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What to Do With an Inheritance

By 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.

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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Where to Keep Cash?

By 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.

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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Investing in Gold

By 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.

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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Donor-Advised Funds

By 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.

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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Yield Curves

By 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.

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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Another Reason to Eliminate Credit Card Debt

By 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.

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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Reducing 2018 Taxes with Qualified Charitable Distributions

By 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 31st 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.

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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Transitioning to Retirement

By on May 1, 2018

Retirement — kind of has a nice ring to it, doesn’t it?  For many of us, it means starting a new chapter in our life and doing some of the things we didn’t seem to have time for while we were working.  I’ve written before about some of the financial aspects of retirement.  The Retirement Checklist article is one recent example of this.  This month, I want to talk a bit about some of the non-financial aspects of retirement.  You might want to reread The Three Phases of Retirement article to kind of tee this up.

Let’s start by identifying the most central aspect of retirement — change.  Yep, your routine is going to dramatically altered.  For some of us, we’ll miss the self-worth that sometimes comes with a successful career.  We might also miss socializing with our colleagues at work.  On the other hand, the time pressure of work will ease up or even go away.  Maybe we’ve had a boss we didn’t like.  The point is, things will be different and how we feel about that varies from one person to another.

There are lots of articles and many books on retirement.  After reading some of these and visiting with my friends and clients who have retired, I’ve found that there are four concepts that can benefit most of us.

First of all, it’s probably good advice to let yourself settle into retirement a bit before doing anything major.  This doesn’t mean you shouldn’t take your dream vacation shortly after retirement.  But, you might want to hold off on moving to a new city, selling your home and other major decisions.

Second, it’s fairly well established that relationships are good for us – including both our physical and our psychological health.  Retirement can offer more time for socializing.  Spending more time with your spouse, visiting your kids and grandkids, having lunch more often with a best friend or group of friends are just a few of the ways we can strengthen our relationships.  If most of your relationships were professional, it might be that some of those people would still like to get together from time to time.  You can also meet new acquaintances by taking classes, going to the health club, joining a committee at church, doing volunteer work and so on.

Third, it’s up to you how to best use the time that retirement offers.  Maybe you want to play golf every day.  Maybe you want to learn a new language.  Maybe you want to learn to play an instrument.  Maybe you want to read more books or see more movies.  The options are endless.

Fourth, and finally, a lot of the time pressure and stress that you had to manage while you were working will be dramatically reduced or even eliminated.  You may be just as busy as you were while working, but you’ll be busy doing the things that you want to do and doing them at your own pace and that’s a huge difference.

If you’d like to discuss your retirement situation, 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.

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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IRS Tax Scams

By on April 1, 2018

April 15th is coming up soon and the tax scammers have been in high gear.  I even received a recorded call threatening me with arrest from some scammers this year!  The most important thing to know is that the IRS never makes an initial contact by phone or email.  If they do send you a letter, it will be easily verifiable.  If anyone calls saying they are the IRS, just hang up.  In fact, always be suspicious of any email or call asking for personal information.  I’ll cover two scams that are currently being used in this article.

In the first type of scam, victims are told that they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer.  If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license.  In many cases, the caller becomes hostile and insulting.

“This scam has hit taxpayers in nearly every state in the country.  We want to educate taxpayers so they can help protect themselves.  Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. “If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.”

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers.  They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

In the second type of scam, criminals actually deposit a “refund” in your bank account and then have a “collection agency” contact you to reclaim the funds.  Once again, just hang up.  The IRS recently published some warning signs that this scam may be occurring. They say you should be alert to possible tax-related identity theft if you are contacted by the IRS or your tax professional/provider about any of the following situations:

  • More than one tax return was filed using your SSN.
  • You owe additional tax, refund offset or have had collection actions taken against you for a year you did not file a tax return.
  • IRS records indicate you received wages or other income from an employer for whom you did not work.

Unfortunately, scammers seem to be a part of our lives in recent years.  If you need more information on these scams or just want to discuss some other aspect of your financial life, 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.

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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Inflation

By on March 1, 2018

I’m pretty sure every reader has a pretty good understanding of inflation.  In general terms, things cost more as inflation rises so that a fixed amount of money buys fewer things.  And from an investment point of view, a portfolio worth a certain amount of money will buy less as inflation rises.

Inflation is measured in a variety of ways.  For most of us, the most familiar measurement is the Consumer Price Index.  The CPI increased from January 2017 to January 2018 by 2.07%.  This is pretty good as most industrialized governments attempt to keep inflation between 2% and 3%.

The overall CPI is an important measure of spending power.  However, it’s also important to look at the sub-groups that make up the CPI.  For example, over the last twelve months housing increased 2.79%, medical care increased 1.98% and education and communication decreased 1.73%.  So, if you’re retired and have paid off your house, the housing component wouldn’t be that important whereas heath care would be quite important.

What does inflation mean to our investments?  To understand that, we need to understand the difference between nominal and real interest rates.  Nominal interest rate is the growth of your investments.  Real interest rates represent your investment growth after inflation is taken into account.  As an example, suppose inflation is running at 3.5% and your portfolio is currently returning 6%.  Nominal is 6% and real is 2.5% (6% – 3.5%).  The important lesson here is to think about the real rate of return since that represents your purchasing power.

For many of us, our investments can be divided into stocks and bonds.  It’s generally accepted that over the long run, stocks are able to cope with inflation fairly well.  Bonds on the other hand usually suffer as inflation rises.  This hasn’t really been true during the last few years, but normally rising inflation leads to rising interest rates.  And as interest rates rise, fixed-income investments like bonds lose value since a new bond has a higher rate of return than an older existing bond.   Now there are some important nuances here.  One example is when you hold bonds that yield at least your targeted withdrawal rate in retirement.  Suppose your retirement plan is to withdraw 3.5% per year from your portfolio.  Now if your returns are higher than that, your earnings are less than the current yield, but still high enough to meet you goals.

You can see that inflation matters and that the best defense depends on whether you’re retired or not as well as other factors.  We’d be happy to talk about inflation and your particular situation or any other financial matters 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.

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