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401(k) Options After You Leave an Employer

Apart from the spike in inflation, 2023 ended the year with a relatively strong economy, boasting an unemployment rate of 3.5 percent (below the market forecast of 3.7 percent) with increases in wages, corporate profits, and economic growth over the past two quarters. Despite the positive data, a slate of companies, including Microsoft, Google, Amazon, Goldman Sachs, and Bed Bath & Beyond, have all announced significant layoffs planned for this year.

Whether the result of a layoff, a new job, or retirement, the reality is that over the course of a career, most people will change jobs several times. The good news is that 401(k) plan assets are portable – meaning you can take them with you. However, it is important to be aware of all your options so that you choose the most advantageous one each time you change employers.

You Don’t Have to do Anything Right Away

The first thing to note is that the income deferrals you contributed to your employer’s retirement plan are yours to keep. However, an employer match may be subject to a vesting schedule. If you do not work at the company long enough to satisfy the vesting schedule, you might lose all or a portion of the unvested assets in your account.

It is not necessary to roll over your 401(k) assets right away; in many cases, you can leave them where they are indefinitely. However, you will no longer be able to make contributions to the plan, receive matching funds, or tap that money for a loan. If the plan has a wide range of investment options, low fees, and expenses and has performed well, then leaving assets where they are may be your best choice.

On the other hand, you should investigate to ensure your plan does not change once you no longer work for a former employer, as some plans charge higher fees for inactive employees. Also, some employers may require you to cash out of your account balance – usually if it is below $1,000. If your balance is above $1,000, that employer must offer you the option to roll those assets into a personal IRA.

Take the Money

If you opt to withdraw the cash value of your account, you will be subject to an immediate tax impact. Your company may cut you a check for the amount withdrawn, but it is required to withhold 20 percent of the amount to prepay the tax you’ll owe. If you have not yet reached age 59½, the IRA will classify the distribution as an early withdrawal. This means you might owe a 10 percent penalty in addition to the federal tax withholding. The balance also may be subject to state and local taxes. All told, you could lose up to 50 percent of the account value if you take an early distribution.

For young adults in particular, it can be tempting to withdraw their 401(k) balance when they leave an employer. They may not have acquired much in assets, not met vesting requirements for the employer match, and figure they have more need for the money now than in 50 years when they retire. However, bear in mind that investments made early as an adult often purchase good, dependable stocks at low prices, with decades for those stocks to appreciate. Holding onto those assets over the long term allows for maximum growth opportunity, whereas withdrawing them means you’ll have to start all over again.

Roll Over Assets to Your New Employer’s 401(k)

Some employer plans will accept transfers from a former retirement plan, but not all of them do. You will have to inquire. If this is an option, recognize that there is no need to roll over right away. You may want to work there for awhile to ensure you’re happy, the company is viable, and you plan to stay there a while. Furthermore, you may have to wait until the next enrollment period to request a rollover, and some employers may require that you work a specific period of time (e.g., one full year) before you can transfer old 401(k) assets to your new plan.

Open a Personal IRA

A third option is to transfer your old employer’s 401(k) assets to a personal individual retirement account (IRA) that you open through a brokerage of your choice. The new brokerage custodian will give you the forms needed to request the formal rollover, and your former 401(k) plan administrator might have forms to complete as well. It is best to have the two custodians conduct the transfer directly so that you never take possession of the funds yourself, which could result in tax penalties if not conducted correctly.

You’ll need to select new investment options (e.g., mutual funds, exchange-traded funds, individual stocks or bonds) for the IRA, and be sure to compare its fees with your old account. By rolling over to an IRA that you manage yourself, you will have a wider range of investment options and can shop for plans with lower fees.

Bear in mind that, moving forward, any additional contributions you make to this IRA will be subject to lower annual contribution limits (in 2023: $6,500 if under age 50; $7,500 for 50 and older) than 401(k) plans as well as the income limitations applicable to a Roth IRA (2023: less than $153,000 Modified Adjusted Gross Income (MAGI) if you are single; less than $228,000 if you’re married and file jointly).

There are three IRA rollover options for 401(k) plan assets:

  • Roll over to a new or existing traditional IRA – No taxes are due on the assets you transfer, and earnings continue to accumulate tax deferred until withdrawn. It’s best to directly roll-over the funds from one custodian to another.
  • Roll over to a new or existing Roth IRA – This option requires that you pay taxes on the rollover amount in the tax filing year they are transferred. You may use money from the 401(k) plan or pay the tax separately using other assets (the latter is preferable so that your equity continues to appreciate). Once the IRA has been open for at least five years, and you are at least age 59½, contributions and earnings can be withdrawn free of all taxes and penalties. Furthermore, unlike the traditional IRA, you are not required to take minimum distributions (RMDs) from a Roth.
  • Roll over a Roth 401(k) to a new or existing Roth IRA – No taxes are due when the money is transferred, and new earnings accumulate tax deferred. Contributions and earnings are eligible for tax-free withdrawals once the IRA has been open at least five years and you are at least age 59½.

