dead wrong. After all, estate planning is just about making sure you’ve got all your affairs in order. Your wealth is irrelevant. Simply put, everyone needs an estate plan.

While you’re still alive, you need to have two legal documents to cover the possibility of your absence or inability to act on your own. One focuses on your money matters and another guides your health care decisions. On the money side, you designate a person willing to act as your “agent” in all of your financial affairs. For your health care needs, you name a person who will be your “patient advocate” in an emergency medical situation. Both of these are referred to as a Durable Power of Attorney.

In addition, upon your death you also need to provide clear direction for the distribution of your money and property and the possible need to make arrangements for the care of certain loved ones.

The first task in your estate planning journey is to carefully name your beneficiaries of your assets. For some assets, like retirement accounts and insurance policies, most people know to name specific beneficiaries. It’s a bit less known that you also can do the same for your non-retirement investment accounts and bank accounts. That’s even true for your real estate holdings, too. Now, there are often really good reasons to not name beneficiaries for each and every one of your assets. It’s important to meet with an experienced attorney to make sure you think through all the unique angles of your life.

Next up in your estate plan is to have a Last Will. This basic estate planning document plays multiple roles. At its heart, a Last Will names a “personal representative” to help divvy up your material stuff and it lays out who gets what if you failed to name an explicit beneficiary for an asset or account. On top of that, this document also is the spot you designate a “guardian” to care for your minor children or pets.

With these four steps complete – that is, your two Durable Powers of Attorney, your beneficiary setup and your Last Will – you could have everything nicely covered.

On a final note, people often ask whether or not they need a trust. Nowadays, many people don’t, but some absolutely do. Naturally, you should call an attorney to find out more. It’s money and time well spent.

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 [email protected] and at www.FrontStreet.com

For those who tend to bury their head in the sand when markets get ugly, you might be surprised by what’s happened over the past six months.

Back in early October, the stock market rout seemed to be picking up steam. Inflation worries were raging and the Fed was talking tough about more interest rate hikes to come. As a result, many saw a recession just around the corner. And, then, as if a switch was flipped, stocks bounced and bonds popped.

At its lowest point last fall, the stock market was down about 25%. After the recent rebound, stocks are now only 10% off their highs. Similarly, back in October, bonds had dropped an unheard of 15%. Despite their recent recovery, bonds are down a still-dismal 8% from their highs. But, it’s been a really good run for bonds lately. Overall, you could say that roughly half of last year’s pain has been recouped, but, not at all, forgotten.

So, what has spurred the market’s recovery? As always, the answer is complicated, counterintuitive and possibly questionable.

The consensus expectation of a coming recession seems to have caught the attention of the Fed. Inflation is showing clear signs of declining, albeit very slowly. This trend has given the Fed some justification to turn more of their attention to the health of the economy and signal a “pause” in future interest rate hikes. Like everyone else, they want to see how the economy is faring.

Once the Fed started to speak in calmer tones, things shifted. The market adopted the mindset of “some bad news might actually be good news.” With each economic headline pointing to a slowdown, not only are future rate hikes taken off the table, the possibility for rate cuts goes up. That alone boosted both stocks and bonds. And, now, with the recent mini-banking crisis throwing a wrench into the system, the probability of future interest rate cuts is now the base case.

This can be seen in the shape of the yield curve. Longer-term interest rates are far below short-term rates. Today, you can safely earn around 4.5% just sitting in a money market fund. But, if you choose to lend to the government for 2 years, you’ll only earn about 3.8%. The yield is even lower still on the 10-year Treasury. That shows how confident investors are of future rate cuts. This phenomenon is known as an inverted yield curve and it’s historically been a bad sign. It has a perfect record as a recession indicator.

If the economy does go into a recession, the question is how deep will it be and how long will it last. There is little way to know for sure. On balance, and especially given how quickly the mood can shift, I’d say being a bit cautious with your portfolio is probably prudent.

