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.

Q: Our brokerage firm has asked us to name a “Trusted Contact” on our investment accounts. Should we put this in place?

A: Having designated “trusted contacts” on file with your brokerage firm is a good idea.

Among other reasons, a trusted contact is a person your brokerage firm or investment advisor can reach out to in the event they suspect possible fraud or financial exploitation. In an environment of increasingly sophisticated cybersecurity threats, too often involving vulnerable seniors, having a trusted contact on file may just be the saving grace that stops a crime in its tracks.

It’s important to know what a trusted contact can and cannot do. A trusted contact is not given any special authorities or power over your accounts. They cannot trade or conduct any business on your behalf. And, they cannot gain access to your financial information. They are just a person that your brokerage firm or advisor can talk to under certain circumstances, including confirming your current contact information, inquiring about your health status, as well as learning the identity of key people named within your estate plan.

Q: I’ve been hearing that doing a Roth conversion in a bear market is tax smart. Why is it more attractive at this particular time?

A: Let me first set the scene. You’ve got an IRA funded with pre-tax contributions. Of course, the flipside of getting that tax break is that someday, when you finally decide to draw from your IRA, you’ll eventually have to pay the taxes. It seems Uncle Sam is always waiting in the wings!

In a bear market, however, your IRA’s balance is temporarily depressed. It’s better to convert part of your regular IRA to a Roth when it’s down in value. After all, you’ll pay less tax on the portion you choose to convert before your investments recover.

However, the benefits of doing a Roth conversion are not quite so clear cut. When done correctly, it takes careful tax analysis and, often, a crystal ball.

For example, if you get too excited and convert too much of your IRA to a Roth, you could accidentally push yourself into a higher tax bracket. This easy-to-make mistake defeats the purpose of legally taking advantage of the IRS. Ideally, you want to do a Roth conversion in a lower tax bracket than you’ll experience in the future (cue the crystal ball!)

Additionally, if you are already collecting Social Security, a Roth conversion could also push more of your Social Security into the taxable column. You really don’t want the IRS to collect taxes on your Roth conversion only to find out a larger portion of your Social Security ends up getting taxed.

Benjamin Franklin was a wise guy. He’s the one behind “Don’t throw stones at your neighbors, if your own windows are glass.” He also came up with “No pain, no gain.“ Amazingly, he shared this nugget about 250 years before the internet was even invented, “An ounce of prevention is worth a pound of cure.”

Online security is a growing problem that needs attention. This is especially true for seniors. I was recently reminded of this working with a client who experienced financial fraud. Thankfully, my client was made whole. But, it certainly didn’t come without worry and stress. In the spirit of prevention, here are some easy things you can do.

Two-Factor Authentication: This is the Holy Grail for your online financial accounts. Whenever you log in, a text message should be sent to you with a unique code to gain access to your accounts. Almost every reputable financial institution has this safety measure available. If you can log in, without going through a two-factor authentication process, please stop reading this article immediately and contact your bank, credit card and financial advisor.

Use a Password Manager: Every single person I know struggles to remember all of their usernames and passwords. Naturally, the easiest thing is to use the same login information for every website. Unfortunately, that happens to be the best way to let fraudsters gain access to every one of your accounts! So, what can you do? Use a password manager, such as LastPass or 1Password. These applications will allow you to establish unique passwords and, most importantly, securely store them all in one place.

Set Up Activity Alerts: If some crook does gain access to your accounts, there are things you can do to limit the damage. For example, many financial institutions allow you to establish text, email or phone alerts for large purchases or possible fraudulent transactions. If you cannot figure out how to set up these account alerts, once again just call your bank, credit cards or financial advisor for help.

Hobble Your Accounts: I have to admit, this suggestion might sound a bit weird. For my clients, I’ve purposely limited what they can do online in their investment accounts. Unless I’m told otherwise, they cannot just log in and proceed to buy or sell securities or move money out of their investment accounts. Of course, the same applies to every bad guy who might happen to gain access, too!

While going completely offline is always an option, it’s increasingly cumbersome. Remember, fraudsters don’t like to work that hard. They seek easy targets. When they hit a brick wall, they tend to move on. With a few easy steps, you can make it a lot harder on them while still enjoying the conveniences of our connected world.

