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SECURE 2.0 Tax Law Changes

By Arlen T Olberding, CFP® on February 1, 2023

In our January article, we talked about some of the tax law changes coming in 2023. Days before the end of the year, the SECURE 2.0 Act of 2022 passed the congress with bipartisan support and was signed by the president. The bill contains many provisions that are intended to strengthen the country’s retirement savings. This month we’ll discuss some of the highlights of this important piece of retirement-tax legislation.

Automatic Opt In

The act requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter, that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent. All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than 3 years), church plans, and governmental plans. These rules are effective for plan years beginning after December 31, 2024.

RMD Age Increased

The age to begin required minimum distributions has been 72. This bill increases the RMD age to 73 starting on January 1, 2023 – and increases the age further to 75 starting on January 1, 2033.

Catch-up Contributions Indexed

Last month’s article discussed an increase in the catch-up contribution limit by $1,000 to $7,500. This new act indexes future limits to the IRS cost-of-living-adjustment (COLA) and is effective for taxable years beginning after December 31, 2023.

Emergency Expenses

Generally, an additional 10 percent tax applies to early distributions from tax-preferred retirement accounts, such as 401(k) plans and IRAs, unless an exception applies. This bill provides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within 3 years. No further emergency distributions are permissible during the 3-year repayment period unless repayment occurs. This provision is effective for distributions made after December 31, 2023.

529 Plan Rollovers

The legislation amends the Internal Revenue Code to allow for tax-free and penalty-free rollovers from 529 accounts to Roth IRAs, under certain conditions. Beneficiaries of 529 college savings accounts would be permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years.

In addition to emergency withdrawals from a 401(k) plan, the act provides employers with the option to offer to their non-highly compensated employees a pension-linked emergency savings account. Employers may automatically opt employees into these accounts at no more than 3 percent of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer). The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or their IRA.

The legislation covers a lot more – such as additional changes to 403(b) plans, long-term care funding and student loans. To see which provisions apply to your situation, or to discuss any other financial matters, we can set up 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.

Posted in Taxes

2023 Tax Law Changes

By Arlen T Olberding, CFP® on January 1, 2023

First of all, Happy New Year! 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 2023.

Social Security

Inflation creates a number of financial problems, but high inflation does signal a healthy increase in Social Security payments. Rates will actually increase 8.7% in 2023!

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 $22,500 this year – a $2,000 increase. If you’re 50 or older, you can also use the catch-up contribution which will be $7,500 – a $1,000 increase. The same rules apply to 403(b) plans, Thrift Savings Plans and most 457 plans.

IRA
For both traditional and Roth IRAs, contribution limits will be $6,500 – up $500. Catch-up contributions for those 50 and older remain unchanged at $1,000. (In addition, the income cutoff for IRA tax deductions has increased. For example, the tax deduction eligibility of traditional IRAs is now phased out over the $73,000 to $83,000 range for joint filers.)

Tax Rates
Marginal tax rates remain unchanged in 2023. The dollar thresholds for particular brackets have increased due to inflation. Here are the rates for single filers for 2023:

37% for incomes over $578,125 (over $693,750 for married couples filing jointly)
35% for incomes over $231,250 (over $462,500 for married couples filing jointly)
32% for incomes over $182,100 (over $364,200 for married couples filing jointly)
24% for incomes over $95,375 (over $190,750 for married couples filing jointly)
22% for incomes over $44,725 (over $89,450 for married couples filing jointly)
12% for incomes over $11,000 (over $22,000 for married couples filing jointly)
10% for incomes of $11,000 or less ($22,000 or less for married couples filing jointly)

Standard Deduction
The standard deduction for those who do not itemize increased to $13,850 for singles filers and $27,700 for married couples filing a joint return.

Estate Taxes
Estates will be exempt from Federal taxes up to $12,920,000. The limit in 2022 was from $12,060,000.