Q: I read your column from Sunday, February 26th and you got one thing wrong. Lower income taxpayers should provide their tax preparers with the amount of property tax levied as well as the taxable value of their home. This information is needed to apply for the Homestead Property Tax Credit on Form 1040-CR. In addition, lower income renters can benefit from this property tax credit, too!

A: Actually, I got two things wrong in that column! I incorrectly stated that the 2022 standard deduction for those married filing jointly was $27,700. That’s for 2023, not 2022. The standard deduction for married filers in 2022 is only $25,900.

With my conscience now clear, let’s go through the details of the Michigan Homestead Property Tax Credit. First, I’ll address homeowners and then move on to renters.

For homeowners: If your income falls below $63,000 and the taxable value of your homestead is less than $143,000, you qualify for a potential tax credit. Note, the taxable value of your home is not what your home is worth today. Your taxable value is what’s shown on your property tax statements. You can also look it up online.

The Homestead Property Tax Credit generally works like this. Let’s say your income was $50,000 and you paid $3,000 in property taxes. First, multiply $50,000 times 3.2%. This sets a threshold of $1,600. In this case, your $3,000 in property taxes exceeds this $1,600 threshold by $1,400. To figure your tax credit, you multiply $1,400 by 60%. Your property tax credit amounts to $840. Better yet, even if you happened to pay zero state income tax, the State of Michigan will still send you a tax refund check for the $840!

For renters: The same income test above applies for renters, too. But, since you don’t own a home, you instead use your annual rent expense to figure your tax credit. Multiply your annual rent expense by 23% and then compare it to your 3.2% of income threshold. Just like a homeowner, you are entitled to receive 60% of the difference as a tax credit.

Keep in mind, the maximum Homestead Property Tax Credit you can get is $1,600. And, one final tip, if you overlooked the Homestead Property Tax Credit in the past, the State of Michigan allows for you to go back a whopping four tax years to get your tax credit. Go take a look in your tax files. It might amount to some real money!

Q: I filled out my tax preparer’s organizer. As usual, my pile of documents included our property taxes, medical expenses, mortgage interest and donations, plus a few other things. But, I just got an email from my tax person saying I really didn’t need to gather all of that stuff. Why is that?

A: As they say, old habits die hard! It is true, if you are like most people, your effort to gather all of those receipts and statements to document your itemized deductions is probably no longer necessary. Since 2018, under the current tax law, they basically doubled the standard deduction. This effectively eliminated the need for most taxpayers to even think about claiming itemized deductions.

For example, for those who file as a married couple, the standard deduction for 2022 is $27,700. If you both happen to be over age 65, it jumps to $30,700. This dollar amount is the bogey to compare to your level of itemized deductions.

There are four main categories of itemized deductions to consider. You might not even come close to needing to itemize your deductions. The categories are the taxes you paid, your mortgage interest, your donations to charity, and your medical and dental expenses. If you are moderately good at math, you can probably tally them all up in your head to see if gathering up all of the necessary documentation is worth your effort.

First, add up the property taxes and state income taxes you paid last year. Remember, though, the maximum for this category is capped at $10,000. Next, add in the amount of mortgage interest you paid last year, if any. Then, total up your cash and in-kind donations made to charities. Finally, there’s one more complex category. Add up your medical and dental expenses. Do some mental math to see if they exceed 7.5% of your adjusted gross income. For example, let’s say your adjusted gross income is $100,000. Unless these expenses exceed $7,500, none of your medical and dental expenses will be tax deductible.

The bottom line is this. If you are married, don’t have a mortgage, or don’t give away a lot and you don’t have big medical and dental expenses, it’s highly unlikely your itemized deductions will exceed your automatic standard deduction. On the other hand, certain single filers, and even some married filers, might still end up itemizing their deductions. It only takes a little understanding to figure out if you can avoid the tax gathering work or not. According to recent stats, only about 10% to 15% of all taxpayers itemize their deductions. If you don’t fall into this group, welcome to the world of tax simplicity!