Do Something

Leaving your 401(k) with a former employer is a perfectly acceptable option, but you should consider consolidating your 401(k) plans at some point. More and more people are working for multiple employers throughout their careers, and they may lose track of where they hold 401(k) assets. In fact, at the end of 2021, there was a nationwide total of $1.35 trillion sitting in forgotten 401(k) plans.

Don’t let that happen to you.

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No-Heir Estate Planning

Even if you have no heirs, you should have an estate plan. Otherwise, the state will determine the fate of your worldly possessions. In fact, if you pass away “intestate” (without a will), the state can even keep all of your assets for itself – if no heirs are found.

The most basic tenet of no-heir estate planning is to write a will. Every state has different rules about what constitutes a legally enforceable will, so be sure to check out your state’s guidelines. If you move, you’ll need to update your will according to the state you live in when you pass away.

In yourwill, direct who receives which of your assets. There is no edict that says you must leave possessions to a relative. You can choose a friend, a group of people or even one or more charitable organizations. You also should choose an executor of your will: someone you trust to carry out your wishes. This person can be an attorney or bank custodian of your assets. You should speak with whomever you choose to make sure they are willing to take on the role of executor. It is generally no small task, and might entail distributing and even selling your possessions in order to make cash distributions to the beneficiaries.

If you have any pets, be sure to figure out during the planning process who is willing to take care of your animals after you pass, or direct their care to a specific shelter.

Also, consider the beneficiaries you will designate for bank and investment accounts, as well as any insurance policies you own. Note that beneficiary designations you assign on these accounts will supersede your will instructions, even if they precede when you wrote your will. For example, your employer might pay for a life insurance policy in your name that pays out proceeds equaling two to three times your salary. You might not even remember that you completed this paperwork years ago, naming your girl/boyfriend at the time as your beneficiary. If you don’t keep those designations up to date, you may end up leaving a substantial sum to a woman/man who broke your heart, instead of the person who embraces it now.

It is also a good idea to name a “Transfer on Death” (TOD) designation on other types of accounts, such as your bank checking and savings accounts. This designation also supersedes will instructions and allows your money to be distributed once the beneficiary presents your death certificate and proper ID. It’s actually advisable to name the executor of your will as TOD, as he may need to access your funds quickly to pay for funeral and burial expenses. Other assets can take longer to distribute, so a TOD designation is a quicker way for your beneficiary to access cash.

Be aware that even if you have prepared a will, your estate will still be subject to probate, in which a judge makes the final determination of your assets. If you wish to avoid this step, you can fold all or a portion of your assets under one or more trusts, which will distribute them according to the trust directionsand avoid probate altogether. A trust is particularly beneficial if you have a large estate or wish to leave a substantial donation to one or more charities.

Another estate planning consideration is what to do if, instead of dying, you become incapacitated and cannot make decisions for yourself. As part of the estate planning process, you should name a power of attorney to make financial decisions for you. This can be anyone – a friend or close neighbor, or the person you name as executor of your will.

You should also establish a living will, advanced care directive, and/or healthcare proxy. A living will is a directive that states your wishes regarding medical care should you become incapacitated (e.g., permanently unconscious). An advanced care directive can be more specific, such as establishing a “do not resuscitate” (DNR) order if your breathing or heartbeat stops, and if you would like to donate tissues or organs after you pass.

A healthcare proxy, which may be referred to as a medical or durable power of attorney, is the assignment of a person who will make all of your healthcare decisions when you no longer can. Note that with medical instructions as well, states have varying guidelines. It’s important to be familiar with your state’s requirements and update your medical care directives if you relocate to another state.

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Retirement Tax Planning For 2023

Retirement Tax Planning For 2023Although you might get busy with the holiday season, don’t forget to consider ways to strengthen tax efficiencies for 2023 and beyond.

2023 Retirement Contribution Increases

Set up your accounts to automatically defer money to meet the new increases in retirement contributions next year. In 2023, you can defer up to $22,500 in a 401(k), 403(b), most 457 plans and the government’s Thrift Savings Plan. Plan participants who are age 50 and older may defer up to $30,000 next year.

Furthermore, the combined 2023 limit for Traditional and Roth IRAs is $6,500, or $7,500 if you’re age 50 or older.

If you are a business owner with a solo 401(k) plan, you may make an additional employer contribution of up to 25 percent of compensation, for a combined maximum of no more than $66,000 in 2023. Note that self-employed individuals are subject to specific calculation rules.