Required Minimum Distributions
Washington had discussed increasing the age at which you must take your RMD from 72 to 73, but that legislation is still pending so 72 remains the rule for 2023. You may know that the RMD is calculated by dividing the value of your combined retirement accounts by the projected life expectancy for your age group. With markets down at the close of the year, portfolios will be worth less and RMDs will therefore be smaller. This can be helpful if you don’t need all of your RMD this year.

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 2023 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.

Posted in Saving, Taxes

Delayed Gratification

By Arlen T Olberding, CFP® on December 1, 2022

Delayed gratification is often thought of as resisting an immediate reward in exchange for a greater reward in the future. However the essence of delayed gratification is simply resisting an immediate reward in preference for a later reward. This act of self-control can be useful in many different aspects of our lives, including our financial lives. This month we’ll take a closer look at the financial implications of delayed gratification.

The seminal research on delayed gratification, the now-famous “marshmallow experiment,” was conducted by Walter Mischel in the 1960s and 1970s at Stanford University. Mischel and his colleagues were interested in strategies that preschool children used to resist temptation. They presented four-year-olds with a marshmallow (or other treats) and told the children that they had two options: (1) ring a bell at any point to summon the experimenter and eat the marshmallow, or (2) wait until the experimenter returned (about 15 minutes later) and earn two marshmallows. The message was: “small reward now, bigger reward later.” Some children broke down and ate the marshmallow, whereas others were able to delay gratification and earn the coveted two marshmallows. In follow-up experiments, Mischel found that children were able to wait longer if they used certain so-called “cool” distraction techniques (covering their eyes, hiding under the desk, singing songs, etc.). We might learn a lesson or two from these kids as we’ll explore in just a bit.

(By the way, in a follow-up study, Mischel thought he observed a strong correlation between delayed gratification as a 4-year-old and future success in life. However, a subsequent study by other researchers demonstrated that the correlation was much weaker than originally thought. Socioeconomic circumstances for the children turned out to be a bigger factor.)

Just to get our brains cooking, let’s look at some classic examples of delayed financial gratification. Saving for a large expense such as a new home or putting money aside for retirement are great examples of delayed gratification. We’re foregoing some immediate pleasures for an important goal down the line. Investing is another prefect example. You delay using your money now with the expectation that it will grow over time. Achieving these kinds of longer-term objectives can be facilitated by goal setting. You may want to review a couple of previous articles on this subject: Goal Setting and The Power of Goal Setting.

If saving/investing is one side of this coin, the opposite side is reducing expenses. Whipping out your credit card every time you see something you’d like, frequently leads to debt — and credit card debt is very expensive. So delayed gratification can mean avoiding purchases that you can’t afford at the moment. It might be helpful to reread Top Reasons to Become Debt-Free, Another Reason to Eliminate Credit Card Debt and Using Credit Cards Wisely.

Now how about those Stanford kinds covering their eyes, hiding under the desk and singing songs? Well, adults can learn from this when they’re having a hard time exercising delayed gratification. A perfect example is having a portion of your paycheck direct deposited into an investment account. Yep, if you don’t even see the money, you’re less likely to spend it. Another thing we can learn from these kids is that it helps to think more about our future objective (think comfortable retirement) than it does to think about the hot new car we’re passing up.

Delayed gratification can be challenging, but I hope you can see it’s an important part of your financial life. If you’d like to talk more about delayed gratification, or go over any other financial matter, 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.

Posted in Fundamentals

Tax-Loss Harvesting

By Arlen T Olberding, CFP® on November 1, 2022

Most of you know that what we pay for an investment is called its basis and what we sell an investment for is its realized gain or simply its gain. If we sell an investment at less than its basis, we produce a loss. Okay, simple enough, but what is tax-loss harvesting? It just means intentionally selling an investment at a loss to meet some tax objective. Tax-loss harvesting can actually be a bit tricky, but here are the basics.

