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2025 Tax Law Changes

By on December 1, 2024

As you make your plans for the coming year, it’s important to take note of the changes in contribution limits and other tax changes in 2025.  The information that follows was gathered from the IRS and other relevant government agencies.

Social Security
Social Security payments will increase 2.5% in 2025.

401(k)
I view 401(k) plans as a high priority — especially if your employer does contribution matching.  For the under-50 crowd, you can contribute $23,500 this year – a $500 increase.  If you’re 50 or older, you can also use the catch-up contribution which will be $7,500 – same as 2024.  In 2025, if you are between the ages of 60 and 63 by the end of the calendar year, your catch-up contribution will be $11,250 (rather than the $7,500 for those in the 50-60 age range).

IRA
For both traditional and Roth IRAs, contribution limits will be the same as 2024, $7,000.  Catch-up contributions for those 50 and older also remain unchanged at $1,000.  For traditional IRAs, whether these contributions are deductible depends on something called your Modified Adjusted Gross Income or MAGI.  (That’s basically your Adjusted Gross Income with certain deductions added back in.)

For traditional IRAs, joint filers who have a MAGI of less than $150,000 may deduct their entire contribution.  Those with a MAGI greater than $165,000 can’t deduct anything.  (The deduction amount is phased between those two thresholds.)

For a Roth IRA, there is no deduction since it’s funded with post-tax dollars.  There is however, a MAGI limit as to whether any contribution is permitted.  For joint-filers with income is less than $236,000, they may make the full $7,000 contribution to their Roth IRA.  No contributions may be made with a MAGI above $246,000.  (The limit is phased between those two levels.)

Tax Rates
Marginal tax rates remain unchanged in 2025.  The dollar thresholds for particular brackets have increased due to inflation.  Here are the rates for single and married joint filers for 2025.  (That is, for income earned in 2025 which will be taxed in 2026.)

  • 37% for incomes over $626,350 (over $751,600 for married couples filing jointly)
  • 35% for incomes over $250,525 (over $501,050 for married couples filing jointly)
  • 32% for incomes over $197,300 (over $394,600 for married couples filing jointly)
  • 24% for incomes over $103,350 (over $206,700 for married couples filing jointly)
  • 22% for incomes over $48,475 (over $96,950 for married couples filing jointly)
  • 12% for incomes over $11,925 (over $23,850 for married couples filing jointly)
  • 10% for incomes of $11,925 or less ($23,850 or less for married couples filing jointly)

Standard Deduction
The standard deduction for those who do not itemize will increase to $15,000 for single filers and $30,000 for married couples filing a joint return.

Here’s an early warning for 2026 taxes:  Unless congress acts, the standard deduction will revert to pre- Tax Cuts and Jobs Act of 2017 (TCJA) levels (adjusted for inflation).  This means the deduction amounts will be substantially lower than the amounts in effect from 2018 to 2025.  As an example, the married-filing-jointly deduction is expected to be around $14,000 (down from ~$30,000 in 2025).

Estate Taxes
Estates will be exempt from Federal taxes up to $13,990,000 per person.  The limit in 2024 was from $13,610,000.

Required Minimum Distributions
Required Minimum Distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year.  You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).

Account owners in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they’re a 5% owner of the business sponsoring the plan.

Roth IRAs do not require withdrawals until after the death of the owner.  At that time, a spouse who inherited a deceased partner’s IRA can roll the funds into their own IRA or an Inherited IRA.  Other beneficiaries may be subject to the 10-year distribution rule. This rule requires all assets in the account to be distributed by the end of the 10th year from when the original account owner died.

As a reminder, there was a change for Roth accounts that are held in 401(k) or 403(b) plans for 2024 and later years.  They no longer require RMDs.

Health Savings Account (HSA)

A Health Savings Account (HSA) is a personal savings account that lets you set aside money to pay for qualified medical expenses such as deductibles, copayments, coinsurance and some dental, drug, and vision expenses.  You can use HSA funds tax-free, and the interest earned on your account is also tax-free. You can also deduct your voluntary contributions to your HSA from your taxable income. To be eligible for an HSA, you must be covered by an HSA-eligible plan, also known as a High Deductible Health Plan (HDHP). With HDHPs, you usually pay more out-of-pocket for health care costs before your insurance company starts to pay.

The HSA contribution limit for 2025 is $4,300 for self-only coverage and $8,550 for family coverage. This is an increase of $150 for individuals and $250 for families from 2024.  Individuals 55 and older may contribute an additional $1,000.

Health Flexible Spending Account (FSA)

A Health Flexible Spending Account (FSA) is an employee benefit that allows you to set aside pre-tax money to pay for certain healthcare expenses such as insurance copayments and deductibles, qualified prescription drugs, insulin, medical devices, contact lenses and eyeglasses, dental cleanings and hearing aids.

