Taxes are frustrating to nearly every small business owner I speak with. Most people agree that we should all pay our fair share. But after working countless thousands of hours to build a viable business, it’s easy to feel like Uncle Sam’s reaching into our pockets too far. That’s why I focus on helping my clients who own businesses make sure they’re not paying more in taxes than they need to. One great tool we can use in this endeavor is a defined benefit retirement plan. Whatever you want to call it, DB plan, defined benefits pension plan, etc., it can be a killer way to defer a huge portion of your income from taxation.
I realize you might cringe when you read the words “pension” or “defined benefit”. The idea of promising employees a monthly check throughout their retirement may not foster warm and fuzzies. But if you don’thave employees, or only have a few, a defined benefit plan can offer some pretty major tax advantages.
Read on to learn how you might take advantage of them.
For business owners starting to think about the next generation, the phrases”estate tax” or “transfer tax” almost seem like curse words. The bad news is that when you build an estate of a certain size, the IRS wants to get in your pockets regardless of what, when, or how you transfer your assets to beneficiaries. The good news is that there are plenty of strategies available to help you minimize these taxes. The grantor retained annuity trust is one of them, and will be the topic of today’s post. We’ll cover what they are, why they’re beneficial, and how you might go about using one.
Gift Tax Review
Ok – before we dive into the details, let’s review what taxes typically apply when you gift an asset to someone else.
First off, you’re allowed to give away $14,000 per year, per person tax free. If you’re married, you and your spouse are both allowed $14,000 per person per year, or $28,000 total. So, if you and your spouse want to gift each of your kids $28,000 for their birthday every year, you could do so tax free. (It’d be one heck of a birthday present, too).
You also have a lifetime gift exclusion. This is the amount that you can give away, either while you’re alive or after you die, without incurring any federal estate or gift taxes. Anything that exceeds the $14,000 annual limit (or doesn’t qualify) works against your lifetime exclusion. The lifetime gift exclusion in 2017 is $5.49 million, which inches higher with inflation over time. Here again you can combine your lifetime exclusion with your spouse, for a total of $10.98 million.
So let’s say that one year you and your spouse decide to gift your oldest child $128,000. The first $28,000 would be covered under your annual allowance and excluded from tax. The remaining $100,000 would work against your lifetime exclusion. Neither you nor your child would owe tax on the gift, but you’d have worked your lifetime exclusion from $10.98 million down to $10.88 million. If your future gifts (either while you’re alive or after death) exceed $10.88 million, they’ll be subject to the federal gift/estate tax:
“How can I know for sure my savings will last after I stop working?”
“I”m concerned I’ll spend through my savings too fast and run out of money when I’m 80.”
These are a few common phrases I hear from people who are approaching retirement. Many people I speak with in the their mid 50s and early 60s these days have saved diligently for years for their own retirement. But now as they approach the transition from accumulating wealth to spending their savings, the question of whether they’ve saved enough becomes extremely important.
Plus, when you mix in longer life expectancies, rising health care costs, and expensive stock and bond markets, there’s a lot of uncertainty surrounding the issue.
So in today’s post, I’ll cover some of the leading ways you can determine whether you have enough saved up to stop working. Without putting you and your family’s future at risk, that is.
You’ve seen the stats. Long term care is expensive, and we’re all likely to need it at some point in our lives. The cost of spending time in a nursing home or assisted living facility adds up quickly, which is why many retirees choose to insure against it through a long term care insurance policy.
Problem is, since there’s a high likelihood of requiring long term care, insurance is an expensive proposition in its own right.
Are you better off crossing your fingers and hoping you don’t need expensive care for a long period of time? Or is it better to cover this risk through an insurance policy that will cost you an arm and a leg anyway?
This post will cover the essentials of long term care insurance, including exactly how to decide whether picking up a policy is a good decision for you and your family.
Long Term Care: The Stats
So here’s the big question. What are the chances you’ll ever need long term care? According to longtermcare.gov, about 70% of people turning 65 will need long term care services at some point in their lives. With the average annual cost of a nursing home totaling about $96,000 these days, this can be a scary proposition.
The stats can be misleading, though. Many people who need long term care services only need them for short periods of time. And since most long term care policies have elimination periods (the period before the policy starts paying out) of around 90 days, many people won’t even need care long enough for their coverage to kick in.
Inheriting an IRA is quite a bit different than inheriting any other asset. Unlike cash or investments in a traditional investment account, if you inherit an IRA you’ll need to start withdrawing from the account in order to avoid hefty penalties. In this post we’ll cover what your options are when you inherit an IRA, and how you can best manage it for you & your family.
How IRAs are Passed After Death
Whereas many of your assets will be distributed to heirs according to your will, IRAs are instead distributed by contract. Your custodian (the brokerage firm that holds your account, like Vanguard or TD Ameritrade) lets you designate as many beneficiaries and contingent beneficiaries as you like. Once you die, your account bypasses your will, the probate process, and is distributed according to this beneficiary designation.