Offsetting Gains

Suppose we need to sell some stock that has gained value. We will be subject to a tax on that gain. The tax will be at our ordinary income tax rate if we’ve owned the investment for less than a year. (That’s 24% for joint filers earning $95,376 to $182,100 for federal taxes and 4.55% for Colorado taxes.) Federal taxes are 15% for most of us if we’ve held the investment for a year or more. (The federal rate is 20% for people with earning around a half-million dollars or more.) Ouch, right? Well, this is where tax-loss harvesting can come to the rescue. You can use investment losses (from this year or from prior years) to offset your gain. Remember that taxes are only calculated on your net gain (total gains – total losses). This can save you a lot of money and is the big benefit of tax-loss harvesting.

Excess Losses

Suppose your losses exceed your gains? These excess losses can be used in two ways. First, they can be used to reduce your taxable earned income by up to $3,000 (for married couples filing separately, it’s $1,500). What if there are still unused losses? They can be carried forward and used to reduce capital gains in future years. And, there’s no expiration date!

An Example

Let’s just clarify all of this with an example. Suppose you sell some stocks and have a $50,000 gain. Suppose you also harvest $65,000 in losses. So, your taxable gains are ZERO! And, there is $15,000 in losses left over. Okay, let’s reduce our earned income by $3,000 (that’s worth $720 for someone in the 24% tax bracket). And we’re not done yet, we can carry the remaining $12,000 forward to reduce capital gains in future years for as long as it takes to use them up.

Common Reasons to Sell

If we don’t want any capital gains this year, why not just avoid selling an investment? Naturally the most common reason is that we need the money. Another common reason is that our portfolio has become significantly unbalanced (too much in real estate, not enough in technology, etc.). We need to sell stocks in one sector to free up the funds to invest in another sector.

The Fine Print

There are a number of important details here. In fact, it’s easy enough to make a mistake that a financial advisor should really be working with you on your strategy. Here are some of the more common things to consider.

You can only harvest tax losses in non-retirement accounts. (Not in IRAs, 401(k)s, annuities, etc.)
If you intend to reinvest the money you obtain from tax-loss harvesting, you must watch out for the IRS wash-sale rule. This basically says that you can’t reinvest in the things you sold for a loss (or in substantially identical things) for 30 days before the sale and for 30 days after the sale. If you do, then you can’t use these losses for tax purposes. (There are ways around this with EFTs and mutual funds, but they must be selected with an eye on the substantially-identical rule.)
Short-term losses (investments owned for less than a year) must be applied against short-term gains and long-term losses must be applied against long-term gains. But, suppose your long-term losses exceed your long-term gains? Then it’s permissible to apply the remaining losses against your short-term gains. The converse is permitted too, but due to the tax structure, it’s normally better to carry excess short-term losses forward into a future year.
It’s very common to harvest losses late in the year as you start thinking about taxes. But, there have been studies that show it’s often advantageous to harvest losses throughout the year. (Indeed, many brokerage firms have programs that can do this automatically on a daily basis.)
It can be worthwhile to harvest losses even if you don’t have any gains you want to offset this year. If it’s a down year (in 2022, the Nasdaq is down almost 33% and the Dow is down over 20%), you may want to harvest some losses to help you in future years when you’ll have more gains to deal with.

You can probably see that tax-loss harvesting can be used to reduce your taxes and keep more money in your pocket. You can probably also see that loss harvesting must be done with care to avoid unintended consequences. We’d be pleased to review tax-loss harvesting for your particular situation, or go over any other financial matter, 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.

Posted in Taxes

Original Medicare or Medicare Advantage?

By Arlen T Olberding, CFP® on October 1, 2022

If you are already on Original Medicare or Medicare Advantage, you probably know that October 15 – December 7 is the Open Enrollment Period. That’s when you can make changes to your health insurance. Maybe you started out on Original Medicare and you’ve started to wonder if Medicare Advantage might be better for you. Or maybe you’ve been on Medicare Advantage and you want to go back to Original Medicare. Reevaluating your needs during Open Enrollment is certainly a good thing to do each year.

