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Adjusting Withholding for Taxes

By Arlen T Olberding, CFP® on March 1, 2019

You probably remember that the government passed some extensive tax law changes late in 2017. These were called the Tax Cuts and Jobs Act. Early in 2018, the IRS reduced withholding rates to account for some, but not most, of the tax law changes. (For many of us, this resulted in higher take-home pay which will cause smaller refunds.)

Significant errors in withholding are undesirable. If your withholding is too low, you will owe money at the end of the year and might be subject to interest and penalties. If your withholding is too high, you will have unnecessarily loaned the government interest-free money.

You adjust withholding through your employer by controlling the number of “allowances” you claim. The more allowances taken, the lower your withholding will be. The IRS has created a calculator to help you determine the proper number of allowances to use. You can find this tool here.

This change in the tax laws is a good reminder to keep an eye on withholding rates. We should always review this aspect of our finances whenever we have a major change in our life – marriage, divorce, new children or the purchase of a new home.

While 2018 is now in the books, this is a great time to make any necessary adjustments to your withholding rate for 2019. In fact, your 2018 tax return will provide excellent insight into your tax liability under this new law.

If you have questions on your withholding, how to use the withholding calculator or other aspects of your financial life, we’d be happy discuss your situation in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

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

Higher 401(k) and IRA Limits for 2019

By Arlen T Olberding, CFP® on February 1, 2019

I know you’re familiar with 401(k) and IRA plans. Hopefully you’re already contributing to both of them! If you’d like to reread some previous articles on these savings plans, please check out 2018 Financial Resolutions, Financial Planning Resolutions and Plan Now to Minimize Your Taxes.

As of January 1, you can sock away even more money for retirement. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is increased from $18,500 to $19,000. The additional catch-up contribution limit for individuals aged 50 or over remains at $6,000.

The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000.

The combined contribution limit increase of $1,000 ($500 from IRA and $500 from 401(k)) per year can add up. For example, assuming a 4.5% growth rate and 25 years to retirement, you’ll have an extra $50,000 for retirement!

You may be wondering about the tax treatment of these contributions given the tax-law changes this year. For many of us, these contributions are still tax deductible for your 401(k) and for your Traditional IRA. So your Adjusted Gross Income could be reduced by $25,000 ($19,000 + $6,000) if you maxed out your savings for both plans. However, for some of us, the deductibility of your contributions may have limitations. These can depend on you income level, whether you are covered by a retirement plan at work and your tax-filing status. Please review such details with your financial or tax advisor.

Deductibility is one of the specifics that need to be understood in your individual situation. Another consideration is whether to fund a traditional or a Roth IRA. We’d be happy discuss your situation in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in News, Saving, Taxes

Lifestyle Creep

By Arlen T Olberding, CFP® on January 1, 2019

Lifestyle creep is simply using income increases to finance a more lavish lifestyle. It’s natural to want to enjoy increases in your income, but some discipline here can reap large rewards down the road. Some advisors advocate saving all of your future increases since you’ve gotten along without them so far. This approach neglects the effects of inflation on maintaining your current lifestyle. It also denies you the ability to enjoy life now rather than saving all increases for an uncertain future.

My advice to clients is to enjoy life now and to prepare for the future. Circumstances vary at different points in our lives, so there’s no hard-and-fast rule for everyone. For example, a 20-something just out of college has different spending needs than a 50-something who’s paying for their kids’ college and also saving for retirement. No matter what your situation is, putting all of your new eggs in either basket is a warning signal. A good starting point for thinking about this balance is to enjoy about 25% of your new take-home pay and to save the rest. (If your increase is large, this might seem like a large amount to save. However, don’t forget all of the things you may want to save for: an emergency fund, paying down credit card debt, a down payment on a house, college for your kids and so on.)

What are some of the things that might tempt us to spend more than 25% of our increase now rather than salting it away for future uses? We might want a nicer apartment or home (size, location, etc.). We might want a new car. We might want to eat out more often. There are numerous temptations. That’s why the 25/75 guideline is so useful. It can help us prioritize our current desires (and generally these are truly just desires rather than actual needs). It may help you figure out the most satisfying way to spend the 25% portion of your increase by setting up an actual budget for these funds.