When account holders don’t designate any beneficiaries things get a little murkier. When the account holder dies, their account is distributed according to their custodian’s default policy. At most custodians this default policy diverts the IRA back to their estate (and goes through probate) but at some it’s diverted to their spouse first. Unfortunately, if the account holder didn’t designate a beneficiary while they were alive, you’re at the mercy of your custodian’s policy.
If the account is indeed diverted back to their estate, it’ll be distributed according to your state’s interpretation of their will. And if they didn’t have one (meaning they died intestate), the state will make its own decision on who should inherit the asset.
The moral of the story? Take advantage of the opportunity to bypass probate, and designate your beneficiaries formally while you’re still alive.
You’ve heard it before: life changes once you have kids. As the proud parent to a six month old baby boy, I can attest that the rumors are true.
Having kids brings a quite a bit of chaos to your life. And to try to get a handle on things we’ve read several of the popular contemporary baby books. In most of them the message is the same: apply a consistent routine. When your baby knows when to expect sleep time, feeding time, or play time, they gain confidence and often start to excel. In other words, routine = fewer moving parts, less chaos, and more confidence.
I think our personal finances have a lot do with this as well. When you have a kid your financial picture changes. You have different and greater obligations, and need to start thinking about college costs. The fewer “loose ends” you have with family finances, the less chaotic your family life will be and more you’ll thrive.
Today’s post is another on the topic of financial independence. We’ve had several of these recently, but since that’s the focus of this blog I guess that’s not surprising.
Rather than discuss the fundamental components of financial planning like insurance or investing, today’s focus is entrepreneurship. Specifically, how entrepreneurship can be a wonderful way to align your career with your lifestyle and become financially independent on your own terms.
Forewarning: today’s post is another that falls on the philosophical side of the spectrum. I normally don’t write too many of these posts, and realize there’s already been several to start the year. Read on if you’re OK indulging my abstract (and possibly poor quality) musings.
Recently I’ve had a few questions from clients and readers about what they should be looking out for now that we have a new president in office. As you know, Mr. Trump has had a pretty eventful first few weeks in office. In fact, as I write this protests are underway at no less than 15 major airports across the country.
In this post I’m going to share some of the trends and data points that I’m keeping an eye on, and on some discuss how they might affect your financial situation. This post is in no way political. This isn’t an endorsement or criticism of president Trump or his policies. My objective here is simply to share some thoughts about how our new president might impact our finances and what you might want to look out for.
As one of my clients phrased it recently, we’re all in this boat together. Like or not we just have a new captain at the helm.
There are many unfortunate things that can happen to us that risk our pursuit of financial independence. Some of them we can manage & control, others we can’t. For the “stuff” out there we can’t control, insurance allows us to transfer risk to an insurance company in exchange for a nominal premium.
This post covers the role of insurance along your pursuit toward financial independence. It’ll also cover a prudent risk management framework. If used correctly, financial independence no longer becomes an aspiration that may happen – it becomes an inevitability.
Financial independence is a goal many of us share here in the America. It’s also, of course, the focus of this blog.
For the baby boomer generation, financial independence lines up very closely to the traditional American career path: enter the workforce in your 20s, put in 40-45 years, and fully retire sometime around age 65.
Younger generations are starting to explore more creative paths to financial independence, like extreme budgeting and newfangled forms of entrepreneurship.
Whatever your route to financial independence, risk is an important part of the equation. There are many unfortunate things that sometimes happen in this world that might drag us off course, or even be catastrophic:
We could die or become disabled unexpectedly
We could wreck our car
We could get sick
We could get sued
Our house could burn down
These are risks that we face every single day. They jeopardize our assets, our ability to earn income or both.
With Donald Trump now in office, there are a lot of people approaching retirement who are concerned about the state of Social Security. With Mr. Trump initiating drastic reforms in other areas of the government, the fact that Social Security is underfunded has many current and future retirees concerned their benefits might be reduced at some point.
Social Security is a huge component of most Americans’ retirement plans. And while I consider myself pretty well versed in the system, I decided to bring in a subject matter expert for this post. Ben Brandt, of Capital City Wealth Management, was kind enough to share his time and shed some light on the matter. This post is a quick update of the current status of the Social Security fund, as well as Ben’s insight on what reforms are currently on the table.
The Current State of Social Security
We’ll get to my interview with Ben shortly. For some context, let’s take a look at the current state of Social Security. Every year, the Social Security fund’s trustees are required to issue a report on the fund’s financial status. Each report includes data on the fund’s current assets (cash) and liabilities (retirement benefits payable). They also include long term projections based on demographic data and a bunch of other variables.
The most recent report claims that the Social Security trust is currently taking in more revenue through payroll taxes than it’s paying out in benefits. It projects this to be the case through 2019.
Some key assumptions from the trustees’ most recent report.