A good starting point is to clearly understand the difference between these two forms of health insurance. Original Medicare is a fee-for-service health plan that has two parts: Part A (Hospital Insurance) and Part B (Medical Insurance). After you pay a deductible, Medicare pays its share of the Medicare-approved amount and you pay your share (coinsurance and deductibles). If you want Medicare drug coverage (Part D), you can join a separate Medicare drug plan. Medicare Advantage (also known as “Part C”) is a type of Medicare health plan offered by a private company that contracts with Medicare. These plans include Part A, Part B and usually Part D. Advantage plans may offer some extra benefits that Original Medicare doesn’t cover. The Medicare people prepared this graphic to help you easily understand the two Medicare offerings (Original & Advantage).

Now that you have a general understanding of the two types of Medicare, you’ll need to decide which one is best for you – and this varies from person to person. (Indeed, about half the participants use Original Medicare and the other half use Medicare Advantage.) Here’s a chart from Medicare that lays out the key differences.

Naturally you’ll have to look this chart over and watch for the things that matter to you. Considering the cost differences can be a somewhat complicated exercise. For example, will you add drug coverage to Original Medicare (most people should). Will you add supplemental (Medigap) insurance to Original Medicare (this varies depending on your situation)? Which company will you choose for Medicare Advantage (coverage and costs vary)? Do you want insurance to cover vision, hearing and/or dental services (use Medicare Advantage)? And after considering these various options, you should think about your total medical cost (insurance plus copays, etc.).

You can probably see that choosing the best medical insurance plan depends on the details of your situation. One approach is to look things over and then consult with an advisor. We’d be pleased to review medical insurance, or go over any other financial matter, 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.

Posted in Insurance

Inflation & Higher Interest Rates

By Arlen T Olberding, CFP® on September 1, 2022

As you know, inflation has been generally on the rise. Inflation simply means an increase in what we have to pay for goods and services. We feel it at the gas pump, in the grocery store and when we try to finance a major purchase like a new home. The rate of inflation was at 8.5% in July 2022. The Federal Reserve has been trying to reduce inflation by raising the interest rates for banks to borrow funds from each other. The last two interest rate changes have been a very high 0.75% per increase. This has landed us at a 2.4% interest rate as of July 2022. Some experts believe it could even reach about 4% by the end of the year. This month we’ll take a look at a few of the important things you might consider in this inflationary period of rising interest rates.

Investments

One good thing about inflation is that the rates paid by financial institutions generally rise. They lag the Federal Reserve increases and are lower, but they do go up. The bad news is that even though interest earned goes up, your spending power still goes down. Nonetheless, it makes sense to try and maximize returns.

The most important thing you can do is monitor the rates that are being paid for your money. For example, online banking typically outperforms local brick-and-mortar banks. At the moment, several online banks offer interest in the 1.75-2.15% range with their high-yield money market accounts. Treasury bills are another option. They are currently paying 3.26% for a one-year investment. When inflation is high, a very interesting option is I Bonds from Treasury Direct. They are fully insured government bonds whose rate is tied to inflation. Currently their interest rate is 9.62%. Yep, 9.62%! What’s the catch? Nothing really, except there are a few important things to be aware of. First, you can only invest $10,000 per person per calendar year. So, if you’re a couple, that’s still $20,000. Have a trust? They qualify for $10,000 as well. Second, the rate is adjusted every six months. Third, you can’t cash these in until after a year. So, they’re kind of like CDs in that regard. Fourth, if you cash them in before 5 years, you lose three month’s interest.

Debt

The interest charge on debt is directly related to the Federal Reserve rate. As the Fed raises interest, you’ll pay more for new debt. For existing debt, it depends on whether your rate is fixed or whether it’s variable. So, you may have a fixed-rate mortgage and that cannot change. On the other hand, if you are a first-time buyer or are thinking about refinancing your mortgage, you’ll pay more as inflation rises. As a reminder of mortgage rates, here’s a chart for the last 10 years.

It’s the same story for auto loans and other major purchases. If you carry a lot of credit card debt, the rate is already very high and will probably increase as the Fed raises rates.

The best way for you to deal with rising inflation will depend on your particular situation. If you’d like to discuss this in more depth, or go over any other financial matter, we can discuss things 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.

