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Easing Into Retirement Or Semi-Retirement

Retirement is not a single event. It is a process that begins long before you leave work and continues for the rest of your life. Here are some tips on how to transition into retirement and beyond.

CONSOLIDATE AND SIMPLIFY

Consolidate your retirement accounts for simplicity. Combining accounts makes managing your money and seeing the big picture easier.

Fewer accounts mean fewer monthly or quarterly statements, fewer companies to notify if you move or want to change beneficiaries, and possibly lower costs. It can also make calculating RMDs easier.

EXAMINE THE NUMBERS

As you move away from working full-time, be sure your monthly and annual budgets are up to date. Include existing expenses that aren’t likely to change, such as groceries and utility bills.

Don’t forget to include new expenses you may incur in retirement. This includes healthcare costs your employer may have paid for or taxes when you withdraw from tax-deferred retirement accounts.

UPDATE YOUR PLANS

If it’s been a while since you’ve reviewed your estate planning documents, nearing retirement is a good time for a refresher.

While you may focus on ensuring your will and trust documents are up to date, don’t forget about your power of attorney, health care directives and guardian nominations.

If your retirement plans include relocating to a new state, consult an attorney in the new location to ensure your estate documents will be valid in that state. Having out-of-state documents can complicate trust and estate adminstration.

When you update your estate plan, remember to create a list of your accounts and assets and update that list as things change. It is not important to add a value to the account, as those change over time. Make sure to include the name and location of the account and the last four digits of the account number. It is one of the most important things you can do for your beneficiaries to avoid a time-consuming treasure hunt for your assets when you’re gone.

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ClientLine Short Bits – Secure Act 2.0 for Individuals

At the end of 2022, Congress passed a new round of laws aimed at creating a secure retirement for Americans. Here are some of the highlights.

RMD AGE INCREASES

Beginning in 2023, the age to start taking required minimum distributions (RMDs ) from qualified retirement plans increases from 72 to 73. Then, beginning in 2033, it will increase to 75. You have until April 1 of the year after attaining that age to take your first RMD.

Starting this year, the penalty for failing to take an RMD is reduced from 50% to 25%. If the mistake is corrected in a timely manner, the penalty is reduced to 10%.

INFLATION ADJUSTMENTS

Beginning in 2024, the IRA catch-up contribution amount for taxpayers over age 49 and qualified charitable distributions (QCD) will be indexed annually for inflation.

EXPANDING EXCEPTIONS

Starting in 2024, there will be no early withdrawal penalty on distributions of up to $1,000 per year if needed to meet emergency expenses. There are limitations to taking more than one distribution in a 3-year period.

Starting in 2026, distributions of up to $2,500 per year will be allowed to pay long-term care premiums. Also, there are new exceptions for distributions to domestic abuse and terminally ill individuals. Allowed withdrawals for natural disasters, public service workers, private sector firefighters, and correctional officers have been expanded.

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May 2023 Client Line Newsletter

ClientLine Short Bits – SECURE Act 2.0 for Individuals.

Easing Into Retirement or Semi-Retirement – here are some tips on how to transition into retirement and beyond.

Your Financial Legacy and Taxes – take steps today to insulate your estate from taxes.

May 2023 Client Profile

SECURE Act 2.0 For Businesses – the 2022 act builds on the 2019 version.

Best Practices for Employee Reimbursements – using new technology to report and track employee business expenses can be easier and more accurate.

May 2023 Question and Answer

Amended Tax Return Tips – you can amend your return by filing Form 1040-X.

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Review Your Credit Report Often

Your credit report is your financial biography. It’s key to determining the interest rates you’ll pay on loans and can impact a job application if you work in certain fields. You’ll want to review all three of your credit reports at least once a year to ensure they are correct.

THREE REPORTS

According to a Consumer Reports study in 2021, one in three people reported finding errors on one of their credit reports. There are three credit reporting companies: TransUnion, Experian, and Equifax. You’ll want to review your report from all three. Just because your Experian report is correct doesn’t guarantee your Equifax report contains the same information.

IT’S PERSONAL

Start by reviewing the personal information (name, address(es), and dates of birth) to ensure that the data is correct. If you see an address you don’t recognize, it could signify that someone has misused your Social Security Number. This could be an early warning sign of identity theft.

ACCOUNT STATUS

Next, review all the accounts reported to the credit bureau. Ensure you know what each one is for and that you opened the account. Also, look at the payment status of each account for accuracy. Even one incorrect notation of a late payment can significantly impact your credit score.