After last year’s pain, the start of 2023 has been nice. Stocks are up nearly 10% and bonds have bounced over 4%. The mood has quickly shifted from doom and gloom to optimism. Is this shift fully justified? 

For the past 18 months, almost everything has hinged on inflation. To vanquish the post-Covid surge in inflation, the Fed abruptly raised rates from zero to about 4.5% to 4.75%. After one more 0.25% expected interest rate hike, most investors now believe the Fed will finally pause. 

Why the pause? The outlook for inflation has really improved. According to the Fed’s preferred measure, we’ve seen a discernable decline in inflation from around 5.5% at its worst point last year to the latest reading of 4.4%. It’s likely heading lower still. But, it will take some time to get to the targeted 2% inflation rate the Fed wants. And, most expect it will take economic pain to get us there. 

With the hope for a Fed pause, investor focus has now clearly shifted to the health of the economy. Naturally, this is where things start to look fuzzy.

It’s awfully difficult to believe that cumulative rate hikes of about 5%, at such a quick pace, won’t push us into a recession soon enough. Interest rate hikes are seen as a blunt tool and they affect the economy with both “long and variable lags.” In normal language, they take time to really bite. 

Given this, investors have been bracing for the pain to come. But, lately, the optimistic idea that we can squash inflation without feeling real economic pain has once again taken root. The idea that the Fed can actually thread the needle is back in vogue, as it was last June. This optimism has translated into diversified balanced portfolios recovering roughly half of their losses from the market low in mid-October.

Other than simply breathing a sigh of relief when reviewing their monthly statements, how should investors react to this mood shift? 

Keep in mind that certain very reliable economic indicators, such as the “yield curve”, implies a looming recession of some depth. The 10-year Treasury now yields 3.4% as compared to the 3-month Treasury Bill yield of 4.5%. This upside-down relationship has a very good record as a recession predictor. If inflation proves to be stickier or the interest rate hikes start to kick in too strongly, the market rebound could easily reverse. 

In all humility, though, nobody really knows the short-term direction of markets. Nonetheless, after last year, taking a fresh look at your portfolio’s mix of stocks and bonds is in order. The time to do this review is from a position of strength. And, there’s absolutely no doubt things look quite strong right now!

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 [email protected] and at www.FrontStreet.com

Q: Last year was ugly. I’ve looked over my year-end statements and I think I lost as much in bonds as I did in stocks. To stop the bleeding, I’m thinking about selling my bonds and moving into cash or even buying CDs. Does this move make sense? 

A: You’re right, last year was particularly bad for bonds. Arguably, it was one of the worst years in modern history for investors with balanced portfolios. The Fed’s moves on interest rates caused bonds to fall a whopping 10% to 15%. Adding insult to injury, stocks fell about 15% to 20% last year. Clearly, there was no great place to hide.

Looking forward, while nobody really knows what 2023 will bring, I think the pain you’ve felt in bonds is likely a thing of the past. The bond market has largely “priced in” the impact of the Fed’s current war on inflation. Rather than moving out of bonds now, holding tight is probably smarter. Changing your portfolio based on recent pain almost always turns out to be a mistake.

Q: I’m starting to receive some 2022 tax documents. I’m really confused about my IRA distributions, as shown on Form 1099-R. I donated money to charity directly from my IRA believing those distributions wouldn’t count as taxable income. But, looking over my IRA’s 1099-R, it appears my donations were taxable distributions, nonetheless. Did my brokerage firm make a mistake or did I do something wrong? 

A: No, the brokerage firm didn’t make a mistake. And, no, you didn’t make a mistake. Form 1099-R is simply a summary of all of the money that came out of your IRA last year. Brokerage firms include a tally of every dollar that left your IRA, regardless of whether it was a charitable donation or not. 