Posted in Investing, News

Which Payment Method to Use?

By Arlen T Olberding, CFP® on August 1, 2022

Of course people still write checks, do electronic fund transfers, use mobile payment services (Apple Pay, etc.) and even use digital currencies (Bitcoin, etc.), but the big three when it comes to making payments are cash, credit cards and debit cards. In 2019, debit cards were used the most (30%), followed by cash (26%) and credit cards coming in third (24%). This month we’ll take a look at which form of payment might be best for you.

Debit Cards

A debit card is a payment card that can be used in place of cash to make purchases. Like cash, you must have the money now in order to make a purchase. The money for the purchase must be in the cardholder’s bank account at the time of a purchase and is immediately transferred directly from that account to the merchant’s account to pay for the purchase.

The main advantage of debit cards (other than you don’t have to carry cash) is that they can help you control your spending since you can’t spend more than you have in your bank account. In addition, merchants may offer cash back to customers, so that a customer can withdraw cash along with their purchase. (For example, asking the grocery store to give you $50 in cash when you buy your food.) There are usually daily limits on the amount of cash that can be withdrawn.

The main disadvantage of debit cards is that they offer less protection than credit cards in case of fraudulent activity.

Cash

Probably all of us have experience using cash. It’s still quite popular. Maybe its top benefit is that it’s accepted everywhere. (In fact, even if you prefer using a card, it’s good to always pack some cash for those merchants and restaurants who only accept cash.) Like debit cards, it can also be useful in controlling your spending. (Back in the day, some people used to budget by putting some money in an envelope labeled rent, another labeled groceries and so forth.)

Credit Cards

A credit card represents a loan (actually a revolving line of credit) from the issuing institution that can be used to make purchases now which are paid for later. If you pay what you owe in full at the end of each statement period, credit cards are a lot like cash – they don’t cost you anything extra.

Credit cards have a number of advantages. A very significant one is that the government limits your liability in case of fraud to $50 and many card issuers limit it to $0 if you report problems promptly. Unlike debit cards, credit cards help you build your credit history which affects your credit score which affects your loan rate when you finance a home, a car or anything else. Normally, credit card companies will help you resolve problems you have with a merchant – like faulty merchandise. With debit cards, you’re on your own. Many credit cards offer cash back, free travel and other incentives for using them. Credit cards allow you to purchase things that you don’t currently have the funds for. Interestingly, this can also be their biggest disadvantage too. Another disadvantage is their very high interest rate if you’re unable to pay your bill in full each month.

While many experts prefer credit cards, you can see that all three forms of payment are still very popular. When deciding how to pay for a particular purchase, you’ll need to consider your individual situation. If you’d like to talk more about payment options, or go over any other financial matter, we can discuss things 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.

Posted in Fundamentals

The True Cost of a Loan

By Arlen T Olberding, CFP® on July 1, 2022

No doubt about it, everyone borrows money. Certainly most of us use credit cards. Probably most of us have mortgages. Some of us have student loans. Maybe we need a car loan. When we look for these loans, we want to get the best deal. It used to be somewhat tricky to compare your options, but the federal Truth-in-Lending Act was passed in 1968 and it helped make comparisons so much easier. Among other things, it required lenders to characterize their loans using a clearly defined percentage called APR (annual percentage rate). APR expresses the cost of a loan as an annual percentage. It includes both interest charges and most of the fees charged by the lender. It neglects compounding (which something called APY takes into account). So, you can think of APR as interest + fees on an annual basis. As you might expect, fees vary by the type of loan you’re taking out. (For example, credit card fees are different than mortgage fees). Let’s take a closer look at some of these fees by loan type.