An employee who chooses to participate in an FSA may contribute up to $3,300 through payroll deductions during the 2025 plan year.  Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.  Also, if your plan permits, up to $660 may be rolled over for a FSA in 2025. This is an increase from the 2024 maximum of $640

Naturally there are other changes in the tax laws and there are a lot of details as to what applies to whom.  So, if you’d like to discuss how the 2025 tax rules affect your situation, or any other financial matters, we can discuss this in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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How Much Should I Save Each Month?

By on November 1, 2024

How much to save is such an important question and it can vary quite a bit depending on your age and goals.  Nonetheless, there are some rules of thumb that many professionals recommend.  This month we’ll take a look at some of them.

A widely accepted strategy is the 50/30/20 rule.  It simply states that we use 50% of our gross income for essential living expenses, 30% for discretionary expenses and 20% for saving.  (Percentages rather than dollar amounts allow this approach to work for all income levels.)  Gross income is the total amount of money you earn before any deductions or taxes are taken out — that’s your annual salary if you are a salaried employee.  Essential living expenses are the basic, non-negotiable costs you incur to maintain a stable, healthy lifestyle. These cover the essentials you need for day-to-day life and typically include:  housing, utilities, groceries and household supplies, transportation, healthcare, insurance, debt payments and childcare.  Discretionary expenses are the non-essential costs that support your lifestyle, hobbies and enjoyment. These expenses are typically flexible and can be adjusted based on your budget. Here are some common discretionary expenses:  dining out and entertainment, hobbies and recreation, travel and vacations, shopping for clothing and so forth, personal care and gifts and special occasions.  Now, let’s look a little more closely at saving.

With a target of 20%, you may wonder what kinds of savings this is meant to cover.  In short, it covers all savings.  A common rule of thumb is that 10-15% is reserved for retirement and the remaining 5-10% is allocated for a new home, college expenses, an emergency fund, a rainy-day fund and so forth.

With this income allocation plan in mind, here are a few of the time-tested principles of saving.

  • Start now. No matter how much you’re able to put aside for savings, starting now is way better than waiting until you can chip in a certain percentage.
  • Automate savings. It works so much better to have a portion of your paycheck automatically deposited into a savings account.  (Or maybe several accounts – retirement, college, etc.)
  • Prioritize retirement. You’ll need a lot of money for retirement and time (compounding) is your friend.  You can take out loans and find other ways to help pay for other items, but other than Social Security (and maybe a pension), you alone must save for your retirement.  Starting younger (in your twenties) is always helpful, but it’s quite important that you begin no later than 40.  (You can, and should, start even if you’re older, but you’ll face certain challenges such as larger savings requirements.)

With these guidelines in mind, you may wonder about the details of a personalized savings plan for your family.  It might be helpful to see some of the articles I’ve previously written on this topic.  In addition, we can discuss a solid plan for you, or discuss any other financial questions, in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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What is a Credit Card CVV?

By on October 1, 2024

The CVV (Card Verification Value) is a security feature for credit card transactions, typically used in online or phone purchases. It is a three- or four-digit number printed on your credit card — separate from the card number.

  1. Location: On Visa, MasterCard, and Discover cards, the CVV is a three-digit number on the back of the card, usually next to the signature strip. On American Express cards, it is a four-digit number on the front of the card.

  1. Purpose: The CVV helps verify that the person making the purchase physically possesses the card, as it is not stored in most databases (like the card number might be). This reduces the risk of fraud in online or in other “card-not-present” transactions.

Here’s how a CVV helps protect you:

  1. Prevents Unauthorized Use Without the Physical Card:
  • The CVV is not stored in merchant databases when you make a purchase. Even if a hacker obtains your credit card number through a data breach, they would still need the CVV to complete a transaction.
  • Since the CVV is physically printed on the card and not stored digitally, it adds protection in case your card number is compromised.
  1. Reduces Fraud in Online Transactions:
  • Many websites require the CVV as part of the payment process to verify that the buyer physically has the card. Without this code, it becomes difficult for a fraudster to make an online purchase, even if they have your card number.
  • The CVV is not embedded in the card’s magnetic stripe or chip, meaning it is not transmitted during in-person transactions. This limits the possibility of it being stolen through skimming devices.
  1. Stops Some Automated Fraud Attempts:
  • Many fraudsters use automated systems to try different credit card numbers for purchases. However, without the correct CVV, those systems are less likely to succeed, as most websites won’t process transactions without the CVV.
  1. Prevents Fraud in Case of Merchant Data Breaches:
  • In the event of a merchant database hack, where your credit card number is stolen, the CVV is usually not part of the stored information. This ensures that the stolen data alone isn’t enough to make fraudulent purchases.