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: What’s going on with interest rates lately? I know the Federal Reserve is still raising interest rates. But, now I read that mortgage rates are falling and my bond portfolio is also recovering. Can you explain?

A: As we all know, the Fed is deep in the midst of a serious rate hiking campaign. Since March, short-term interest rates have been raised from zero to about 2.25% to 2.5%. The Fed started out slowly this spring and then really picked up speed by this summer. It’s been one of the fastest “monetary tightening” phases in modern history.

Given the Fed’s inaction last year in the face of a sudden surge in inflation, they went into catch-up mode. In unprecedented fashion, they raised rates 0.75% at both their June and July meetings. The Fed basically carried out a policy of shock-and-awe. By mid-June, the major bond market index was down well over 10% as compared to the start of the year.

Thankfully, I believe the Fed has now shifted into a more gentle phase. They have three more scheduled meetings in 2022 and have signaled an additional 1% in cumulative rate hikes by Christmas. Current expectations are for a 0.5% hike at their late-September meeting followed by two smaller 0.25% bumps at the November and December meeting. After that, they’ll likely enter a wait-and-see phase to see how the dust has settled on inflation and the economy.

Investors have more-or-less factored all of this into their calculations. They are already looking “over the valley”, so to speak. And, what do they see on the other side? A break in the inflation fever, for starters. But, to accomplish that feat, they also see the Fed having pushed the economy to the very edge of a recession. And, what happens in a recession? The Fed shifts into reverse and starts to cut interest rates!

So, when you read headlines about mortgage rates falling and when you notice your bonds are starting to recover, try to focus on the direction of longer-term rates rather than short-term rates. The fact is, the Fed can really only control short-term interest rates while longer-term rates are largely set by the market.

To fully exorcise the demon of inflation, the Fed is hell-bent on ignoring hockey legend Wayne Gretzky’s famous advice, “Skate to where the puck is going to be, not to where it has been.” Based on current market signals, investors are busy placing bets that the Fed will take things too far. We’ll see where the puck goes next.

As January goes, so goes the year. If that old market saying holds any weight, investors’ worry may be justified. The start of 2022 has certainly been rough.

Along with stock indexes falling between 5% to 10% in January, bonds have also added to the pain with a decline of around 2%. It’s safe to say that few investors have been spared from losses to start the year.

It’s commonplace to blame the Fed for all of this negativity. In their defense, the pandemic has presented a significant challenge. With their now-$9 trillion balance sheet, almost double its pre-Covid size, they have grown visibly uncomfortable in their unorthodox policies. They seem to be looking for the escape hatch from their homemade trap of zero interest rates. Increasingly, it’s not at all clear they actually built one.

Since their grand monetary experiment began in response to the Great Financial Crisis in 2008, the Fed did finally start to baby-step its way toward higher rates by early 2017. Covid suddenly arrived and the Fed pinned interest rates right back down to the floor. And, with that not seemingly enough to cushion the economy, they further juiced financial market sentiment by purchasing yet another $4 trillion of bonds. It worked.

Similar to a game of hot potato, their bond purchases sent investors seeking other, riskier assets; namely increasing demand for both stocks and real estate. This hot-potato effect may be the true magic behind their zero-rate monetary policy. It not-so-subtly shifts the mentality of the herd and sends them thundering off in riskier directions; pushing up the prices of riskier assets in hopes of feeding a sense of consumer and investor confidence.

What’s been happening since the start of 2022 is an example of the jittery herd deciding on its direction. With Covid’s final wave clearly cresting (we all hope) and with both unemployment way down and inflation way up, the Fed has telegraphed that a policy change is just ahead. They’ve penciled at least three 0.25% rate hikes throughout 2022, about a year earlier than expected. In addition, they’ve also sent the message that their business of buying bonds is soon coming to an end.

However, it’s important to note that the Fed’s shift is just one element of the current backdrop. Regardless of how it might seem, there are other factors to consider. We seem to be in the midst of a peculiar game of tug-of-war.

