Taxes-Planning Strategies

We at Paragon Financial Advisors are not accountants and urge you to verify any items we discuss with your tax professional to determine its implications in your particular situation. We also do not believe you should “let the tax tail wag the investment dog.” That is, your investing should not be dependent solely on tax considerations. However, tax consequences certainly should be considered when all other things are equal. Taxes can have a significant impact on your total economic well-being. It is in that spirit that we discuss the Congressional resolution (enacted at the last minute) to the fiscal cliff.

In our past blogs, we have discussed quite a few items pertaining to the resolution of the debt situation currently facing the US. We would encourage you to read those blogs as they lead to the suggestions we make here on ways to prepare for your future. Some of these suggestions are to avoid known items of tax increase and some are designed to position you for changes that may be forthcoming in an environment where Congress is seeking additional revenues. Consider the following:

• Utilize strategies to reduce taxable income, thereby avoiding higher tax brackets on ordinary income/capital gains/interest/ and the 3.8% health care tax.
• Maximize contributions to retirement plans, IRA’s, FSA’s, HSA’s, etc.
• Seek deferred compensation agreements with your employer if available.Maximize the use of tax deduction strategies (charitable contributions, mortgage interest, etc.)
• Consider Roth strategies (contributions, conversions, Roth 401(k)) as a way to hedge against future tax increases.
• Consider a Roth IRA conversion if below the income thresholds.
• Investigate Roth conversion options in 401(k) plans which have now been expanded to include all participants.
• Invest in municipal bonds to generate tax free income (in taxable investment accounts).
• Extremely favorable for those in higher tax brackets especially since municipal interest is currently free from income tax as well as the 3.8% health care surtax.
• For those over age 70 ½ who face required minimum distributions from IRA’s, make donations to qualifying charities from the RMD amount (up to $100,000 maximum in 2013) as a way to avoid the RMD from increasing your taxable income.
• Consider the sale of appreciated assets (or gifting assets to other family members in lower tax brackets) to take advantage lower capital gains rates (0% or 15%).
• Considering the low interest rate environment, do some of the estate planning techniques (such as a Grantor Retained Annuity Trust) make sense for you?
• Consider, if appropriate, some of the advanced wealth transfer strategies (grantor trusts, dynasty trusts, family limited partnerships, etc.) while these strategies are still available.

As usual, we at Paragon Financial Advisors are here to assist you and your family in the long range planning of your financial well-being. Please do not hesitate to give us a call.

Pensions To Lump-sums

Retirees from large companies who have been drawing retirement checks may face a new option. Their former employer may offer to swap them a lump sum payment now in exchange for all future retirement checks. An interesting offer but one that requires very close scrutiny.

First of all—why is the past employer making such and offer? Pension payments are generally made from defined benefit plans, i.e. plans that guarantee the retiree a prescribed benefit based on retirement age, length of employment service, and salaries earned while working. Note here that the employer is bearing all investment risk—the employer must contribute enough money into the plan such that the contributions plus investment earnings will provide the retirement benefits to the retiree over his/her expected lifetime. National media stories are abounding about corporate retirement plans and their underfunded status(i.e. the plans do not have adequate assets to meet the projected pension obligations). That problem has been compounded because the estimated plan earnings assumption has been very difficult to achieve for many plans because of investment performance over the past decade.

Another change working in favor of the employer is a change in allowable interest rates for lump sum calculations. The basic assumption in a lump sum distribution is that the employer will provide the retiree a lump sum of money that can be invested by the retiree to replicate the pension payment stream over the retiree’s life expectancy. The lower the interest rate assumption, the greater the amount of lump sum dollars that were required. Historically, US Treasury security interest rates were the assumed interest rates for lump sum calculations. Plan administrators can now use corporate bond interest rates in their lump sum calculations; those corporate bond interest rates are higher than the Treasury securities. The net impact—the higher the assumed interest rate, the lower the amount of lump sum dollars needed.