While the CVV adds an extra layer of security, it’s important to keep your card details, including the CVV, private to avoid fraud. Here are some tips for ensuring CVV safety:

  1. Never Share Your CVV: Don’t share your CVV number with anyone, even if they claim to be from your bank or credit card company. Banks will never ask for your CVV number over the phone, email or text message.
  2. Avoid Storing Card Information Online: While some websites offer the convenience of saving your card details, it’s safer to avoid storing both your card number and CVV on e-commerce platforms, as this data can be compromised in data breaches.
  3. Use Secure Websites: Always ensure you’re shopping or entering your CVV on websites that use secure connections (look for “https” in the browser bar).
  4. Monitor Transactions Regularly: Frequently check your credit card statements for unauthorized transactions. Many banks offer real-time alerts via text or email for transactions made on your account.
  5. Enable Two-Factor Authentication (2FA): Some financial institutions offer two-factor authentication for online purchases, adding an additional layer of protection beyond just your card and CVV details.
  6. Use Virtual Credit Card Numbers: Some banks provide virtual or temporary card numbers for online purchases, which can help keep your real card number and CVV safe from potential hackers.
  7. Keep Your Physical Card Secure: Ensure that no one can easily see your card, especially your CVV, when making in-person transactions. If you lose your card, report it immediately to your card issuer.

As you can see, the CVV code significantly increases the safety of credit card transactions.  This can help protect the money that you’ve worked so hard to accumulate.  If you have credit card questions, or any other financial questions, we can discuss them in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Blending Finances for Couples & Newlyweds – Part 2

By on September 1, 2024

This is the second part of an article that talks about the three approaches available for combining your finances.  Last month’s article discussed keeping finances separate and partially combining finances (hybrid approach).  This month we’ll wrap up this discussion by talking about completely combing your finances and we’ll also give you some information on separating your finances should that become necessary.  Let’s get back to our discussion.

Completely Combined Finances.  Completely combined finances in marriage involve pooling all income and expenses into joint accounts and sharing financial responsibilities equally. Completely combining finances can foster unity, transparency and collaboration in managing a couple’s financial life. However, it requires a high level of trust, communication and agreement on financial priorities and habits. Couples considering this approach should ensure they have a solid foundation of mutual understanding and a shared vision for their financial future. Regular financial check-ins and open discussions can help maintain harmony and address any emerging issues.

Pros

  1. Simplicity and Streamlined Management
    • Unified Finances:  Easier to manage finances with a single set of accounts.
    • Simplified Budgeting:  Creating and adhering to a budget is simpler when all income and expenses are combined.
  2. Increased Transparency and Trust
    • Full Visibility:  Both partners have complete visibility into all financial activities.
    • Trust Building:  Full transparency can enhance trust and partnership.
  3. Shared Financial Goals
    • Unified Objectives:  Easier to set and achieve shared financial goals, such as saving for a house, retirement or vacations.
    • Collaborative Planning:  Joint decision-making can lead to more cohesive financial planning.
  4. Equal Responsibility
    • Shared Burden:  Both partners equally share financial responsibilities, reducing the burden on any one person.
    • Mutual Support:  Allows for mutual support in managing finances and tackling financial challenges.
  5. Emergency Preparedness
    • Combined Resources:  Pooling resources can provide a stronger safety net in case of emergencies.
    • Joint Savings:  Easier to build a comprehensive emergency fund and save for future needs.
  6. Potential Financial Benefits
    • Better Rates:  Combined finances can sometimes lead to better mortgage rates, credit card terms and other financial benefits.
    • Joint Tax Benefits:  Possible tax advantages from filing jointly, depending on the jurisdiction.

Cons

  1. Loss of Financial Independence
    • Autonomy:  Individual financial autonomy is significantly reduced.
    • Personal Spending:  Personal spending decisions might require consultation and agreement.
  2. Potential for Conflict
    • Spending Disagreements:  Differences in spending habits and financial priorities can lead to conflicts.
    • Financial Control:  One partner might feel dominated if there is an imbalance in financial control or decision-making.
  3. Vulnerability to Financial Mistakes
    • Shared Risk:  One partner’s financial mistakes or mismanagement can directly impact the other.
    • Debt Issues:  Joint liability for debts means one partner’s debt can become a shared burden.
  4. Income Disparities
    • Fairness Concerns:  Significant income disparities can lead to feelings of inequality or resentment.
    • Contribution Imbalance:  The partner earning more may feel they are contributing disproportionately.
  5. Complicated Separation
    • Dividing Assets:  In case of separation or divorce, untangling completely combined finances can be complex and contentious.
    • Legal Implications:  Legal processes may be more involved when all finances are intertwined.

You’ve made great progress once you and your significant other have agreed on how you want to approach your finances!  There are still many details to be discussed including budgeting and, if your finances are partially or completely separated, how to contribute to joint expenses.  This is especially true if one of you earns a lot more than the other or has much higher debt.

There’s also the matter of thinking through separation should it occur.  A lawyer is important to understand this and the rules vary from state to state.  There are three concepts that are essential for you to understand here.