As you can see, getting the spend-now-versus-save-for-later balance right varies based on where we are in life and our personal circumstances. We’d be happy discuss the best way to use your increase in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in Fundamentals, Saving

What to Do With an Inheritance

By Arlen T Olberding, CFP® on December 1, 2018

Many of us, but actually not most of us, will receive an inheritance at some point in our lives. And about one in three of us will have spent/lost that inheritance within two years. If you inherit $10,000 this may not be a big deal. But if you inherit $100,000 or even $1,000,000, you may regret parting with it so quickly. So what should you do if someone leaves you a financial gift?

I recommend to my clients that we meet and make decisions together about what to do with the inheritance. Since I’m a fee-only advisor, this assures independent financial advice with no fear of a conflict of interest. If you have some other form of advisor (broker, banker, friend, etc.), be sure that their advice benefits you and not them. In our meetings on this, we’ll find the best way forward for your own situation. However, there are some general principles that you can use to think about things on your own.

The first rule of thumb is to take a breath before you do anything. This is particularly true if you were close to the giver and are therefore are experiencing grief. For example, if this is your spouse, you may wish to read my earlier article called The Role of a Financial Advisor When a Spouse Dies. However, significant grief can be felt in other deaths such as a parent, grandparent or a very close friend. The thing to note is that our decision-making capabilities are impaired when we’re experiencing grief. So, place your inheritance in a money market account or a similar short-term investment until the grief has diminished. Even if you’re not experiencing grief, this is a great strategy while you figure out what to do.

Second, it’s always good to consider taxes so that you don’t spend money that you don’t actually have. You may hear of estate taxes, but they only exist on very large estates and are paid by the estate itself – not by you. The taxes we need to consider here are called inheritance taxes. Fortunately for us, there are no federal taxes on inheritance and in Colorado, there are no state taxes. However, if the inheritance is in an IRA account, there are most likely taxes on distributions.

There are many options for how to use unexpected income. These options include building/enlarging your rainy-day fund, paying off debt (including credit card debt, mortgage debt, student loan debt and so on), investing for retirement, investing for your children’s education, making a charitable contribution, investing for your legacy (passing it on) and, yes, having some fun.

There are often some special considerations depending on the kind of assets you inherit. Naturally a house, valuable jewelry, a car or other specific assets will have their own considerations. Even financial assets can require some careful consideration. For example, if you inherit a tax-qualified asset such as an IRA, several distribution methods are available.

As you can see, there are a number of important decisions to make if you receive an inheritance. We’d be happy discuss your options in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in Fundamentals

Where to Keep Cash?

By Arlen T Olberding, CFP® on November 1, 2018

We should all have some very liquid assets (cash-like investments) to pay bills and to allow us to pay for life’s inevitable surprises (auto work, appliance repairs, etc.). Often we keep these funds in a checking or a savings account. This is absolutely the right approach for money that we know we’ll need in the short term, but how about your rainy-day fund (6-12 month reserve for emergencies such as job loss)? This money should be working harder than the still woefully low returns that checking and savings accounts offer.

For most of us, there are three options: money market accounts, CDs or online savings accounts. As a review, money market accounts offer a higher rate of return than checking/saving accounts. You can withdraw money without penalty as needed (with a few rules as to how many times per month, etc.). The return can depend upon the size of the deposit. CD rates are higher than money market rates, but they tie up your money for a specified period of time (typically 3 months to several years). Online savings accounts can offer higher rates because they don’t have the brick-and-mortar overhead that a local bank has. All three of these investment options should be FDIC insured.

To get specific, I checked a few local banks today and the savings account rates were still 0.1% or less. Online savings rates were more like 2%. Money market rates ranged from about 0.5% to about 2%. CD rates varied from about 0.5% for a 3-month certificate to about 3% for a 5-year certificate. Since these funds are meant to be cash-like assets, they should be in short-term investments. This means 1-year or less for CDs. An additional benefit of shorter-term CDs is that interest rates are now rising so future returns will probably be higher.