Investment Tax Management

If you’re bullish that the New Year will outperform the dismal investment market returns of 2022, consider repositioning assets to reduce your tax liability. One way to take advantage of this year’s poor results is to convert assets from a Traditional IRA to a Roth. While you still have to pay taxes on any earnings to date, the tab should be lower than in a year of outperformance. Going forward, any gains made under the Roth will grow and be withdrawn free of taxes. This can help lower your tax bill during retirement. It’s a good idea to do a Roth conversion while still working in order to pay capital gains without having to use money from the account. Be aware that you don’t have to convert the entire IRA balance. Assets will be reported as 2022 income, so try to convert only up to your current tax bracket.

As a general rule, it’s a good idea to spread your investment portfolio across a variety of vehicles, including taxable (brokerage), tax-deferred (employer plan) and tax-free (Roth IRA) accounts. When you retire, you can better manage your tax bill based on which accounts you draw money from each year. Conventional guidance recommends withdrawing from taxable accounts first, giving your tax-advantaged accounts more time to grow. However, another option is to make proportionate withdrawals from both taxable and non-taxed accounts for a more stable tax impact each year – that way you won’t have a higher tax bill in the latter years of retirement.

Residential Property Sales

Higher housing prices may cause some home sellers to exceed the current tax exclusion amount:

  • Exclude $250,000 from the sales profit if the seller is single or married filing separately
  • Exclude $500,000 from the sales profit if the seller is married and filing jointly

If your sales profit is higher than these exclusions, that amount may be subject to capital gains taxes. However, if you make value-added improvements to the home, keep those receipts because you may be able to add certain expenses as well as closing costs to your cost-basis – which will help reduce your tax bill.

Charitable Giving

If you are required to take distributions (RMDs) from retirement plans but don’t need the money, consider redirecting that money to a qualified charity. This tactic enables you to redirect up to $100,000/year and avoid paying taxes on those distributions. Another way to donate and receive a substantial tax break is to gift stocks with long-term appreciation to the charity of your choice. This will allow you to receive a tax deduction without having to pay capital gains taxes by selling the stock first.

If you are on the cusp of exceeding the standard deduction for your 2022 return, consider making several years’ worth of charitable donations in one year in order to exceed it and be able to itemize your return. If you don’t know where you stand for this year, consider delaying charitable gifts until next year so you can bunch them on your 2023 return. Note that for charitable donations to qualify for a deduction, they must be completed by Dec. 31 of the tax filing year.

Estate Transfer Planning

The 2023 gift tax exclusion ($12.92 million per person; $25.84 million for married couples) is scheduled to return to $6 million in 2026. Therefore, ultra-high net-worth households should consider taking advantage of this window to transfer much of their net worth by the end of 2025. Also, you may gift up to $17,000 (2023) per year per person without those amounts counting toward the gift tax exclusion limit.

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Do You Have an Investment Exit Strategy?

Investment Exit StrategyAre you a trader or an investor? The difference is frequently discerned by how closely you monitor the stock market and how quickly you move in and out of investments. Traders are often referred to as market timers because they actively seek to buy into positions when share prices drop, and sell out when those prices rise.

Many financial planners and professional money managers are not strong proponents of market timing. The reality is that no one can predict market movements accurately over the long term, so success is often a matter of luck and opportunity.

However, market timing is not the same as having a carefully structured and disciplined investment exit strategy. One reason this is important is that it can help prevent investors from panic selling. If you have considered the growth potential and market risks of a particular security or type of investment, and you put parameters in place that reflect your comfort level, then you can control your losses to a great extent. Without this analysis, you may be subject to emotional responses and sell for a significant loss because you can’t take the stress of watching your investment lose money day after day.

Exit Strategy

When share prices drop unexpectedly – and continue to fall – many investors let their emotions get the best of them and sell prematurely. Having a preconceived exit strategy is a good way to prevent this type of panic selling.

An exit strategy basically means that you set a target sell price, but it’s important that you have the discipline to sell at that price. Often when a stock’s share price is rising quickly, it is tempting to “let it ride” and ignore your exit strategy. However, that tide could change quickly in the other direction, turning a profitable trade into a loss. When this happens, you may stubbornly hang on to that declining stock knowing that you missed your opportunity to cash in – and hope that it will come around again.

An effective exit strategy should have two plans in place; a price point to sell for a gain and a price point to sell for a loss. This tactic can help keep your asset allocation strategy on target by not letting gains or losses in any one position throw your target asset allocation percentages out of whack. At the same time, you can manage risk by not allowing your portfolio to lose too much money. There are certain tactics that can help implement your exit strategy. For example:

  • Stop-Loss – an order to sell a security when its price is declining at the point when it reaches your assigned stop price (sell-stop).
  • Stop-Limit – a limit order gives instructions to sell a stock at a minimum price point. Stop-limit orders can be set to expire at the end of the current market session or carried over to future trading sessions (GTC – good ‘til canceled).
  • Trailing Stop – a modified stop order that can be set as either a percentage or dollar amount below or above the market price of a security.