  1. No-Fault Divorce.  A no-fault divorce is a type of divorce in which the spouse filing for divorce does not have to prove any wrongdoing or fault on the part of the other spouse. Instead, the filing spouse only needs to state that the marriage has irretrievably broken down or that there are irreconcilable differences, meaning that the marriage cannot be saved and there is no reasonable expectation of reconciliation.  In this situation, the court does not consider the behavior of either spouse when making financial decisions.  Colorado is a no-fault state.
  2. Community property.  Community property refers to a legal framework used in some states to determine how property and debts are divided between spouses during a divorce. Under community property laws, most property acquired during the marriage is considered jointly owned by both spouses and is typically divided equally upon divorce.  Colorado is not a community property state. It is an equitable distribution state.
  3. Prenuptial Agreements.  A prenuptial agreement (often called a prenup) is a legally binding contract created by two individuals before they get married. The purpose of a prenup is to establish the property and financial rights of each spouse in the event of a divorce or the death of one of the spouses.  Importantly, a prenup can override community property laws in a divorce, even in states that follow community property laws. A prenup is a contract between future spouses that can address issues like property division, alimony and debt. If a prenup is valid and doesn’t violate state or federal law, a judge will likely accept it as proof that the couple agreed to a different split of their assets than the default 50/50 split in community property states.

So, in summary, a series of open and empathetic conversations about how to handle finances when you are getting married or forming some other kind of committed relationship is essential.  We can help you work through this process, or discuss any other financial matters, in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Blending Finances for Couples & Newlyweds – Part 1

By on August 1, 2024

If you’re engaged in a committed relationship with another person, there are many things you’ll want to discuss and to find a way of dealing with them that works for both of you.  I previously wrote about how you can achieve this alignment and it might be good to read that article before digging into this one.  Okay, now that you have some ideas about how to discuss finances with each other, let’s explore options you have for blending your finances.

There are three basic ways to handle your finances as a couple.  These are:  Keep finances separate, partially combine finances (hybrid approach) and completely combine your finances.  There is not a best approach for each couple.  You’ll need to work this out between yourselves.  However, knowing about these three options can help you explore what’s best for you.  This month, we’ll discuss the first two approaches.  Next month we’ll dig into completely combing your finances and we’ll also give you some information on separating your finances should that become necessary.

Separate Finances.  Keeping finances completely separate in marriage is a financial arrangement where each partner maintains individual control over their own money, accounts and financial responsibilities.

Pros

  1. Financial Independence
    • Autonomy:  Each partner retains full control over their own income and spending decisions.
    • Self-Sufficiency:  It can foster a sense of independence and self-reliance.
  2. Easier Budgeting for Personal Expenses
    • Personal Accountability:  Each person is responsible for managing their own finances, which can simplify personal budgeting.
    • Individual Goals:  Easier to pursue personal financial goals without needing to compromise.
  3. Avoiding Conflicts Over Money
    • Reduced Tension:  Less potential for arguments over spending habits or financial priorities.
    • Privacy:  Each partner can maintain privacy over their financial matters.
  4. Protecting Individual Credit Scores
    • Credit Protection:  Individual financial missteps won’t affect the other partner’s credit score.
    • Debt Management:  Personal debts remain separate, avoiding shared liability.
  5. Simplified Asset Division in Case of Separation
    • Clear Boundaries:  Assets and liabilities are already separated, which can simplify legal and financial matters in case of divorce.

Cons

  1. Lack of Transparency
    • Financial Secrecy:  Keeping finances separate can lead to a lack of openness about each other’s financial status.
    • Trust Issues:  Potential for trust issues if one partner is unaware of the other’s financial situation.
  2. Complicated Shared Expenses
    • Expense Management: Managing shared expenses like rent, utilities and groceries can be more complex.
    • Equitable Contributions: Deciding how to fairly split joint expenses can be challenging.
  3. Potential for Inequality
    • Income Disparities:  Differences in income can lead to feelings of inequality if one partner cannot contribute equally to joint expenses or savings.
    • Financial Imbalance:  One partner may end up shouldering more of the financial burden.
  4. Reduced Financial Cohesion
    • Disjointed Financial Goals:  It can be harder to align on shared financial goals and long-term planning.
    • Less Collaboration:  Reduced opportunity for teamwork in managing finances and achieving joint objectives.
  5. Missed Financial Benefits
    • Joint Accounts Perks:  Missing out on benefits such as combined savings interest, better mortgage rates and joint tax returns.
    • Emergency Situations:  In emergencies, pooled resources might be more effective than separate funds.

Partially Combined Finances.  Partially combined finances can offer a balanced approach, allowing couples to enjoy the benefits of shared financial responsibilities while maintaining personal financial independence. Successful management of this approach requires clear communication, mutual understanding and regular financial check-ins to ensure both partners feel comfortable with the arrangement.

