April 26, 2016

Is Your Arrow Aimed Too Low?

Credit: Yongkiet at FreeDigitalPhotos.net
I am by no means an archer, but I have shot a bow and arrow from time to time. In Boy Scouts I launched a few arrows as part of a merit badge, and as a college student I competed with my roommates as we slowly made the top of a Styrofoam cooler look like Swiss cheese striving for the bullseye. It was fun, but believe me when I tell you that you wouldn’t want me to be your William Tell!

As you might expect, aim is pretty important when it comes to a bow and arrow. Aim too low and you’ll never hit your target. Aim too high and you’ll overshoot your target. Many people view financial goals as targets, and I think the same principles apply. That’s why I’d like to share a few thoughts with you on the importance of aiming your financial arrows to actually hit your financial targets.

In my experience I’ve found that people usually have more concrete targets than they have arrows. Most people have a general idea where they want to go and they may even know when they want to get there, but they don't always know if they're headed for the bullseye. This is where financial planning comes in to make sure you are not just shooting in the dark.

I meet with many people in their 20's and 30's who are carrying around loads of student loans. They are usually making their monthly payments, and in some cases even putting extra towards their loans, but their payment arrows are often flying all over the place. They know they want to eliminate all student debt, but they aren’t using their arrows as efficiently as they could. By prioritizing paying down the loans with the higher interest rates rather than simply making the automatic payments that are based on the size of the loans, they can ultimately pay less interest and hit their debt-free target faster!

I also meet with lots of people who share with me their goal of paying for their children’s education. It’s an admirable and loving goal, but the problem is that sometimes I find that the parents need those funds for their own retirement. Sometimes I also find out that the "child" we are discussing is a senior in high school. Either way, saving is best done over time with small savings arrows, rather than with a last-second, giant contribution.

My bread and butter is meeting with people contemplating or nearing retirement. Most of the people are not comfortable or convinced that their nest egg, Social Security, and any retirement pensions or income they may have are enough to provide for their desired retirement lifestyle by their desired retirement date. Sometimes I find people’s expectations are pretty well lined up, but other times I find people's expectations way off. I’ve had to tell someone who hated their job that they actually could have retired much earlier because their savings arrows had been aimed so high. I’ve also had to tell someone who had practically cleaned out their desk that they weren’t headed to a beach anytime soon because their savings arrows had been aimed too low. A challenging, but much easier conversation for me (and whoever I’m advising) is sharing with someone several years out from retirement that they need to aim their savings arrows a little higher and push their realistic lifestyle target expectations in a few yards in order to make things work, or better yet, that they really are on target for their retirement bullseye or better.

Aim too high with your financial goals and you could be missing out on opportunities and experiences now. Aim too low with your financial goals and you might not pay off your debt in a timely fashion, you might not be able to send your child to college, and you might not be able to retire with the lifestyle you’ve always wanted. If your aim is just right, you're either incredibly lucky or you’ve done some financial planning.


April 07, 2016

Qualified Charitable Distributions

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If I were a betting man, I’d say there is probably a pretty good chance that you have recently put the finishing touches on your tax return. If I’m wrong, congratulations on getting your taxes done early! Your CPA thanks you, trust me. If I’m wrong because I just reminded you that your taxes are due on April 18th this year, save this post for later and make double sure that your CPA is filing you an extension!

Either way, while taxes are still likely fresh in your mind, I wanted to mention something to you for this year called Qualified Charitable Distributions. For those of us who do not like to type or write long words, we affectionately call them “QCDs.”

Qualified Charitable Distributions allow an IRA owner who is over age 70 ½ the opportunity to directly transfer up to $100,000 annually from an IRA to a qualified charity tax-free. QCDs are not new in the sense that they were created by Congress back in 2006 as part of the Pension Protection Act, but they have had a roller coaster history ever since. In the initial legislation, QCDs were only to exist for two years, and at the end of 2007, the opportunity to make QCDs was no more. QCDs became popular during that time period though, and almost every year since 2007, Congress hemmed and hawed over whether to bring them back each tax year or not. Some years they did, some years they didn’t, and some years they did retroactively (I wish I could do things retroactively…). To put it simply, it was a mess. Thankfully, as a result of the Consolidated Appropriations Act of 2016, QCDs are back, and for now at least, they are back permanently.

When a taxpayer makes a QCD, they don’t report taxable income for transferring money from their IRA and they don’t report a charitable deduction, either. It’s almost like it never happened for tax purposes. If a taxpayer just withdrew money from their IRA and donated it like normal, they would report the taxable income and they could take a charitable deduction. The taxpayer gets hit with the “stick” of the additional income, but receives the “carrot” of an additional deduction. So which should you do?

I’ll be honest with you, in most cases, the initial difference on your taxes from charitably gifting by making a QCD or not making a QCD usually appears pretty small, but that doesn’t mean you shouldn’t consider a QCD. By not having to report the additional income when you make a QCD, it’s possible you can avoid triggering or reduce the damage of some of the tax laws currently in place that penalize taxpayers. Charitably giving by making a QCD could reduce your income taxes on your Social Security benefits, it could reduce a phase-out of your itemized deductions, and it could keep your income under one of those heinous Medicare income thresholds so that your insurance premiums don’t increase. If you don’t have a lot of deductions and take the standard deduction instead of itemizing your deductions, a QCD is likely a good idea for you because otherwise you will be recognizing income and not having enough deductions to get any credit on your taxes.

I know that was a lot, and I’m sorry. I’m still a recovering CPA... My point is if you or someone you know is over age 70 ½, they have an IRA, and they are charitably inclined, make sure they ask their CPA about this new potentially tax-saving tool that we now permanently have in our taxpayer toolbox. Just do your CPA a favor, and ask them after April 18th!