Why aren’t your donation checks subtracted out? Because brokerage firms aren’t in the business of verifying whether you gave to a “qualified” charity or not. This leaves it up to you or your tax preparer to subtract your qualified charitable donations, or QCDs, from your total distributions as shown on your Form 1099-R. 

Q: For 2022, it turns out I’m in a much lower tax bracket than usual. As a result, I overpaid by a lot with my estimated tax payments last year. Since I’ve already paid in more than enough taxes, can I do a Roth conversion before I file my 2022 taxes?  

A: I’m sorry, you can no longer do a Roth conversion and have it apply to last year’s taxes. Unlike making a regular IRA, Roth IRA or even an HSA contribution by the filing deadline in mid-April, any Roth conversions had to be completed by the end of the calendar year. Unfortunately, this highlights the need to sit down and do your tax planning near the end of the year.   

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 [email protected] and at www.FrontStreet.com

Fresh starts are nice. That largely explains our natural drive to celebrate the New Year with such hope and joy. After a year like 2022, and especially for retired investors, I’d say a fresh start is well deserved!

Before looking forward, let’s first run the numbers for 2022. With stocks declining about 20% and with bonds dropping about 13% for the year, there were very few places to hide. Given the dual decline in both stocks and bonds, the primary risk management tool of asset allocation failed to deliver. The end result? Last year was one of the worst on record for conservative investors with balanced portfolios.

Today, on the other hand, a broadly diversified bond portfolio made up of a combination of US Treasuries, mortgages and corporate bonds now sports a yield-to-maturity of about 5%. From an income perspective, bonds are now putting up a real fight against stocks. With interest rates having been pinned down by the Federal Reserve for much of the last 15 years, this hasn’t been the case in a long, long time. 

For those sitting with a lot of cash in the bank or parked in a money market fund, it might be enticing to just do nothing and keep that money safe. That’s especially true with short-term cash now earning around 4%. But, remember, if the economy slows next year as expected, short-term rates could just as easily decline once again. In other words, that 4% yield on cash could be short-lived. Looking at following a careful process of investing some of your excess cash in bonds is worthy of consideration.

The last two months of inflation reports are showing a breaking of the inflation fever. While inflation will be slow to fully recede, a careful reading of the tea leaves points to the Fed now starting to shift their focus to the economy. It’s about time, because many investors worry that the Fed has already raised interest rates too high and too fast. Their big fear? A recession. In fact, this might be the most widely-anticipated recession ever. 

Nothing in financial markets is certain, of course. Even with bonds finally showing promise, the Fed has not yet fully vanquished inflation. If inflation so much as ticks higher, expect talk of more rate hikes than currently anticipated. And, even with so many investors openly predicting a recession, stock prices haven’t fully baked in that scenario. We’re not yet out of the woods.

Without sounding too mealy-mouthed, we’re still in a moment that calls for careful, but not crazy, risk taking. The ironic solution? Do what most absolutely didn’t work last year; try to embrace a balanced portfolio in 2023!

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 [email protected] and at www.FrontStreet.com

It simply wouldn’t be Christmas without a legislative gift from Congress. As I write this, one such bill is grinding its way through the House and Senate and is expected to land on the President’s desk for his signature before we ring in the new year. Weighing in at over 4,000 pages, it will most certainly land with an audible thud.

Professionally, my focus is on the key elements that affect near-term and current retirees. Starting on page 2,047 of this “all, but the kitchen sink” omnibus bill are the provisions known as the SECURE Act 2.0.

Similar to the original SECURE Act that became law a few years ago, SECURE Act 2.0 contains about a hundred provisions designed to enhance retirement saving. Key changes range from increasing the required minimum distribution age for IRA owners, to boosting the “catch-up” retirement plan contributions for near-term retirees, and requiring employers to automatically enroll employees into their retirement plans.