Mortgage Fees

The mortgage fees included in the APR are those charged by the lending institution. Here are some typical fees as listed by the Consumer Financial Protection Bureau:

Origination and lender charges. These costs are charged by the lender for “originating,” or making you the loan. They are part of the price of borrowing money. Different lenders may choose to itemize these costs to varying degrees – it’s the overall total that matters. Common charges are labeled origination fees, application fees, underwriting fees, processing fees, administrative fees, etc.
Points. Points are a charge you pay upfront to the lender. Points are part of the price of borrowing money and are calculated as a percentage of the loan amount. You can choose whether or not to pay points.
Taxes and government fees. These fees are charged by your local government. They are charged in connection with the real estate transaction, but are usually not a cost of borrowing money.
Prepaid expenses and deposits. These expenses may be associated with your loan or with homeownership. Typically, you need to pay the interest on your loan between the time you close and the end of that month. It’s also common to pay the first year’s homeowner’s insurance premium and make initial deposits into an escrow account to cover future homeowner’s insurance and property taxes.

Note that there are other fees that are paid directly to third parties and these are not included in the APR. These are charges for third-party services that are required to get a mortgage, such as appraisals and title insurance. You can shop separately for some of these services.

Credit Card Fees

Unlike mortgages, there are no fees associated with credit cards, so the APR only includes interest. The institution issuing the credit card may have other charges such as an annual fee, a late fee, interest on cash advances (normally higher than the credit card interest), a charge for transferring your balance from another credit card and so on. Since these vary from customer to customer and over time, they are not included in the APR.

Student Loan Fees

Student loans typically have only a few fees (typically application fees and origination fees). Some lenders do not charge these fees. If they are charged, they must be included in the APR. So the loan interest and APR on a student loan are the same or reasonably similar. Federal student loans generally have loan fees. These fees are a percentage of the total loan amount. A loan fee comes out of the amount of money that is paid out. This means the money received will be less than the amount that was borrowed.

Car Loan Fees

Loan fees for an auto purchase are collectively called prepaid finance charges. One example of such a charge is a loan origination fee. Different dealers charge different fees, so this is a good area to keep an eye on when financing your new vehicle. Naturally, you should compare dealer financing with bank or other third-party financing.

Of course, there are other types of loans and their details vary. The key concept to remember is that the APR is your best way to compare loan offers. If you’d like to talk more about loan fees, or go over any other financial matter, we can discuss things 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.

Posted in Fundamentals

Goal Setting

By Arlen T Olberding, CFP® on June 1, 2022

Each of us wants something that we can’t pay for at the moment. Maybe it’s your first home. Maybe it’s sending your kids to college. Maybe it’s a dream vacation. Maybe it’s an enjoyable retirement. Maybe it’s several of these goals or even something else. Whatever you’re after, establishing it as a concrete goal and developing a plan for achieving it dramatically increases the likelihood that you will actually realize that goal.

Goals can typically be categorized as short-term, mid-term or long-term. For most of us, our “portfolio” of goals probably includes one or more goals in each category. For example, a dream vacation might be short-term, a down payment on your first home might be mid-term and an enjoyable retirement might be long-term. Many people have a number of goals each with its own timeframe.

There are a variety of ways to set specific goals. I’ve previously described the tool that we use at Guidepost for goal setting. This might be a great time to reread that article. One step in this process is to set realistic goals. This is probably self-evident, but it’s worth keeping in mind. (Maybe a nicer home is more realistic for you than becoming a space tourist!)

After setting our goals, it’s important not to change them under normal circumstances. Sure, you may have a medical emergency that causes you to borrow money from a retirement account, but treat that as a loan and work to replenish it as soon as circumstances permit. It takes time and discipline to achieve our financial goals.

One thing to watch out for is lifestyle creep. Lifestyle creep occurs when increased income causes us to increase our discretionary spending. While it’s fun to enjoy ourselves when we get a raise, it’s important that we enjoy a few treats and not significantly and permanently increase the discretionary portion of our budget. One way to avoid this is to adhere to the pay-me-first principle. That means funding your financial goals before you spend on other things. Another technique is to employ the 50/30/20 budgeting rule. This approach allocates 50% of after-tax income to needs (fixed expenses), 30% to wants (discretionary expenses) and 20% to savings and debt reduction. So, if your income increases, keep these guidelines in mind as you allocate it.