Holding on to the opposite side of the rope stands our post-Covid economy. The economy is quite strong and, in my opinion, it’s likely to both broaden and deepen its strength in the year ahead. As if churning just below the surface, there is a pending sense of a post-pandemic release of optimism and pent up activity. Even with elevated stock market valuations, the economy’s strength may not result in a match that ends with the financial markets facedown in the mud.

Keep in mind the irony of the current situation. If the Fed senses the economy’s footing is slipping, it’s likely to lighten up on its own effort. As it should be, the Fed’s true desired outcome is a healthy stalemate. Unlike most games of tug-of-war, a boring stalemate in this peculiar match is a win-win outcome. So far, the start of 2022 has been anything but boring! It’s likely to be an interesting 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Democrats and President Biden are knee-deep in the political act of horse-trading and arm-twisting. It’s sausage-making at its worst. In the end, most Americans will find the result downright tasty. For the wealthiest among us, it’ll no doubt cause some financial indigestion.

In exchange for the extension of the new bulked up child tax credits, a broadening of childcare tax benefits, the expansion of Medicare benefits along with the introduction of free community college, paid sick leave and universal pre-K, a slew of tax changes are on the table.

In keeping with Biden’s election promise, most of the proposed tax hikes for individuals will only affect people who make more than $400,000 to $500,000 per year. To loosely paraphrase the famous bank robber, Willie Sutton, this is where a lot of the money is and, conveniently, where most of the voters aren’t.

To start, the top tax bracket would be about 3% higher than it is today, returning it to the familiar 39.6% level. This proposal not only increases the top tax rate, it would kick in at a lower income threshold.

Next, high-earning business owners who use S-Corps to split their earnings as partly “wage income” and partly “business profit” may face an extra 3.8% tax on the portion they choose to classify as business profit. This proposed change partially closes a loophole that helps them avoid paying Medicare taxes.

Also on the docket is a tax hike on long-term capital gains. The proposal would raise this tax to 25% from the current level of 20%. Once again, this would only affect those making over about $500,000 per year. An earlier proposal to capture capital gains taxes on inherited assets appears to have been abandoned, for now.

Rounding out the tax changes for high earners is a new 3% “surcharge” on income that exceeds $5 million as well as a slew of limitations placed on massive IRA balances above $10 million. Finally, certain Roth conversion strategies may also be a thing of the past (although some come after a 10 year delay!)

Beyond these proposed tax changes for individuals, Congress is also focused on reversing some of the corporate tax cuts introduced in 2018.

Under current proposals, the top corporate tax rate for businesses structured as C-Corps would rise from the 21% rate to around 26%. Prior to the Trump tax cuts, the top rate for big businesses was once 35%, so this change only represents a partial reversal of tax policy.

Finally, for certain business owners who conduct their activities through pass-through entities – such as S-Corps or LLCs – the lucrative 20% business income deduction will fade away if they make more than $5 million in profits.

Just as sausage-making is a notoriously unappetizing thing to watch, over the coming weeks Congress looks poised to grind out an ugly legislative process. Frankly, if it wasn’t my job to watch it all closely, I’d simply choose to avert my eyes!

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

Investors are experiencing an unnaturally profitable period. The S&P 500 index has gained about 18% so far in 2021. And, as a reminder, this follows a similar 18% return in 2020 and the 30% surge in 2019. That’s over 80% in less than three years. After such a run, prudence really should be the order of the day.

With this run in stocks – and, let’s be honest, it feels inexplicable amidst such economic upheaval – now is a wise time to review your investment portfolio within the context of your longer-term plan. Every so often, it’s smart to take a step back and formally assess where things currently stand relative to your original plan.

There are only a few truly important rules to follow in investing. Beyond proper diversification and sticking with low-cost investments, the most important factor is your portfolio’s asset allocation.

To review, the concept of asset allocation is about finding the right mix between riskier and steadier investments. Studies have shown that your portfolio’s allocation between stocks and bonds, not your individual selections, explains the vast majority of your portfolio’s return.

Do you know your portfolio’s current asset allocation? If not, that’s a good place to start your review. You might be surprised by how much your portfolio has drifted away from your original asset allocation target. Admittedly, rebalancing in the face of possible capital gains taxes can be a difficult and delicate task. But, it’s always best to focus on the dog (your portfolio), not the tail (your tax bill.)