Rates are constantly changing and generally increasing at this time so these investments warrant initial research and regular monitoring. If you’d like to talk about the best way to invest your short-term cash or have other financial questions, we’d be happy to talk with you in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in Fundamentals, Investing, Saving

Investing in Gold

By Arlen T Olberding, CFP® on October 1, 2018

There are two schools of thought on investing in gold. Those who like the idea say that it is a hedge against inflation, a safe haven in a calamitous world and that it offers protection against a weakening dollar. The most famous advocate against investing in gold is Warren Buffett. His basic grievance is that gold does not create wealth. It just sits there. It will only increase in value if someone is willing to pay more than you did (and this generally occurs during periods of fear). Here’s his rather blunt assessment of gold: “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

You might wonder whether gold ever outperforms the stock market. The answer to this depends on when you make the comparison. For example, over the past 30 years, the market has outperformed gold. However, over the past 15 years the opposite is true. So, it depends.

Some advisors advocate owning some gold for diversification since the price of gold is not correlated to stocks or bonds. If you decide to invest in gold, there are a number of ways to do so. You can buy physical gold such as bars, coins and jewelry. You need to watch the markup costs, storage costs and insurance costs. You can buy a gold exchange-traded fund (ETF). This eliminates the negatives of physically owning and storing gold. Your ETF owns the gold and backs your investment with gold assets. There are risks such as a failure of the bank that holds the gold. You can also buy gold-mining stocks. These magnify the effect of gold spot-price changes. You can expect regular 20-30% increases and decreases in gold stock value. Other gold-investment vehicles include futures and mutual funds.

You can see that there are pros and cons to investing in gold and that caution is warranted. If you’d like to discuss gold investments more or have other financial questions you’d like to discuss, we’d be happy to talk with you in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in Fundamentals, Investing

Donor-Advised Funds

By Arlen T Olberding, CFP® on September 1, 2018

Donor-Advised Funds, or DAFs, are merely a tax-efficient way to make charitable contributions. They work pretty simply. You make a contribution to a DAF and they distribute it to a qualified charity. You can advise them on how much to give to each charity. (Strictly speaking, DAFs do not have to heed your advice, but reputable ones do act on your instructions wherever legally possible.) You get the tax deduction in the year that you make a contribution, but you can distribute to a particular charity at some point in the future (for up to five years).

The most immediate tax effect is to reduce your adjusted gross income, or AGI. You might recall that your AGI is simply all of your income reduced by certain IRS-allowed expenses such as IRA contributions and college tuition. Now your AGI can be further reduced by either the standard deduction or your itemized deductions. In 2018, the itemized deduction for joint filers has increased to $24,000. This means your AGI will be reduced by at least $24,000. However, if your total itemized deductions exceed $24,000, then your AGI will be reduced even more. And that can be very useful as taxes are calculated based on your “taxable income” (that is, on your AGI minus either the standard or itemized deductions). Further, reducing your AGI might get you into a lower effective tax bracket. There are a couple of rules that limit your total charitable deductions. The deductions cannot exceed 60% of your AGI for cash contributions or 30% for appreciated asset contributions.

In addition to a reduction in your AGI, DAF contributions can lower capital gain and estate taxes as well as your alternative minimum tax (if applicable). Any appreciation of your contributions within the DAF is also protected from any taxes.

For many of us, the new standard deduction will preclude the use of itemized deductions. However, when evaluating the best tax strategy, don’t forget that itemized deductions include items other than charitable contributions such as medical and home interest (with a $750,000 mortgage limit) expenses. What some taxpayers are doing is to accumulate their charitable contributions and contribute them less frequently (such as every two years). This increases your standard deduction in the year that you make the contribution.

Naturally there are some important details which need to be considered such as the DAF administration and investment fees. If you’d like help with these details or with a more comprehensive DAF discussion, we’d be happy to talk with you in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in Fundamentals, Taxes

Yield Curves

By Arlen T Olberding, CFP® on August 1, 2018

Yield curves are simply graphs of the interest rates of bonds with different maturities versus time. A commonly cited example is the yield curve for U.S. government securities. The rate for 3-month, 2-year, 5-year, 10-year and 30-year treasury securities are plotted on the vertical axis and the maturity period is graphed on the horizontal axis. Such a graph looks something like this:

This is what is called a normalized yield curve where longer borrowing periods receive higher interest rates. The reason for the higher future interest rate is the uncertainty of the future – particularly with regard to inflation. There are other forms of this curve such as a flat yield curve (short and long-term rates are similar) and an inverted yield curve (short-term rates are higher than long-term rates). The shape of this curve tells us something about how investors feel about the future. A positive outlook (economic expansion) leads to a normal curve. A negative outlook (recession) leads to an inverted curve. A belief that the economy is about to transition from a recession to an expansion (or vice versa) leads to a flat curve.