Tax Considerations

An investor’s exit strategy should take into consideration potential taxes on capital gains. The amount you pay depends on how long you hold a position. If held for less than one year, the short-term capital gains tax rate is the same as your regular income tax. If held for one year or longer, the tax rate is 0 percent, 15 percent or 20 percent – depending on income tax bracket and filing status. When determining your exit strategy, it is prudent to set a long-term perspective with a plan to harvest gains on positions more than a year old.

Risk Management

Setting up an exit strategy is one component of a risk management plan. The following are other complementary strategies you can deploy to set boundaries on how much money you are willing lose.

  • Risk/reward ratio – Set a minimum ratio. For example, 1:3 means you are willing to risk $100 for a potential profit of $300.
  • 1 percent (or 2 percent) rule – Limit your risk to investing no more than 1 percent of your portfolio on any one trade.
  • By spreading your investments across a variety of assets, you can reduce portfolio losses through diversification.

Remember that investing is replete with uncertainty; not even the most experienced money managers can predict the direction of the markets. Developing an exit strategy for stock holdings is a way to minimize potential losses while strategically targeting specific returns to meet your goals.

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Recent Trends in Long Term Care Insurance

Long term care (LTC) is associated with the elderly for good reason. Over the past 50 years, life expectancy has increased significantly and is therefore something all families should be prepared to address. Even though we may live to a ripe old age, that doesn’t mean we will be healthy or able to live independently. Most people develop one or more chronic conditions that require living assistance – and many live with that ailment for years. Conditions such as arthritis, joint and muscle deterioration, or back pain often lead to chronic disability, making it difficult to impossible to take care of your own physical and lifestyle needs. Among even healthy seniors, about half of people age 80 and older experience some form of dementia or cognitive impairment.

Most LTC insurance (LTCi) contracts require that the policyowner no longer be able to perform at least two of the basic activities of daily living (ADL), which including dressing, bathing, toileting, feeding and moving without assistance. However, before getting to that stage, many people may live for years needing help with domestic ADLs, such as preparing meals, paying bills, shopping, attending appointments, etc.

New Criteria for LTC Insurance

An unfortunate influence of the pandemic is that some LTC insurance carriers now require an in-person medical exam as part of the application process. In the past, underwriting generally involved a telephone interview, a completed questionnaire and medical records review. These days, in addition to an exam, issuers have increased the number of pre-existing conditions that are excluded from coverage. Furthermore, insurers are declining more applications for medical reasons. In fact, there is preliminary data that suggests more LTCi applications are declined, or higher premiums charged, in geographical areas where populations have persistently higher rates of serious COVID-19 infections. Not surprisingly, these areas are generally correlated with lower vaccine rates.

New Policy Options

Even before the pandemic, LTCi sales were on the decline and many insurers exited the market. This is because with longer life expectancies, carriers increased premiums to cover the financial risk. This priced many policies out of range for most households. In recent years, the life insurance industry has found a strong market in sales of hybrid policies, which guarantee benefits one way or another. For example, a contract might include a rider that allows the policyowner to use the future death benefit in the present to pay for LTC expenses while she is still alive. If she doesn’t need the money, her beneficiaries will receive the value when she dies. Another benefit of hybrid policies that they guarantee premiums will not increase. In many cases, a policy can be purchased with a single lump sum.

New Focus for LTC: Live at Home

Apart from exploring new ways to pay for long-term care, there is political interest in finding ways to provide LTC more efficiently than in the past. For perspective, consider that the current U.S. system of placing Medicaid recipients into nursing home facilities proved to be one of the most vulnerable components of the pandemic. As of February 2021, more than 170,000 residents in long-term care facilities had died due to the coronavirus.

Various public agencies and non-government organizations (NGOs) are looking at new paradigms for caregiving as an alternative to high-volume residencies in order to minimize the risk of disease contagion. Some recent proposals include the following:

  • Enhance our current public programs that support independent living (e.g., Original Medicare, Medicare Advantage (MA) plans and Special Needs Plans (SNPs) with integrated benefits such as wellness care, behavioral healthcare, case management, home-delivered meals, transportation and adult day services.
  • Allow Medicaid’s long-term services and supports (LTSS) programs to reimburse long-term care expenses at home and for community-based services.
  • Expand efforts already originated in a handful of states (e.g., Illinois, Michigan, Minnesota, Washington) for state-sponsored, long-term care insurance plans.
  • Consider building on state initiatives such as California’s Master Plan for Aging, which includes plans to:
    • Create community housing solutions that that are age-, disability- and dementia-friendly, as well as climate- and disaster-prepared.
    • Improve quality of life for the elderly and disabled by presenting opportunities for work, volunteering, engagement and leadership regardless of age or disability. The purpose of this initiative is to reduce isolation, discrimination, abuse, neglect and exploitation.
    • Generate up to1 million highly-qualified, well-paid caregiving jobs.
    • Improve financial security for the elderly population by making long-term care affordable.
  • Reimagine nursing homes using continuum of care housing models designed for 8 to 10 residents with integrated staffing.