Next is really knowing your life’s costs. If you want, you can call this your budget. I prefer to refer to it as your living cost summary. The word, budget, just has such a restrictive ring to it. On the other hand, your living cost summary is a comprehensive tally of where you’re choosing to spend your money. That sounds much easier to stomach.

Do you know the cost of your lifestyle? Having created retirement-readiness models for over two decades, I can assure you that your spending habits will make or break your plan. Of course, as opposed to banking on a higher level of investment returns, your spending is the far more controllable and predictable piece of the puzzle.

Developing a formal retirement income model shouldn’t be seen as rocket science or feel overly painful. Thanks to today’s sophisticated financial planning software, these models have become more robust, flexible and useful over the years. At its very core, though, it’s still all about comparing your income and expenses, year-by-year, and then projecting things out over many decades and over many possible future scenarios.

Your formal financial plan really is the baseline against which all things should be measured. It’s at times like these, when markets seem almost too good to last, recalibrating both your portfolio’s asset allocation and assessing your spending against your original plan should move up your list of priorities. It might even allow you to overcome your natural sense of complacency just when things appear so unnaturally easy!

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: We have two children (ages 3 and 5) and we’d really like to plan for the cost of college. Unlike us, our hope is to leave them with as little debt as possible. What would you recommend in terms of the amount to save and the type of account to use?

A: Your children are lucky to have parents who want to plan for their future. That’s not something they’ll recognize immediately. They will someday, probably!

Addressing the “how much” question is different for every family. Some parents hope to just pay for the cost of tuition, fees and books. Some want to provide for an in-state public university. And, others hope to pay the full cost of a private college or out-of-state university. Defining the exact goal is obviously the first step.

For an in-state, public university, the cost of tuition and books are about $15,000 per year. Room and board will run you another $10,000 per year, as a very rough estimate. So, for a four-year degree, that adds up to over $100,000. And, remember, these figures are measured in today’s dollars. Keeping pace with college cost inflation is a great reason to put away money early.

In your case, with about 14 short years until college starts, providing them with four years of college might require you to save about $8,000 to $10,000 per year for each child. If this level of saving isn’t possible within your budget – and, let’s be honest, it is not for most people – it’s fine to scale back your goals. Remember, scholarships, grants and student loans are all viable financing tools. We also have a very good community college here, too.

Now, once you’ve decided on the amount you can actually save, my recommendation is to use a 529 plan for each child. The State of Michigan’s plan is called the Michigan Education Savings Program. Go to www.misaves.com to read about it.

The investment earnings inside a 529 plan are not subject to any taxes as long as the money is eventually used for “qualified” education expenses. On top of this tax benefit, your savings can result in an immediate state tax break of up to $425 per year.

Jason P. Tank, CFA 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

As I wrote a few months ago, July 15th marks the start of something new. Automatic monthly government checks are coming to the bank accounts of millions of families with kids. But, without some deeper understanding of the new child tax credit, some may be in for an unpleasant surprise at tax time next year.

With Biden’s signing of the American Rescue Plan in early March, major changes were made to the tax credit families receive for having children. To put this into perspective, child tax credits are provided to about 90% of families with kids. It’s a truly far-reaching feature of our tax code.

Unless you really inspected your tax returns, the child tax credit used to operate silently in the background. The new child tax credit now has a much more visible role.

Prior to the American Rescue Plan, the child tax credit was $2,000 for each child under age 17 and $500 for full-time college students. Married filers with modified adjusted gross income below $400,000 received these tax discounts. For single and head-of-household filers, the eligible income threshold is cut in half.

Under the American Rescue Plan, there are two major changes.

First, the law introduced a new intermediate income threshold of $150,000 for married filers with kids. This first income threshold now operates alongside the higher $400,000 threshold. For people who make less than this lower threshold, the tax credit was also boosted to $3,000 for kids between age 6 and 17 and $3,600 for kids under age 6. For those earning between the first and second income threshold, the smaller $2,000 per kid tax credit still applies.