Pros

  1. Balance of Independence and Unity
    • Autonomy:  Each partner maintains some financial independence with their own accounts.
    • Teamwork:  Joint accounts for shared expenses foster a sense of partnership and teamwork.
  2. Simplified Shared Expenses
    • Joint Accounts for Bills:  Easier management of shared expenses like rent, utilities and groceries through joint accounts.
    • Expense Sharing:  Clear mechanisms for contributing to joint expenses while maintaining personal spending control.
  3. Transparency and Trust
    • Openness:  Joint accounts provide transparency about shared financial goals and expenses.
    • Trust Building:  Partial sharing fosters trust while allowing personal financial privacy.
  4. Flexibility
    • Adaptability:  Easier to adjust contributions and responsibilities as circumstances change.
    • Personal Goals:  Each partner can pursue individual financial goals without affecting the joint budget.
  5. Financial Security
    • Emergency Fund:  Combined resources in joint accounts can be beneficial in emergencies.
    • Shared Savings:  Easier to save for shared goals like vacations, home purchases or children’s education.

Cons

  1. Complex Financial Management
    • Tracking Issues:  Managing both joint and individual accounts can be more complex and time-consuming.
    • Coordination:  Requires careful coordination to ensure all expenses and contributions are managed effectively.
  2. Potential for Disagreements
    • Spending Disputes:  Differences in spending habits can still cause disagreements over joint account usage.
    • Contribution Imbalances:  Disparities in income or contributions to joint accounts may lead to tension.
  3. Partial Transparency
    • Limited Openness:  Not all financial matters are shared, which may lead to misunderstandings or lack of full financial insight.
    • Privacy Concerns:  Balancing transparency with personal privacy can be challenging.
  4. Income Disparities
    • Fairness Issues:  Differences in income can make it difficult to decide how much each partner should contribute to joint expenses.
    • Resentment:  One partner may feel burdened if they contribute more to the joint account due to higher earnings.
  5. Legal and Tax Implications
    • Complex Tax Filing:  Partial combining may complicate tax filing and financial planning.
    • Legal Issues:  In case of separation or divorce, dividing partially combined finances can be more complicated.

I hope this article gives you some useful information on this very important topic.  Please return next month for the second part of this story.  In the meantime, if you’d like to begin discussing the best way to combine finances, or discuss any other financial matters, in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Roth 401(k) Plans

By on July 1, 2024

You probably know there are two commonly used types of retirement plans:  Individual Retirement Plans (IRAs) and 401(k)s/403(b)s offered by employers.  Further, they come with different tax treatment choices, Traditional and Roth.  In short, the Traditional option is funded with pre-tax dollars and withdrawals (contributions and growth) are taxed as ordinary income.  The Roth option is funded with after-tax dollars and withdrawals are generally tax-free.

Roth 401(k) Overview

Prior to the SECURE Act 2.0 (enacted in late 2022), Roth 401(k) contributions and taxation treatment differed between employee and employer contributions in that employee contributions went to the Roth option, but employer contributions were required to go the Traditional option.  This act really simplified things by allowing both employee and employer contributions to be deposited to the same option.  Let’s take a look at some of these changes.

Employee Contributions

No changes here.  Employee contributions to a Roth 401(k) are considered ‘after-tax’ and are not deductible by the employee.

Employer Contributions

Under the SECURE Act 2.0, employers can now make matching or non-elective contributions to Roth 401(k) accounts. However, these contributions must be included in the employee’s taxable income in the year they are made, which differs from the previous rule where all employer contributions were pre-tax and allocated to traditional 401(k) accounts.  As a consequence, the employee’s Adjusted Gross Income will increase by the amount of the employer’s contribution leading to a somewhat higher tax bill.

This change allows for Roth treatment of employer contributions, making future withdrawals of these contributions tax-free, provided other Roth requirements are met (e.g., holding the account for at least 5 years and reaching age 59½).

Required Minimum Distributions (RMDs)

The SECURE Act 2.0 eliminated the RMD requirement for Roth 401(k) accounts starting in 2024. Previously, Roth 401(k) account holders had to take RMDs during their lifetime, just like traditional 401(k) holders. This change aligns Roth 401(k) accounts with Roth IRAs, which do not have RMDs during the account holder’s lifetime.

Is a Roth 401(k) Right For You?

This really depends on your circumstances.  If you expect your tax rate to be lower in retirement, this may not be the best choice.  If your tax rate might be higher than it is now, this could be the perfect way to go.  Since it’s hard to see the future and since tax laws change, many people opt for a stream of tax-free income.

So, in summary, the SECURE Act 2.0 introduced significant changes that provide more flexibility and potentially more tax benefits for Roth 401(k) account holders by allowing employer contributions to Roth 401(k)s and eliminating RMDs.  We can discuss whether a Roth 401(k) plan is right for you, or any other financial matters, in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Handling the Estate of a Love One

By on June 1, 2024

The death of a spouse/partner, parent, child or anyone you’re close to can be very difficult.  If your loved one has recently died, please accept my sympathies for your loss.  Or maybe you’re just getting organized before a death occurs.  In either case, I hope that this article will prove helpful to you.