The current trend in the caregiving industry is to help seniors be able to live at home for as long as possible. In many cases this increases the burden on families. Since some people have to leave the workforce to care for family members, this hampers economic growth and tax revenues that could be used to fund better options. While LTC insurance remains expensive, it’s important that potential buyers are aware that most policies pay out benefits regardless of where care is bestowed, including nursing homes, assisted living facilities, the insured’s home or even if the insured has moved to a family member’s home.

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Should You Upgrade Your Homeowners Insurance?

Should I Upgrade Your Homeowners Insurance?During the first year of the pandemic, many homeowners spent their down time upgrading their homes. The year 2020 alone experienced at 3 percent uptick in spending on home improvements – to the tune of nearly $420 billion nationwide. This included modifications for remote work, online schooling and leisure activities at home.

Between remodeling, high inflation and today’s elevated real estate prices, it’s important to review your homeowner’s insurance policy to ensure it’s up-to-date. Does it include enough coverage for recent upgrades to your home? Does it carry an inflation factor to ensure coverage is on par with more expensive building material costs and labor increases? Do you have coverage for ancillary factors, such as the cost of meeting local building ordinances, or flood insurance for today’s extreme weather events?

Replacement vs. Actual Value

One term to check on your policy’s declaration page is whether your coverage is determined by replacement cost or actual cash value. Replacement cost will pay for repairs to your home or replace your personal property (e.g., laptop, television) up to coverage limits, regardless of its current value. In other words, the policy will pay for a new computer even if your old one was 3 years old.

Actual cash value refers to a cash payout equal to the current value of your property. In other words, if your computer was 3 years old, you will receive the cash value of a 3-year-old computer – which will not likely cover the cost of a new replacement.

Guaranteed Replacement

In lieu of upgrading your home’s cost coverage each year, you might have the option to pay for guaranteed replacement, which is an extra fee that ensures the policy will cover the entire cost to rebuild your home. Extended replacement cost coverage pays out a certain percentage above your policy’s stated dwelling coverage limit if the cost to rebuild is higher than the face amount. For example, a policy with $200,000 coverage and 25 percent extended replacement coverage will pay up to $250,000 to rebuild your home.

Ordinance Coverage

Homeowners who live in older homes should consider adding ordinance coverage if it is not standard under your policy. Ordinance coverage pays for the cost to meet current building codes should you need to rebuild. These fees can be substantial and would have to be paid out-of-pocket if you don’t have this form of coverage. Note, too, that although guaranteed replacement cost coverage might offer a higher payout, that is only for the material and labor costs to rebuild – not local ordinance fees, licenses or inspections.

Inflation Impact

As you review your current policy, note that the section labeled Coverage A represents the amount available to rebuild your home. It generally rises by 2 percent to 3 percent each year for basic cost-of-living increases. However, it is worth noting that building materials, such as lumber and steel, increased by 19 percent in 2021, and in June the general inflation rate increased to 9.1 percent, its highest level in more than 40 years.

Because home building costs, the inflation rate and the increasing number of weather events have plagued the home insurance industry, policy premiums are starting to increase at a higher rate each year than in the past. In additional to higher costs due to supply chain disruptions and inflation, the home building industry is hampered by a lack of qualified workers – and experienced workers are demanding higher pay. This is yet another component that is factored into calculating insurance premiums. Basically, anything that would lead to a higher cost to repair your home will result in higher rates.

Insurance companies calculate your policy premiums by multiplying your home’s replacement rate with your home’s current value. Therefore, a combination of higher building costs and higher real estate values have contributed to higher insurance premiums. Some states have set an annual percentage cap on how much insurance companies can raise homeowner rates each year. However, given the increasing number of extreme weather events (e.g., storm surge, wildfires) in recent years, state legislators also have increased those rate caps so that insurers have the latitude to cover excess payouts. Note that rate increases vary by geographical area, based on local weather activity, labor costs and building supplies.

Some insurance policies offer an inflation guard, which automatically increases coverage limits to match inflation rates when the policy is renewed.