Second, the law introduced the concept of monthly checks. Starting on July 15, parents are going to receive automatic, monthly deposits into their bank account or mailbox. For families below the first, lower income threshold, they will now get monthly deposits of $250 to $300 for each of their children. Smaller monthly deposits will also arrive for those making between the first and second income thresholds.

Now, here’s the catch.

Unless Congress steps in, these monthly deposits will stop in January. And, perhaps more importantly, these are actually “advance payments” of the child tax credits. This part deserves a little more explanation.

In the past, child tax credits were received only at tax time. For many, they help to create big tax refunds. Many households plan on their tax refund to help pay for upcoming vacations or pay off old Christmas bills. Without the windfall created by the “all-at-once” child tax credits, tax refunds might look considerably smaller at tax time next year. In other words, the already-spent monthly deposits might result in an unpleasant cash flow surprise for millions of families.

Once started, automatic monthly checks are a tough thing to take away. I expect Congress to act soon to continue them into 2022 and beyond. If they don’t, millions of families might have to develop a plan to save some of the monthly checks to blunt the impact of next year’s smaller-than-usual tax refund.

Jason P. Tank, CFA 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: With inflation readings spiking in recent months, we’re starting to worry about its long-term effects on our portfolio. We remember the 70’s and runaway inflation has been a concern of ours for some time. Should we be this worried?

A: Inflation’s impact on your wealth is not unimportant. In the end, wealth is defined by how much you can buy with your money. Inflation can be an invisible threat. Sometimes, like the 1970’s, it can feel more than obvious. Lately, the recent attention-grabbing headlines reflect the fact that inflation has been on the rise.

But, I think it’s very important to note that today’s inflation readings are a direct result of a drop in prices from March to July of last year. The effects of the shutdown during the pandemic’s early days has thrown the inflation data for a serious loop.

While not a perfect analogy, it’s a lot like comparing the weather last June to the sweltering heat we’ve experienced this year. For the first ten days of June in 2020, the average high was about 67 degrees. In comparison, this June has averaged a high temperature of about 86. I wouldn’t read a lot into that trend when trying to guess about the weather for the rest of this summer.

To smooth out the pandemic’s impact on prices from last spring, it might help to compare today’s prices to 2019 or even 2018. Instead of seeing inflation rate readings of 4% and 5%, the annualized inflation rate over the past two or three years is sitting at about 2% or so. The dip in prices last year, like the cooler start of June of 2020, is undoubtedly distorting today’s inflation data.

Like the Fed, I think the next six-to-twelve months will smooth out the pandemic’s unusual effects and there certainly have been a few!

Q: I couldn’t help but notice that Bitcoin and other crypto-currencies have declined a lot in just the last few weeks. Do you think they are “ready for primetime” as a true investment vehicle for regular people, like me?

A: You’re right, Bitcoin took a 40% nosedive from mid-April to late-May. Ethereum, the other major crypto-currency of note, also crashed about 50% over just twelve days from mid- to late-May. Those are some wild swings.

In my view, crypto-currencies are not even close to being “investable” assets for regular people. They’ve become trading vehicles for those willing to gamble with their money. For those who choose investments based on some measure of fundamental value, this digital currency game is something to safely ignore.

Frankly, I’d lump the current obsession with crypto-currencies with the equally crazy trading of “meme” stocks like Gamestop, AMC Entertainment, and now, Clover Health. The financial media loves to talk about this stuff, that’s for sure. It catches eyeballs. Ultimately, advertising revenue follows. While it might be fun to gawk at it all, it shouldn’t be confused with investing in any traditional sense.

Jason P. Tank, CFA 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

Tax time has come and gone. Even with the delayed tax deadline, I suspect procrastination was still the order of the day. Understandable? Yes. Costly? Maybe.

With my normal review of tax returns for clients, I spot an error every so often. But, I can tell you tax preparers do their best in the very limited time they’re given. Imagine having a client drop a pile of papers on your desk with their half-completed tax organizer sitting on top. From my vantage point, it’s not an easy job.

Now, imagine if the government adds to the complexity and confusion? Let me highlight one example.