What’s particularly interesting about the yield curve is how accurately it forecasts a recession. The Federal Reserve Bank in San Francisco points out that an inverted yield curve has preceded all of the last nine recessions since 1955. (There was one false positive when the economy slowed down rather than going into an actual recession.)

Currently, government securities have a normal yield curve. (However, the difference between the 2-year and the 10-year government securities narrowed to 34 basis points (0.34%) in late July.) In addition, a JPMorgan global bond index recently inverted for the first time since 2007. So, while not foolproof, it is probably wise to be ready for a potential recession.

If you’d like to see if your portfolio is ready for a recession or discuss any other financial questions you might have, we’d be happy to talk with you in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in Fundamentals, Investing

Another Reason to Eliminate Credit Card Debt

By Arlen T Olberding, CFP® on July 1, 2018

You might have heard that the Federal Reserve raised the federal funds interest rate another 0.25% recently. That puts this rate at 2.0%. (It is expected to rise to 2.5% by the end of the year and to 3.5% by 2020.) As the Fed rate increases, so does the prime rate that banks use for lending. And, credit card rates are tied to the prime rate. So, an increase in Fed interest rates directly leads to an increase in credit card rates.

About half all households carry credit card debt and the average debt level per household is about $16,000. So, each 0.25% of increase in interest costs a household $40 per year. This means that the projected increase from the previous level (1.75%) to the forecast 2020 level (3.5%) will cost the average household with credit card debt about $280 per year. While that’s not a ton of money, why throw it away?

Okay, so rates are going to rise which will increase the cost of credit card debt. Even if we neglect that increase, credit card debt is probably the costliest kind of borrowing that you can do. Assuming a credit card rate of 17% on a balance of $16,000, you’ll be paying $2,720 per year in interest. Now for most of us, that’s serious money.

Since credit card rates are already high and are rising, it probably makes sense to pay down this debt as rapidly as possible. Once you’ve done that, you’ll be in a position to reap additional dividends. Take the monthly credit card payments you’ve been making and put half of it into a rainy-day fund. Use the other half to pay off current balances on your credit cards so you can avoid any credit card interest.

If you’d like to see how you can retire your credit card debt or discuss any other financial questions you might have, we’d be happy to talk with you in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.

Posted in Fundamentals

Reducing 2018 Taxes with Qualified Charitable Distributions

By Arlen T Olberding, CFP® on June 1, 2018

You are probably aware that the tax laws are changing in 2018. However, many of us aren’t crystal clear on all of the details of these changes. For example, deductions are changing. The biggest deduction change is that the standard deduction has increased. The increase applies to all taxpayers. As an example, it’s $24,000 for joint filers (plus $1300 for each spouse over 65). As a consequence, many people will use the standard deduction rather than itemized deductions starting in 2018. (The changes in mortgage deductions, home-equity interest deductions, limits on state and local taxes and other deduction restrictions make it even more likely that people will opt for the standard deduction.)

So, in this new tax environment, people are thinking about how to minimize taxes if they switch from itemized to standard deductions. One approach that’s being considered is the Qualified Charitable Distribution rule or QCD. This allows you to contribute up to $100,000 per year per taxpayer to qualified charities and to reduce your adjusted gross income (AGI) by this amount. Lowering your AGI offers benefits not available when using itemized deductions. For example, a lower AGI might put you into a lower tax bracket or even help you reduce the amount of Social Security that is taxable.

Even if you made charitable contributions in the past, you may not have heard of QCDs before. They simply permit you to transfer money directly from your traditional IRA to a qualified charity if you are 70 ½ or older. This reduces your AGI and eliminates taxes on the donated portion of your required minimum distribution. (The RMD is an amount that you must withdraw from your traditional IRA annually once you reach age 70 ½.)

There are a few details that need to be considered when using this tax strategy. For example, you cannot use it until the tax year in which you turn 70 ½, spouses must withdraw their QCDs from separate IRAs, distributions to charities must be made by December 31^st and non-deductible IRAs do not qualify. If you’d like help with these details or with a more comprehensive QCD discussion, we’d be happy to talk with you in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.