Unfortunately, there are quite a few steps to go through when someone dies – especially if you are acting as the personal representative (also called the executor in many states.)  Here is a pretty good basic list to get you started.

Overview:

  1. Avoid Major Decisions.  Many of us have our thinking clouded in the early stages of grief.  Therefore, it’s important to defer any major decisions unless they absolutely require immediate attention.
  2. Get Help.  Contact your estate attorney or another lawyer that you use.  Contact your financial advisor.  (We previously wrote an article on the role of a financial advisor when a spouse dies that may be useful.)  Contact your CPA or tax preparer.  Your professional team can help with many of the steps that follow.  Their expenses are typically paid for by the estate.

Immediate Actions:

  1. Pet Care.  If the deceased lived alone and had pets, it’s essential to contact someone to be sure they’re taken care of right away.
  2. Notify Close Family and Friends.  Inform immediate family members, close friends and any other relevant individuals about the death.
  3. Contact Medical Professionals.  If the death occurs at home, contact emergency services or the attending physician to confirm the death and obtain a death certificate.
  4. Contact Funeral Home.  Arrange for the transportation of the body and make initial funeral or cremation arrangements.
  5. Secure Important Documents.  Locate the will (and letters of instruction if they exist), life insurance policies, birth and marriage certificates, Social Security card and any other important documents.
  6. Don’t Do This Immediately.  Keep your loved one’s phone active to receive important calls.  Also, don’t cancel their primary credit card immediately until you can handle automatic payments and the like.

Legal and Financial Steps:

  1. Obtain Death Certificates.  Request multiple copies (10-12 are often recommended) of the death certificate from the appropriate authorities. You’ll need these for various legal and financial purposes.
  2. Notify Employer and Financial Institutions.  Inform your loved one’s employer or former employer’s benefits department since in many cases, you’ll still be covered by your spouse’s health insurance if his/her company offered such coverage.   Contact banks, investment firms, and other financial institutions of the death.  Also, note that accounts and safe deposit boxes may be temporarily frozen, so be prepared for that.
  3. Contact Insurance Companies.  Notify life insurance, health insurance, and other relevant insurance providers of the death and initiate the claims process.
  4. Review and Execute the Will.  If there’s a will, contact the personal representative/executor if it’s someone other than you.  If it is you, review it carefully and consult with an attorney to begin the probate process if necessary.  (We previously wrote an article on probate that you may wish to consult.)
  5. Credit Agencies.  Contact Experian, Equifax, and TransUnion and inform them of the death.  Put a fraud alert on the deceased’s Social Security number.  Also, request final copies of their credit reports.
  6. Handle Accounts and Subscriptions.  Close or transfer your loved one’s accounts, including bank accounts, credit cards, utilities, subscriptions, and memberships.

Practical Matters:

  1. Make Funeral Arrangements.  Plan the funeral, memorial service or celebration of life according to your loved one’s wishes or religious/cultural traditions.  You’ll need to write an obituary unless the deceased wrote their own.  If the deceased is a veteran, he/she may have burial benefits, so check with Veterans Affairs.
  2. Manage Property and Assets.  Secure your loved one’s property and assets, including their home, vehicles, and personal belongings.
  3. Address Debts and Expenses.  Pay any outstanding debts, including medical bills, credit card debts, and funeral expenses — from the estate if possible.
  4. Update Legal Documents.  Review and update legal documents such as deeds, titles, and beneficiary designations as necessary.
  5. Contact Social Security.  If the deceased was your spouse, it’s likely that Social Security benefits will change.  Often, your total benefits will decrease, but the amount that you personally receive will increase.
  6. Taxes.  There are two kinds of taxes to take care of.  First, there are personal income taxes that need to be paid for the deceased for the year that they died.  Second, there may be estate taxes depending on state in which the deceased resided and the amount of assets in the estate.  Colorado does not have estate taxes.

Emotional and Personal Support:

  1. Seek Emotional Support. Lean on friends, family, support groups or a therapist for emotional support and guidance through the grieving process.
  2. Take Care of Yourself.  Remember to prioritize your own well-being during this difficult time. Get enough rest, eat properly and engage in activities that bring you comfort.
  3. Consider Practical Help.  Accept offers of practical assistance from friends and family members, such as help with meals, childcare or household chores.

Dealing with the death of a loved one can be overwhelming, so take things one step at a time and don’t hesitate to ask for help when needed. This article can serve as a guide to help you navigate the practical and emotional challenges that arise during this difficult time.  There are many other things to consider such as stopping prescription deliveries, returning any medical equipment and so forth.  We would be happy to meet with you to review your situation through a no-charge, no-obligation initial meeting.  To set up a meeting, please visit our website or give us a call at 970.419.8212.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Reasons to Delay Social Security Payments

By on May 1, 2024

In this article, I want to share some information on the advantages of delaying your Social Security benefits.  Industry research has confirmed that most retirees benefit from delaying Social Security payments.  There are, of course, reasons why people don’t do this even though it might benefit them to do so.  Some simply need the money now rather than later.  Some have health issues which cause them to think they might not live to a very old age.  And some have a bird-in-the-hand philosophy.