When you reach 70 ½, you can start using your IRA as a tax-smart charitable tool. When you donate to charities out of your IRA, those distributions aren’t considered taxable income. This stands in stark contrast to IRA withdrawals that you use for your normal life expenses.

Remember, your IRA money has never been taxed. You were given a tax break when you contributed to your IRA. You then invested that money, possibly for decades, without paying any tax on the income you earned. When you do eventually withdraw money from your IRA, you finally have to pay tax on it. That is, except when you give money directly to charity. Those donated distributions don’t count as taxable income.

Even better, the amount you give to charity from your IRA helps to satisfy your required minimum distribution (RMD) for the year. In other words, what you give to charity from your IRA can help to lower your taxable income. Doesn’t that sound suspiciously similar to getting a charitable deduction? It certainly does and it’s a very nice tax break (for those age 70 ½ or older) who take the standard deduction and would otherwise lose out on deducting their charitable donations.

Unfortunately, things can and do go wrong with this tool.

Brokerage firms, such as Schwab, Fidelity and Vanguard, are tasked with sending out a tax report – called Form 1099-R – to both you and to the IRS. Form 1099-R lets everyone know how much you took out of your IRA. However, there is no breakdown of the amount you used for yourself and the money you gave to charity. Instead, they just report to the IRS the full amount that exited your IRA. The IRS doesn’t even require brokerage firms to remind everyone that some of your withdrawals possibly went to charities and, therefore, shouldn’t be considered taxable income.

Unwittingly, many taxpayers who wisely make charitable donations directly from their IRA may be paying tax on the money they’ve given to charities. So, if you only do one thing today, pull out your old tax returns to see if an amended tax return is in your future. Just when you thought tax season was over!

Like clockwork, I once again spent a good chunk of this past weekend watching the Berkshire Hathaway annual meeting. It might sound terribly boring to some, I know. Since my first father-and-son trip to Omaha over twenty years ago, Warren Buffett and his long-time sidekick, Charlie Munger, manage to get my attention during the first week of May. At age 90 and age 97, respectively, I suspect this tradition will only last a few more years.

In a world infatuated with shiny objects, the annual Buffett and Munger show has surprisingly maintained its relevance. We should all be so lucky to have such command of our wits at their age. Remarkably, they manage to match their wits with more than a dollop of wisdom. Right along with their billions, after nearly seven decades of investing, their collective wisdom is still piling up. They’ve seen it all. Well, almost.

Throughout the years, the Berkshire Hathaway meeting has offered an annual check-up on the ever-changing investment environment. Back in 2000, the tech-stock bubble was finally bursting. In 2006, the crazed housing market was starting to roll over. By 2009, the Fed dove headfirst into its zero interest rate policy. Each year’s meeting has offered a chance for Buffett and Munger to share their insights for hours on end.

This year, what caught my ear was their fascination with how our current economic “movie” will play out. While they didn’t share the name of the movie they’re watching, for years now I’ve felt we’re deep in Wonderland, walking shoulder-to-shoulder with Alice herself!

At the center of their curiosity is the conundrum of super-low interest rates. It certainly has been my obsession. Will interest rates stay this low? Have they permanently elevated stock prices? Do bonds still have a rightful place in conservative portfolios? Can we really print trillions without major consequences? Seeking answers to these important questions, and many more, will lead you right down the rabbit hole, of course. As enticing as it is, just throwing up your hands doesn’t really seem like a viable option.

For Buffett and Munger, the current movie inevitably inches closer to their final scene. I imagine their calm sense of wonder at this year’s meeting reflects their own demographic reality (and their unimaginable personal wealth is possibly a contributing factor!) For me, however, today’s environment is just one more fascinating scene in a story that’s still very far from complete. Calm wonder, I’m afraid, feels like a luxury. Embracing a little bit of their attitude, though, might in fact be the only rational way to manage through it.

As I reflect on this year’s meeting, the lesson from Buffett and Munger certainly wasn’t about the nuts-and-bolts of investing. Rather, I think this year’s lasting lesson is to always stay curious. After all, in a world that seems about as mad as the one Alice tumbled into, things are bound to get curiouser and curiouser!