The bottom line—some pension plan administrators are attempting to remove retirees from their plans and the offer may not be in the best interest of the retiree. Should you or someone you know face such a choice, we at Paragon Financial Advisors will be happy to assist you in analyzing this decision.

Happy Days Are Here Agian??

The stock market is bumping up against all-time highs. The question is why. Are these legitimate levels based on fundamentals or is the excessive liquidity being pumped into the money supply simply going into stock because it’s the better (?) place now. David A. Rosenberg (Chief Economist & Strategist) at research@gluskinsheff.com had some interesting comments in his Economic Commentary of March 25, 2013. He commented on the lack of economic recovery (“… the worst recovery in recorded history.”) and gave the following statistics:

• Industrial production: -1.2% (1.2% lower than the previous cycle peak)

• Manufacturing output: -4.3%

• Real manufacturing and trade sales: -1.7%

• Total payrolls: -2.2%

• Full time employment: -5%

• Real personal income ex transfers: -4.5%

• Real disposable personal income per capita: -6.2%

And this performance is in the wake of:

• Four years of $1 trillion deficits
• Four years of 0 interest rate policies
• A tripling of the Fed balance sheet (QE1, QE2, Twist, QE3, etc.
• Bailout stimulus

Hummm-let me think about that!!!

Shocking Trends in College Expenses and College Debt Necessitate Earlier Planning for Families

The July 2013 issue of Bloomberg Businessweek found HERE includes troubling trends in college expenses as originally presented by the Federal Reserve Bank of New York, National Center for Education Statistics.  Since 1999 and adjusted for inflation, tuition has increased more than 50%.  As costs continue to rise, if sources of college funds fall short of what is needed, student loans are taking up more of the slack.

The problem is magnified by the fact that congress missed the deadline for making a change on July 1^st meaning the subsidized Stafford loan rate has doubled from 3.4% to 6.8%.

What can you do?  Saving for future college costs can seem ominous but there are things you can do now to get a jump start.  Always discuss any options presented with your financial advisor prior to acting.

529 College Savings Plan – Numerous states sponsor 529 College Savings Plans through various institutions.  A 529 plan is a great way to begin savings for college.  Contributions for 2013 can be as much as $14,000 per donor for a child ($28,000 for a married couple).  There is a 5-year rule allowing donors to make contributions of $70,000 per donor for a child ($140,000 for a married couple).  Using this rule the one-time gift is treated as having been contributed over a 5 year period.  There are several planning strategies that can be utilized with this type of account.

Coverdell Education Savings Account – While not as generous as the limits for a 529 plan, the Coverdell Education Savings Account (ESA) is another potential savings vehicle allowing the accumulation of assets on a tax free basis if used for college.  For 2013, individuals may contribute as much as $2,000 to a Coverdell ESA if they qualify under the income limitations.

Scholarships – Seek out scholarship opportunities diligently.  Begin compiling a list of possible avenues now and continue to add to the list as you find new opportunities.  Research what is required for each one and work with your child to ensure they are not just eligible but hopefully near the top of candidates applying.

Grants – If you qualify for grants, by all means accept them!  If you need help with the FAFSA process find a financial advisor in your area who is knowledgeable about college financial aid.

Part-time employment during high school and college – Although it may not be an answer for everyone, consider encouraging the student to contribute towards their future by partially paying their own way. 

Encourage an entrepreneurial spirit in kids – Children are creative beings, capable of so much.  Encourage them to realize their potential through setting a good example.  Find a mentor or teacher who can help them develop ideas into potentially viable businesses that could succeed beyond expectations.

Most importantly, begin saving and preparing now instead of waiting.  Every dollar contributed helps towards the end goal.  Structure a proactive plan of seeking out opportunities and saving early so there is less reliance on student loan debt which is becoming more unreasonable.

 

 

 

Applegate, Evan. "Correlations: Student Debt Explodes." Bloomberg Businesswek. 1 July 2013: Page 18. Print.

Applegate, Evan. "Correlations: Student Debt Explodes." Bloomberg Businesswek. 1 July 2013. www.businessweek.com Web. 2 July 2013