Beginning next year, the new age that triggers a required minimum distribution (RMD) from IRAs or other tax-deferred retirement accounts is increasing. It’s moving up in two stages. The new RMD age is increasing from age 72 to the magic age of 73. This new age milestone will stay in place for a decade. Eventually, starting in 2033, it’ll jump up again to age 75.

In addition, the penalty for failing to take out your RMD will finally be reduced from its currently massive level of 50% of your missed amount. Starting in 2023, the new penalty is set at a still very painful level of 25%. But, if you are able to fix your mistake quickly enough, the penalty could be further reduced to 10%. This is a welcome change.

Further, if you are fortunate enough to be able to support yourself for at least a little while with your non-Social Security and non-IRA income sources, this new RMD age of 73 now adds another year to your retirement “gap years” planning toolbox. The retirement “gap years” is the period of time between the end of your work life and the start of your Social Security and drawing from your IRAs. With SECURE Act 2.0, Congress has now added one additional planning year to analyze the possible tax benefits of both Roth conversions and realizing long-term capital gains at no federal tax.

As a wealth manager, I have to admit that Congress is truly the gift that keeps on giving in the form of job security!

Life is complex enough. With so many demands on your time and attention, finding ways to simplify things is both a goal and a never-ending struggle. To help, let me give you two ways to make your financial life just a little bit easier.

For retirees who have reached age 72 – the age where required minimum distributions or RMDs enter the scene – there’s a little known trick that will help eliminate the need for having to make administratively burdensome estimated tax payments each quarter.

Just like when taxes were withheld from your paycheck during your working years, any taxes withheld directly from your IRA distribution are considered by the IRS as if they were paid evenly throughout the year. That’s the case, even if they were withheld on the very last day of the year.

This treatment turns your IRA into a convenient tax planning tool at the end of each year. In other words, if you are able to target the right tax withholding percentage for the US Treasury and State of Michigan, you can safely forget about estimated tax payments. That means you can forget writing out eight checks, rummaging through your files for eight tax vouchers, addressing eight envelopes, licking eight stamps and stop worrying about the deadlines of April 15, June 15, September 15 and January 15.

Speaking of required minimum distributions, or RMDs, another simplification move you might consider is to finally consolidate your IRAs. I’m always surprised by the number of people who have multiple IRA accounts spread across multiple brokerage firms.

While it’s a natural instinct to not put all of your proverbial eggs in one basket, the most common reason for having too many accounts in too many places is purely administrative inertia. However, that inertia results in wasteful, extra effort and risk in the long run. If you ever fail to take out your annual RMD, there is an unbelievably onerous 50% excise tax waiting in the wings.

Beyond that worry, having too many separate IRA accounts complicates your tax preparation, too. For every additional IRA you have, there is one more Form 1099-R to remember, to gather and to report to your tax preparer. And, if you use your IRA as a charitable tool, as you should, you’ll also need to track and tally up your donations from each separate IRA. Why? Because your brokerage firms won’t automatically subtract them from your Form 1099-R. That bookkeeping duty is yours.

From my experience, each added element of complexity creates the possibility of making costly mistakes. The longer I’ve been in this business, the more I seem to embrace simplicity.

We’re now barreling into the end of 2022. After obsessing about your long list of things to buy for the upcoming holiday season, take a little bit of time to check-off entries on your financial planning to-do list! Here are some simple ones.

IRA Donations: The holidays are a natural time to think about your charitable giving. Consider donating directly from your IRA rather than from your regular checkbook. As long as you’ve reached age 70.5, this tax management tool is in your toolbox.

When you give from your IRA it won’t count as taxable income. Yes, those IRA donations will show up on your tax return as a distribution, but if done correctly they will then immediately get subtracted. Since you’ve never paid any tax on your IRA balance to begin with, your IRA donations are just like getting a tax deduction. If you’re like most people today who use the standard deduction, donations made out of your regular bank account won’t result in any tax benefits.