You can receive each of your credit reports free once per year at Annualcreditreport.com.

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Raising Financially Savvy Kids

Whether your kids are toddlers or teenagers, it is critical that you teach them how to become financially independent.

KEEP THE END IN SIGHT

If you have adult children living at home with you, work with them to set a date to move out. Having a solid end date in mind can help keep them moving forward and on track.

CREATE A BUDGET

Use your experience to help your child create a realistic budget to help ensure spending doesn’t exceed income after taxes and savings. The budget should list after-tax salary, living expenses, debt payments, retirement contributions, savings goals and spending money.

Savings goals should include building an emergency fund of three to six months of living expenses in case they lose their job or need to pay an unexpected bill.

TEACH THEM

Educate your child on the benefits of the time value of money, paying off debt, and how to build good credit. This can help keep them from running aground financially in the future.

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April 2023 Question and Answer

QUESTION

What’s the difference between fixed and variable costs?

ANSWER

It’s important for small business owners to track and understand how expenses vary with changes in production and sales volume because it impacts many aspects of the business.

Most businesses have both fixed and variable costs. Fixed costs, or overhead expenses, are incurred regardless of a change in production and sales volume. Examples of fixed costs include rent, insurance, utilities, and some taxes (like property tax).

Examples of variable costs include raw materials, delivery expenses, sales commissions, and credit card processing fees.

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How to Deal with Unpaid Invoices

Proactive processes can help protect your company and its cash flow.

PREPARATION

Complete some due diligence before you decide to work with a client. Basic internet research for reviews can show how well the company is managed.

And when you start a contract with a customer, ensure that invoicing and payment details are provided. Spell out how you invoice and payment due dates so there’s no confusion. Be clear on what payment methods you accept and what your late payment policy is.

FOLLOW UP

If your client has a missed a payment due date, follow up immediately with a polite email reminder. And if you have contact information for the accounts payable department, reach out to them, as they will generally know why your invoice is unpaid. It could be that they’re waiting on approvals or missing information.

If the client continues to be delinquent despite your follow up efforts, perhaps you should stop providing products or services until you’re paid in full.

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April 2023 Client Profile

Elizabeth is considering whether she should buy long-term care insurance. She’s 35 years old and healthy, so she’s not sure it’s the best use of money now. What should she consider when making a final decision?

Long-term care insurance generally covers a portion of the expenses incurred due to a chronic medical condition. Most policies will pay a percentage of the cost of care in your home, an assisted living facility, or a nursing home.

Most people think of it as coverage for old age needs. But, long-term care insurance provides aid should you develop an illness or incur an accident at any age.

Elizabeth’s annual premiums will likely be lower since she is currently healthy. However, actuaries look at your family history, including DNA ancestry sites to see if you are likely to develop a long-term disease like Alzheimer’s and Parkinson’s.

Qualified long-term care insurance premiums can be deducted if you itemize on Schedule A. However, there are deductible limits based on age.

On average, 70% of Americans
over 65 will need some form of
long-term care service in their lifetime.

Source: Longtermcare.gov

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.

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Tax Deduction vs Tax Credit

Tax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill, but in very different ways.

DEDUCTIONS

Deductions reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So, if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

CREDITS

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. For instance, a tax credit valued at $1,000 lowers your tax bill by $1,000.

Generally, tax credits are more valuable than tax deductions. However, there are times when a deduction can be more useful if it reduces your adjusted gross income (AGI) to allow you to take advantage of tax breaks you wouldn’t receive if your AGI were higher.

REFUNDS

Some tax credits are refundable or partially refundable, like the child tax credit or the American opportunity tax credit. That means if your calculated tax is $600 and you have a refundable tax credit of $1,000, you’ll receive a $400 refund. But most tax credits are non-refundable. That means you won’t receive a refund if using a tax credit reduces your tax bill below $0.

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Who Can Contribute to a 529 Plan?

You can help any child save for college expenses by contributing to a 529 college savings plan. All 529 plans accept third-party contributions, regardless of who owns the account. That means anyone, including grandparents, aunts, uncles, or even friends, can help a child save for college.

The money you invest in a child’s 529 plan grows on a tax-deferred basis, and distributions are completely tax-free when used to pay for the child’s qualified education expenses. Because of this tax-free compounding, even a small gift can potentially grow substantially over time. Every dollar a student has in college savings is one dollar less that they will have to borrow in student loans.

Beginning in 2024, beneficiaries can rollover unused 529 funds to a Roth IRA. Several rules apply, so consult your tax professional.