Flood Damage

Be aware that homeowners insurance does not cover flood damage. Mortgage lenders require homes located in government-designated Special Flood Hazard Areas (SFHA) to purchase a separate flood insurance policy. However, we have seen inland and even metropolitan areas that are not located in flood zones be devastated by the effects of storm surge following a hurricane. Homeowners who live in these higher-risk areas should consider purchasing a separate flood insurance policy as well. 

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Stock Splits, Explained

Stock Splits, What is a Stock SplitImagine selling slices of a large pizza. You can cut it into four even slices and charge $2 a slice. Or, you can cut it into eight even slices and charge $1 per slice. Either way, the total value of the pizza will still be $8.

That’s what happens when a stock splits. Let’s say a stock’s market price is $100. With a 2-for-1 split, each current owner receives one additional share for each share he owns. Now, each share is worth $50. If you had one share to start, you now have two, but the total value of the investment remains $100.

A stock split differs from when a company decides to issue new shares, wherein new shares flooding the market can dilute the value of existing shares. With a stock split, the value of existing shares do not decrease. The total market value of a shareholder’s holdings will remain the same.

There are different forms of stock splits, such as the 2-for-1, 3-for-1, or 3-for-2 stock split. They all work the same way: You get two shares for everyone you hold, or three shares for everyone you hold, or three shares for every two shares you own.

Another, the less common form is called the reverse stock split. This is when a company decides to reduce the number of outstanding shares, which in turn will increase the stock price of shares held by stockholders. This strategy is generally used to boost the price of a stock that has lost value over time.

It is important to recognize that the stock split is a simple strategy designed to affect the stock price. It in no way changes the company’s market capitalization (i.e., total value of all outstanding shares) or other fundamental metrics. In order to issue a stock split, it must be approved by both company management and the board of directors. Furthermore, the company must publicly announce its intention to conduct a stock split within days or weeks of implementation.

The timing of the announcement is important because some investors try to take advantage of a stock split, believing that the value of the stock will increase as a result. This has more to do with market sentiment than any change in company fundamentals.

For example, in the past when a stock split its value often returned to its pre-split price within a year. This is not necessarily because the company has improved fundamentals, but rather because the investor market simply believes that stock is worth that price — it’s a form of confirmation bias. However, in recent years it is not as common for split stocks to climb back to their original price as it was in the past.

Why Conduct a Stock Split?

Again, the reason for a stock split is largely driven by market sentiment. For example, some investors may not have a lot of discretionary income to invest, so they look for a lower-priced stock. While they might not consider a stock valued at $100 per share, they may be interested in the company at $50 a share. In fact, following a recent stock split, investors may see it as getting a bargain price for that stock. As such, they might buy two shares. Now they’ve spent $100 on two shares whereas they were reluctant to buy one share for $100. The value is the same, but psychologically, that stock now seems like a great buy. This is referred to as unit bias. Psychologically, most people perceive lower per share prices to mean that a stock is “cheaper” and therefore may have more room to make gains.

In addition, now they can further diversify their portfolio with different stocks, whereas before those high-priced shares may have dominated their portfolios, exposing them to greater market risk.

A stock split also gives current shareholders the opportunity to increase their holdings at half price. While the value hasn’t changed when they make the buy if the stock increases in the future their portfolio will increase in value because they have more shares of that stock. For example, let’s say you have 10 shares of a stock priced at $10, for a total value of $100. The stock splits 2-for-1, so now you have 20 shares priced at $5, still valued at $100. In a few years, the stock price grows to $20 per share. Had the stock not split, your total value would grow to $200. But because you now own 20 shares, the total value of those shares would grow to $400.

Clearly, the true value of a stock split comes from holding those shares until the price increases substantially.

Mutual Fund Split

Some mutual funds also engage in the split strategy, but instead of splitting an individual stock, the fund company issues additional shares of the fund at a reduced price. In all other ways, a mutual fund share split works like an individual stock split.

If you’d like to learn the history of a company’s stock splits, consider the following resources:

  • Click on the investor relations tab on the company website, which often provides a history of the company, including dates of past stock split activity.
  • Search by the ticker symbol at stocksplithistory.com or Morningstar.com.
  • Another option for both stocks and mutual funds is to search by the stock symbol at Yahoofinance.com. On the stock’s performance chart, look for the Events tab and check the Stock Splits option. You may need to reduce the historical time frame to see splits marked clearly.
  • You also may be able to search for stock split history on the website of your online broker. Many outfits offer these types of research tools.
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Building Wealth Through Home Equity

Building Wealth Through Home EquityOften the first house a person buys is an affordable condominium, townhouse or older single-family dwelling, also referred to as a “starter home.” It might be small and lack features they dream about, from new appliances in the kitchen, to dual sinks in the bath, to a large yard or a garage.