One final thought for now on financial goals. It’s sometimes called the “I’ll be happy when” syndrome. It goes something like this, I’ll be happy once I’ve saved $1M. Or, I’ll be happy once I get a new sports car. Or, I’ll be happy after I get a promotion. You get the idea. Basically, it’s letting your desires and expectations exceed your income and to defer your happiness into the future. What people almost always find is that when they save that money or get that promotion, a new reason to not be happy yet pops up.

Hopefully this article has reminded you of the importance of goal setting. If you’d like to talk about your specific goals, or go over any other financial matter, we can discuss things 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.

Posted in Fundamentals

Probate

By Arlen T Olberding, CFP® on May 1, 2022

Probate is simply the administration of a deceased person’s estate. Probate involves paying debts (including taxes) and then distributing the remaining assets. (There are also related tasks such as closing accounts, liquidating assets and so forth.) Last month’s article talked about being an executor and how to minimize your personal risk. This month we’ll discuss the overall probate process and some of the associated costs.

Probate Process

A simplified description of the probate process includes the following steps:

Filing of the will and opening an estate in the probate court.
Giving notice of the probate proceeding to legal heirs, beneficiaries and creditors.
Verifying that the will is legal and valid.
Figuring out the value of the property in the deceased person’s estate.
Paying the debts of the estate, including taxes.
Giving the heirs of the estate their inheritances, the gifts that the deceased person left to them in the will.

Probate Rules

An important thing to know is that the applicable estate laws are determined by where the person died, not where the executor lives.

The probate rules tend to vary by state and even by county. An attempt is underway to create a more nationwide approach to probate. It’s called the Uniform Probate Code or UPC. Colorado is one of eighteen states that have adopted these rules.

Under the UPC, there are three kinds of probate. They are informal, unsupervised and supervised formal. They basically differ by the amount of court involvement with informal having the least. The majority of the estates in Colorado are settled under the informal process. (There is also a highly simplified process for estates valued at less than $70,000 that have no real property.)

Probate Costs

First of all, it’s important to know that probate costs are almost always paid by the estate, not by the executor or the beneficiaries.

Probate costs can vary considerably depending mainly on the complexity of the estate and whether it is being challenged by a beneficiary or other interested party. Some common costs in the probate process are:

Court costs.
Attorney fees. These are especially common when the executor doesn’t live where the deceased lived. There is no legal requirement in Colorado to use a probate attorney.
Executor costs (sometimes waived by the executor).
Accounting fees (preparing tax returns and so forth).

It may be that there will be appraisal fees to establish the value of key assets on the date of death. In some cases a bond will be required to ensure that the executor doesn’t steal from the estate. Finally, there are various miscellaneous costs such as postage, shipping and so forth.

It has been estimated that typical probate costs are about 3-8% of the estate’s value. To help you understand where these costs come from, here are some key probate expenses. Court fees are typically a few hundred dollars. Probate attorneys generally charge about $3,500-$5,000 in Colorado. Colorado does not have a law specifying executor fees. That means reasonable compensation is the rule. In Colorado, that averages about 1.5% of the estate value. Accounting fees can be in the $500-$2,000 range. If a bond is required, that is typically about 0.5-0.8% of the estate value.

Length of Probate

The average time that an estate goes through the probate process is about 6-24 months. Complex estates and contested estates can be open even longer.

Exempt from Probate

Various asset types are exempt from probate. These include life insurance and retirement accounts (IRAs and 401(k)s for example). Joint-tenancy, payable-on-death and transfer-on-death assets also avoid probate. A living trust is another way to shield assets from probate. It used to be that this was aggressively pursued to avoid estate taxes. However, with the high estate tax exclusions that are currently in force ($12.06 million for an individual in 2022), this is less important for many estates. Nonetheless, you can see that probate expenses that are calculated as a percentage of estate value still can make estate value minimization important.

Hopefully this article helps you understand the probate process and some of its costs. If you’d like to talk about the probate process, your estate or go over any other financial matter, we can discuss things 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.

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