The key to understanding this is something called the full retirement age or “FRA” (also called the normal retirement age).  Taking Social Security before the full retirement age decreases your monthly benefit.  Taking it after that age increases your monthly benefit due to delayed retirement credits of 8% per year (under current law).  So if you can wait until age 70, your monthly benefits will increase by 77% (compared to claiming at age 62).  Note that benefits do not increase after age 70.

The full retirement age varies slightly depending on when you were born.  (The full retirement age is age 65 if you were born in 1937 or earlier.  It’s 67 if you were born in 1960 or later.)  If you were born in 1960 or later, the following table describes how your benefits increase or decrease depending on when you start taking Social Security.

If you’re able to wait, here are some of the reasons that delaying payments often makes a lot of sense.  First, there are the higher monthly payments that I mentioned.  Another very important reason to wait is that doing so will increase the chances that you’ll have enough income should you live to a ripe old age.  Running out of money is a top concern of retirees and delayed Social Security can really help out here.  Another reason to wait is that research has shown that Social Security returns are superior to annuities, bonds and equities in many ways.  Finally, delayed Social Security benefits can help protect you against increased inflation and down markets.  The very things that your other investments are not immune from.

Outside of these when-to-start considerations, it’s important to coordinate starting dates with your spouse to maximize your combined monthly income.  Guidepost Financial Planning can help you sort through your options.  Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Financial Health

By on April 1, 2024

When asked about their financial health, many people immediately think of their credit score.  While that is an important component, it’s far from the whole story.  As an analogy, think about going to get your physical and the doctor only takes your temperature.  But what about blood pressure, cholesterol levels and so on?  Yep, understanding your health requires you to look at a number of factors.  This month I’ll go over some of the more common aspects of analyzing your financial health.

Income.  The amount of money earned from various sources such as salary, wages, investments and business activities.  Obviously this is a key number that drives many of the health considerations that follow.

Expenses.  The money spent on necessities, discretionary purchases, bills and debt repayments.  Expenses, along with income, underlie the rest of your financial health. You should be spending less than you earn.

Savings. “It’s not what you make – it’s what you keep.”   Savings drive the success of your emergency fund, retirement fund and other investments for future requirements. Your level of savings directly impacts your net worth (below) and retirement success.

Net Worth.  Net worth is simply the difference between all of your assets and all of your liabilities.  Net worth varies from person to person, but watching it for an upward trend is very helpful in determining whether you’re on track. Ideally, your net worth should be growing every year as your investments grow and your debt is reduced.

Debt Management.  The management of outstanding debts such as loans, mortgages and credit card balances.  One measure of your health here is something called the debt-to-income ratio.  It’s calculated by dividing your monthly debt payments by your gross monthly income.  Lenders like to see this number less than 20% and they are very concerned when it gets over 36%.

Budgeting.  Planning and allocating income to different expense categories to ensure financial stability and meet financial goals.  Budgeting can really relieve much of your financial stress because you know where your money is going which makes it much easier to redeploy it if necessary.  Even without any historical data (which takes a bit to collect), there’s a decent rule of thumb to guide you.  It’s the 50/30/20 rule.  It merely suggests spending 50% of you after-tax income on life’s necessities, 30% on things that are more in the discretionary category and 20% on savings and debt reduction.

Investments.  Allocating funds to various investment vehicles such as stocks, bonds, real estate and retirement accounts to grow wealth over time.

Credit Score.  A numerical representation of an individual’s creditworthiness, which impacts borrowing ability and interest rates on loans. A score over 750 is a good initial goal.

Emergency Fund.  Savings set aside to cover unexpected expenses or financial emergencies. This fund comes into play whenever significant and unexpected financial needs arise.  Suppose you lose your job, need a new roof, need some medical procedure not mainly covered by insurance and so forth.  Most of us know that the rule of thumb here is to have at least 3-6 months’ worth of expenses in this fund.  If you don’t currently have this fund, it’s pretty easy to start.  Just have a portion of each month’s income directed to a special account that’s earmarked for emergencies.

Retirement Fund.  These savings will be needed when you stop working.  While it’s never too late to start, it’s best to start while you’re young to let your investments grow over time.  My favorite vehicle for retirement savings is a Roth IRA.  A 401(k), especially if your employer provides matching funds, is also very important for long-term wealth building.  There are also individual Traditional IRAs as well as regular taxable investments.  We feel that it’s best to invest 15-20% of your net pay into this fund.  Setting up automatic withdrawals for this is a great way to accumulate what you need for a comfortable retirement.

Life Insurance.  Insurance doesn’t grow your finances, but rather it protects them.  It would be very disheartening to be successfully building strong financial health only to have it wiped out buy some disaster. Term life insurance can be appropriate for most people and the amounts should be reviewed if you add dependents.