Additionally, if you are age 72 and subject to required minimum distributions (RMDs), it’s possible your IRA donations will help to lower the taxation of your Social Security benefit. This double tax benefit of IRA donations counting toward your RMD and possibly also reducing the taxation of your Social Security benefits could add up to some nice tax savings.

Check Beneficiaries: Given that this is a time for family, it’s an obvious moment to review all of your beneficiary designations on your retirement accounts and life insurance policies.

This is especially important if you’ve moved any of your accounts in 2022. Too often when people are filling out account paperwork, they’re simply unable to recall all of their beneficiaries’ information on the fly. To move things forward, they send in the paperwork anyway and swear they’ll later go back to fix it. Unfortunately, as we all know, later never arrives. Doing a routine beneficiary review will catch these long-overdue tasks.

Tax Gathering: Speaking of moving money around, if you transferred any accounts or insurance policies in 2022, you should immediately pull out your tax file and jot down that old account information. When tax time arrives in a few short months, you might need to reach out to that brokerage firm or insurance company to gather your 2022 tax information.

There is nothing fun about failing to include something easy on your tax return and getting a love letter from the IRS when their computers finally notice your oversight. Worse yet, this IRS notice will arrive well past your ability to remember any details. Avoid the stress now and make a log of your closed account information.  

One of my favorite lines came from the movie, A League of Their Own. In the film, Tom Hanks plays the role of a reluctant manager of a women’s baseball team during WWII. In a totally sexist scene, one of his players expressed emotional vulnerability on the field. Dumbfounded, Hanks popped out of the dugout declaring that “There’s no crying in baseball! There’s no crying in baseball!” 

Having worked with retirees for over two decades now, I feel similarly about retirement. While I’m hopefully more empathetic in my delivery, there really is no failure in retirement, either. It’s just not how it works in reality. 

Over the years, financial planners have been given some pretty good retirement modeling software to help clients map out their future. While the mathematical basis of a client’s future income and investment returns has been pretty solid, the modeling of how they actually spend money in retirement has always left something to be desired. 

For anyone who has ever had the pleasure of reviewing a typical retirement model produced by financial planning software, the language of “success” and “failure” has likely struck you as both alarming and silly. When most retirees face particularly difficult future scenarios, such as a deep bear market or an unfortunate stretch of lower-than-expected investment returns, they don’t just blindly spend themselves off a cliff. They actually talk, think, prioritize and adjust. 

Worse yet, the sophisticated modeling of thousands of future outcomes of your retirement years, known as a Monte Carlo simulation, often shows an absurdly wide variation of possible outcomes. These outcomes range from you running out of money to watching your portfolio grow into the stratosphere! At both extremes, you are assumed to spend more and more each year in retirement, as if you are an unthinking robot. 

Then, in an unhelpful summary, the final report shows that your retirement dreams have a 75% chance of “success” along with a heart-stopping 25% chance of “failure.” Ready to hang it up, and with the odds seemingly in your favor, you cross your fingers and decide to retire.

Of course, it’s a known fact that real retirees aren’t robots at all. I’m pretty sure I haven’t met one! In reality, the description of success and failure in retirement is more accurately about accepting the possibility of needing to make some spending adjustments as your future actually unfolds. 

So, rather than modeling the impossibility of blindly driving off the cliff, the more helpful plan is to establish and monitor portfolio-level guardrails and then use them to proactively nudge things safely back on the road to the goal. Based on my experience working with living, breathing human beings, that’s exactly how retirement looks in the real world. 

Social Security is set to give out the biggest hike in benefit payments since 1981 and it’s going to be even larger than last year’s 5.9% raise. Drumroll please. Starting in January, benefits will rise a whopping 8.7%.

Hands down, inflation has been the financial focus of the past year. It has impacted both stocks and bonds in a severe way. With bonds failing to provide stability for investment portfolios, it’s not uncommon for conservative investors to see their portfolio down about 20% for the year. It’s been ugly and any good news is welcome.