However, the key to a starter home is not to acquire your dream house, it is to build equity that you can eventually deploy to buy your dream home. It’s important not to wait until you have enough money for the ideal property. Start as early as you can and buy something affordable to get your foot in the door of homeownership.

Interest Rates and Maintenance Expenses

Buying a home when mortgage interest rates are low offers a key advantage for building wealth because it reduces your loan payment, thereby freeing up more discretionary income to put toward other investments, home upgrades or pay down the mortgage balance.

When deciding your price range for purchasing a home, it’s also important to budget common maintenance costs, such as utilities, repairs and upgrades, as well as homeowner’s insurance and property taxes. These costs can be substantial, yet many new homebuyers do not account for them in their budget. They only take into consideration whether or not they can afford the monthly mortgage. It is always a good idea to have a lower payment that you can well afford in order to avoid relying on savings or credit to pay for maintenance expenses as they arise. And remember, maintenance of your property is critical because it can help improve your sale price when you move, which is key to building wealth.

Building Home Equity

The next step to building wealth through homeownership is to sell for a substantial profit. Home equity, which is the market price for which you can sell the home minus your remaining mortgage balance, is achieved in two ways. One way to build equity relies on the real estate market. Over time, houses generally increase in price, so most people are able to sell their home for more than they paid for it. How quickly home prices rise will depend on the overall economy and your home’s particular appeal. That’s why it’s important to make an attractive location one of your top requirements. For example, even if you don’t have children or want children, buying a home in a sought-after school district will likely increase the value of your home faster. Other location features include easy access to shopping districts, major highways and even an airport.

The second way to build equity is through the monthly payments you make on the mortgage, which reduce the balance owed. If you can afford it, adding more to your monthly payment and directing the excess toward your principal balance helps build home equity faster. Another payment option that can help build equity faster is to apply for a shorter-term loan than the standard 30-year mortgage. For example, a 15-year term mortgage features a lower interest rate and the borrower pays off the loan in half the time. Note that monthly payments will be higher, but a homeowner can save thousands of dollars in interest with a shorter-term loan.

Transaction Costs

The garden variety advice is to remain in your home for at least five years. That’s because selling your home and buying a new one involves substantial transaction expenses, from closing costs to initiating a new loan, as well as paying commission fees to both the seller’s and buyer’s real estate agents (usually 3 percent each). Therefore, you need to have lived in the property long enough to build equity through payments and market appreciation to offset these expenses and still make a profit.

Sales Tax

Be aware that it is advantageous to live in your primary residence for at least two years before you sell. Otherwise, your sales profit could be subject to capital gains taxes on the first $250,000 for single tax filers, and as much as $500,000 for married filing jointly. The tax rate is the same as your ordinary income tax rate if you owned property for less than one year; after that, the capital gains rate is based on your tax bracket (15 percent or 20 percent).

Trade Up, Then Down

Over many decades, you can build wealth by buying a home and then periodically “trading up” once you attain substantial equity. The tactic of trading up means you invest your profits in a more expensive home and then begin building equity again. One way to save for retirement is to keep trading up until you retire, then downsize to a less expensive home with lower maintenance expenses. At that point, you can redeploy the profit derived from the home equity you have accumulated into a stream of retirement income.

Today’s Market

In recent years, high prices and low inventory in the residential real estate market have made it harder for young adults to buy a starter home. For those currently shut out, keep saving until the market stabilizes, because the higher your down payment, the lower your monthly payments will be – and the more equity you’ll have in your home. You can still build wealth through homeownership, even if you start late.

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Blog Financial Planning

How Social Security Benefits Are Affected by Earned Income

Thanks to the Great Resignation trend over the past year, there is a high availability of jobs. Therefore, now is a good time for retirees who would like to go back to work to ease into the job market. However, if you’ve already begun drawing Social Security benefits, you should understand how earning income will affect those payouts.

First of all, you have two options if you’d like to stop receiving Social Security. One option is available only if you’ve been drawing benefits for a year or less. In this case, you may cancel your application; but be aware that you must repay all the benefits that you and your family have received to date. That includes spousal benefits and even Medicare premiums that were deducted from your payout. You will still be able to reapply for Social Security later.

The second option is available only if you have reached full retirement age but have not yet turned 70 years old. In this case, you may request to have your Social Security payouts suspended.

There are two benefits associated with these strategies: 1) foregoing Social Security income will likely reduce your tax bill; and 2) your Social Security benefits will start accruing again based on the delay and calculations that include your new wages.

However, you may continue receiving Social Security while you work, which could be important if your spouse is receiving benefits based on your earnings record. Under this scenario, a portion of your benefit may be withheld or even subject to higher taxes. It all depends on how much you earn. If your annual income is $19,560 or less (2022), it won’t impact your Social Security benefits.