Just like your physical health, it’s important to look at a comprehensive picture of your financial health. Want to get an unbiased assessment of your situation?  We can review your financial health, or any other financial matters, in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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Capital Gains for Stock Sales

By on March 1, 2024

Capital gains represent the difference between the purchase price and the sales price of capital assets.  Capital gains apply to a number of assets including:  stocks, mutual funds, Exchange Traded Funds (ETFs), bonds, real estate, cryptocurrencies, stamp and coin collections, precious metals, artwork and so forth.  (More specifically, if the sales price exceeds the purchase price, there is a capital gain.  When the sale results in a loss, we refer to the sale as a capital loss.)

This month we’ll focus on capital gains for stock sales.

A key concept for capital gains is taxation.  If you owned the asset for more than a year, capital gains rates apply.  Less than a year, ordinary income tax rates apply.   For most of us, the capital gains tax rate for Federal taxation is 15%, but there are actually three different rates depending upon your income.  For 2023, here are the IRS rules for married couples filing jointly:

In addition, there is another tax called the Net Investment Income tax (NII).  It’s a 3.8% tax applied on top of the capital gains rate.  It’s dependent on your income level.  For married couples filing jointly, if their Modified Adjusted Gross Income (MAGI) is more than $250,000, they are subject to this tax.

The general concept of a capital gain (loss) is pretty simple.  Take the sales price minus the purchase price to determine your gain (loss).   (One detail to keep in mind is that the purchase price includes and commissions and fees you paid.  Similarly, the sale price excludes such costs.)  The calculation of the purchase price can be a little complicated if you purchased your shares prior to January 1, 2011 (different dates for other types of investments).  The reason for this is that the IRS requires brokerage firms to report your gain (loss) after that date.  An additional complication occurs if you purchased stock at different points in time.  Then there needs to be a determination of which shares you’re selling so that the gain can be properly calculated.  There are four common ways to determine what’s called the cost basis (the purchase price of the stock you’re selling).  We’ll take a look at each of these methods next.

Average Cost.  This is the total amount you paid divided by the total number of shares you own.  This technique can only be used for mutual funds.

First-In, First-Out (FIFO).  Here you sell the shares in the order they were purchased (oldest first).

Last-In, First-Out (LIFO).  The opposite of FIFO.  The most recently purchased shares are sold first.

Specific Share Identification.  Here you identify which shares you are selling and thereby determine their basis.

Which calculation is best depends on your particular situation.  The most common way of calculating basis is FIFO, but it’s not always the best way.  Here’s an example to clarify this.

Suppose you’ve purchased shares in a company over time as follows and that you’ve held all of them over a year.

Now suppose you want to sell 70 shares and that they’re currently priced at $100 per share.  The FIFO method (sell oldest first) would be:

20 shares x $50 = $1,000
40 shares x $30 = $1,200
10 shares x $75 = $750

That yields a cost basis of $1,000 + $1,200 + $750 = $2,950.  The gain would be 70 shares x $100 per share (sale price) or $7,000 minus the cost basis.  That is, $7,000 – $2,950 = $4,010 gain.

Using LIFO, we get:

30 shares x $75 = $2,250
40 shares x $30 = $1,200

Giving a cost basis of $2,250 + $1,200 = $3,450.  This produces a gain of $7,000 – $3,450 = $3,550.

Using Specific Share Identification, let’s sell 30 shares from Lot C, 20 shares from Lot A and 20 shares from lot B.  Then we get:

30 shares x $75 = $2,250
20 shares x $50 = $1,000
20 shares x $30 = $600

Giving a cost basis of $2,250 + $1,000 + $600 = $3,850.  The gain on this is $7,000 – $3,850 = $3,150.

In summary, the different cost basis methods produce the following gains:

There are a couple of additional cost basis details that are worth mentioning.

Stock Splits.  You need to adjust the basis for this.  Suppose you had 100 shares that you purchased for $50 per share.   Suppose that the stock split 2 for 1.  After the split you own 200 shares and their cost basis is $25 per share.

Historical Share Prices.  There are a number of ways you can determine what you paid for older shares.  Here are the common ones:

  • Refer to the statements received at the time of the purchase.
  • Contact the brokerage company you were with at the time of the purchase.
  • Contact the company that issued the shares.
  • Refer to one of the online resources such as BigCharts.com, Finance.Yahoo.com or Finance.Google.com.

However you determine the price you purchased your stock at, be sure to document it for any future IRS inquiries.

You can see that determining the cost basis for your stocks can vary from totally simple (see the 1099-B form) to kind of involved (finding stock purchase prices and determining which calculation to use).  There’s also the matter of offsetting gains with losses and how to treat reinvested dividends.  Additionally, there is the way capital gains are calculated for your home and other assets.   If you’d like to talk about cost basis, tax minimization strategies or discuss any other financial matters, we can do this in a no-charge, no-obligation initial meeting.  Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products.  Please consult your tax or investment advisor for specific advice.

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