Thankfully, for retirees, there is a silver lining. Since 1975, Social Security has been automatically and annually adjusting benefit payments to offset inflation’s bite. Not surprisingly, this policy was put in place at a time of high inflation. Clearly the political pressure of giving discretionary raises to voters (I mean, retirees!) was too much to bear. The solution? Automatic adjustments, by law.

The 8.7% inflation hike in Social Security benefits translates into a raise of $160 per month for the average beneficiary. Adding to the good news, for the first time since 2012, the monthly Medicare Part B premium that is deducted from Social Security checks will decrease by about $5 per month. Bottom line, there’s soon going to be more money in the pockets of retirees.

A common question for those not yet collecting Social Security is whether they, too, will benefit from this 8.7% inflation adjustment. It depends.

If you are over the age of 62, the answer is, yes. This is true for those who are receiving benefits and for those who are eligible, but choosing to delay their filing in return for a higher benefit later on. For this group, the annual inflation adjustment is built directly into their benefit formula.

If you have not yet reached age 62, things are more complicated. For this group, your benefits are based on your earnings history. After ranking the best 35 years of your earnings, Social Security does adjust each year using a different time of inflation adjustment. Specifically, they use a national average wage index. To properly calculate a person’s average earnings over an entire career, those earnings way back in 1985 must be put “on par” with today’s average prevailing wage level.

Now, historically the national average wage index has grown faster than the inflation rate used by Social Security in setting current benefits. But, you guessed it, not this year! So, for those under age 62, your projected Social Security benefit will not quite see the 8.7% bump. Life’s not entirely fair, I suppose.

To learn more about Social Security, plan to attend the Money Series at Leland Township Library on Tuesday, November 15 at 3pm. Register at MoneySeries.org.

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 [email protected] and at www.FrontStreet.com

I’m getting that “deja vu” kind of feeling. In May, June and July, I wrote about the increasingly ugly state of the investment markets. After the short-lived summer rally, things now look uglier. My underlying message, nonetheless, remains consistent.

In my June 26th column, I highlighted the return of the “ballast of bonds.” Over the past decade, like a frog in a hot pot, a false sense of complacency crept in. Low interest rates and ultra-tame inflation became a fixture in all financial calculations, including bond prices. After years of this status quo, things have now shifted on a dime following the post-Covid surge of demand and inflation. It caught almost every investor, and the Fed, by surprise.

With each version of the Fed’s promise to fight inflation, the bond market’s guesses about the path and plateau of interest rates have ratcheted higher and higher. The series of hits this has been delivered to the bond segment of balanced portfolios has felt like Chinese water torture.

We’ve now seen an historic decline of 14% in broad bond market indexes. Bonds now offer far more ballast and the most attractive yields in over a decade. I view bonds more favorably for two reasons; (a) Inflation is likely to peak soon and (b) bonds will likely re-assume their traditional role as a counterweight to stocks. While I’ve said it before, in my view, the pain in bonds is nearly done.

Turning to stocks, it’s becoming clear the Fed has accepted a recession as the necessary price of vanquishing inflation. Once hopeful of a soft landing, investors in stocks are now also anticipating something bumpier.

To set expectations then and now, in late-May I wrote a retrospective on the “anatomy” of past bear markets. Right after I wrote those words, stocks officially fell into bear market territory. And, after the big summer rally, they are once again down around 25%. Today, I’ll reiterate my message of early July; now is once again the time to prepare portfolios for the recovery.

Reviewing history, the typical bear market’s average decline is 30% to 35%. If this bear market follows suit, another 10% to 15% decline and more volatility should be expected. The average bear market over the last 50 years took about a year to reach the bottom. We are now sitting at about the 10 month mark. Like bonds, I think most (but not all) of the pain in stocks is done.

With both known and unknown uncertainties swirling around, the table is set for an emotionally challenging three-to-six months for investors. We all know that history doesn’t exactly repeat. But, much like a deja vu moment, it does often have a vague rhyme to it.