Note that only wages from a job or self-employment count toward your Social Security income limit for withholding purposes. Distributions you receive from pensions, annuities, investment income, interest, veterans benefits or other government or military retirement benefits are not considered earned income.

Once your income totals more than $19,560, the impact depends on your age. If you have not yet reached “full retirement age,” Social Security will withhold $1 in benefits for every $2 you earn over the limit.

During the year you reach full retirement age, your annual total earnings limit increases to $51,960 (2022), and the subsequent benefit reduction drops to $1 for every $3 you earn over that amount. In fact, they count only how much you’ve earned up to the month before your birthday – not what you end up earning in a whole year. Once you’ve reached full retirement age, it doesn’t matter much how you earn, there will no longer be any withholding of benefits.

Better yet, starting in January of the year after you turn full retirement age, regardless of whether you continue working or not, your Social Security benefit will increase to reflect any previously withheld benefits due to your income exceeding the limit. And if the years you subsequently worked rank among your 35 highest earning years, your payout will increase even more to reflect a higher benefit calculation (since you paid FICA taxes on that income).

Tax Considerations

In the case of all beneficiaries, at least 15 percent of Social Security income is exempt from federal income taxes. Be aware though, that for tax purposes, your reportable income includes half of your Social Security benefit plus all other forms of income, such as a job, pension or investment income. If your total annual income is between $25,000 and $34,000, then as much as 50 percent of your Social Security benefit is taxable. If you earn more than $34,000 in a year, then up to 85 percent of your Social Security benefit is subject to taxes.

This is a general overview of what happens to your Social Security benefits when mixed with earned income. There are additional details, so it’s a good idea to work with a Social Security expert to decide if you should cancel or suspend payouts, and to understand how your income and tax situation may be impacted by going back to work.

With that said, if your portfolio has taken a beating this year, you might want to stop investment distributions for now and give it time to grow. Fortunately, the United States is currently enjoying a robust job market in which highly experienced candidates can negotiate a flexible work schedule, job site and higher salary, so it may be worth it to go back to work for another year or two to help secure your long-term retirement plans.

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Blog Financial Planning

New Required Minimum Distribution Rules for 2022

Starting in 2020, new legislation increased the age to begin Required Minimum Distributions (RMDs) from 70½ to 72. More recently, the IRS updated the Uniform Life Table for alignment with longer life expectancies. Note that it takes years for actuaries to work up new data for this table, and the recent changes do not reflect the downturn in life expectancies resulting from the pandemic. These updates were established pre-pandemic and scheduled to take effect in 2022.

The good news is that retirees who prefer not to withdraw from their retirement portfolios now have a couple more years of growth opportunity before they are forced to take distributions.

Because retirement portfolios fluctuate based on market performance, and your life expectancy changes with each year you continue to live, your RMD amount also changes each year. To calculate your annual RMD, you need your retirement plan’s previous year-end account balance and the most updated Uniform Life Table. To determine the correct amount, divide the year-end value by the estimated remaining years of your lifetime, based on your age on Dec. 31. This is the formula: Account balance ÷ Life expectancy factor = RMD.

The new Uniform Life Table is updated with a longer average life expectancy than the prior table, so the divisors have increased. This means that the amount required to be withdrawn is now reduced from what would have been required under the previous table.

The following are some guidelines to keep in mind when calculating, withdrawing and managing your required minimum distributions.

  • Once you reach age 72, you have until March 31 of the following year to take your first RMD. After that, RMDs must be withdrawn before Dec. 31.
  • An annual RMD may be taken as a lump sum, on as-needed basis or as regularly scheduled payouts.
  • Consider that if you delay taking the distribution until the end of the year, your portfolio has more time to grow tax-deferred before you reduce the balance.
  • As long as you don’t own more than 5 percent of the company you work for, you may delay taking RMDs from the retirement plan sponsored by your current employer as long as you continue working and contributing to the account. RMDs are not compulsory from that account until you stop working.
  • If you have multiple IRAs, including SEP and SIMPLE IRAs, you can withdraw the combined RMD amount from just one account (or any combination thereof).
  • If you have multiple 403(b) accounts, you can withdraw the combined RMD amount from just one account (or any combination thereof).
  • However, if you have multiple 401(k) accounts, you must withdraw RMDs from each account starting at age 72.
  • Married couples may not combine their RMDs and withdraw them from one account.
  • RMDs from an inherited IRA also may not be aggregated unless they were inherited from the same decedent.
  • You do not have to take an RMD from a Roth IRA because the original contributions were already taxed.
  • In the year you first quality for an RMD, it may not be a good to wait until March 31 of the following year to take it because you’ll have to take your second RMD by Dec. 31 of that same year. Two RMDs in one year could yield a substantially higher tax bill.