PFwise.com
Search
  • Home
  • Blog
  • Tools
  • Know-how
    • Insurance 101
    • Annuity 101
    • College Planning
    • Real Estate
    • Retirement Planning
    • Smart Investment
    • Stock Ideas
    • Tax Planning
  • About Us
  • 中文
  • Resources
    • Personal Finance Reading List
    • Financial Aid Resources
    • Personal Finance Calendar
    • Retirement Planning Calendar
    • ETF list
    • Financial Glossary
  • Newsletters Archive

There is No One Size Fits All When Choosing the Best Medicare Plan

1/31/2022

0 Comments

 
​When reviewing different Medicare options, some retirees might first look at the cost of premiums when selecting from the available plan options. However, because not all Medicare plans are created equal (and because retirees will have varying needs for medical care), choosing a plan with a lower premium could end up costing a retiree more in the long run.

One of the major decisions when enrolling in Medicare is whether to choose traditional fee-for-service Medicare or Medicare Advantage. Medicare Advantage plans can be attractive for some retirees because they often have lower premiums than the alternative of using traditional Medicare with Medigap and Part D prescription plans, and can come with additional benefits, such as prescription, dental, and vision benefits. Nonetheless, these plans can have high maximum out-of-pocket limits that could be reached if the insured has significant medical needs. Further, Medicare Advantage plans steer retirees to ‘in-network’ providers, meaning that a policyholder could end up paying significantly more for care if they are seen by an ‘out-of-network’ provider.

Similarly, retirees choosing among Medigap policies might be tempted to choose the plan with the cheapest higher-deductible premium (which could result in significant out-of-pocket expenses if the retiree ends up needing expensive medical care), or at the opposite end, the plan with the most comprehensive coverage (which might lead the retiree to pay more in premiums when they could afford the deductibles and coinsurance of a plan with cheaper premiums). In the end, there is no ‘one-size-fits-all’ approach to selecting Medicare plans
0 Comments

Why It Is Important to Find a Good Agent To Buy the Medicare Policy

1/30/2022

0 Comments

 
Navigating Medicare enrollment can be a tricky task for retirees, a Medicare specialist can help choose a particular plan that fits the retiree's situation the best.

First, the agent-vetting process can occur as the retiree is approaching Medicare eligibility age (typically 65), and a good agent should be familiar with the pros and cons of starting Medicare at the age of eligibility if the retiree has other options (e.g., a workplace retirement plan). Also, a good agent will also guide the retiree through the process of applying for Medicare Parts A and B, even though they will not earn a commission for doing so (as Medicare specialists are typically only compensated for Medigap supplemental policies, Medicare Part D prescription drug plans, and Medicare Advantage plans).

Next, agents should be able to explain how the retiree’s Medicare premiums will be impacted by the Income-Related Monthly Adjustment Amount (IRMAA) based on the income.

Finally, the agent can then help the retiree choose among Medigap, Medicare Part D, and Medicare Advantage plans for their specific state. For example, if the retiree is considering a Medicare Advantage plan, having an agent that is familiar with the insurance carriers and hospital networks in the retiree's state can help choose a plan that includes the best medical providers for the individual situation.
0 Comments

Get Another Part D Drug Plan If Moved to Another State?

1/29/2022

0 Comments

 
Q. I am moving to another state where my Part D drug plan is not available.  Can I get another plan?

A.
If you have Original Medicare, you can get a new Part D plan without penalty if you do it in a timely way.  If you get your medication coverage from a Medicare Advantage (MA) plan, it's a bit more complicated.

You will likely need to switch to a new plan for all your coverage, as plans often do not cross state lines.  The timetable is the same for original Medicare or an MA plan: your special enrollment period starts a month before your move and lasts until two months after the month you move.

0 Comments

Cannot Contribute to HSA If Enrolled in Medicare?

1/28/2022

0 Comments

 
Q. If I am enrolled in Medicare, but I am still working, can I still contribute to my HSA?

A.
No, you can no longer contribute to your HSA because you can only contribute tax-free dollars to an HSA if you have a high-deductible plan and no other health coverage.

If you enroll in Medicare, you can still use HSA money to pay for out of pocket costs, but you cannot continue to make contributions to it.

Note, you can still contribute to FSA, but you do have to use the FSA dollars in the same or following year.
0 Comments

Simple Tips for Tax Preparations

1/27/2022

0 Comments

 
​If you haven’t done so already, it’s time to get ready to file your taxes. Whether you use a tax professional or prepare your taxes yourself, the first step is to get organized, and a tax preparation checklist can help you do that. Here are some tips to help you get started. 

*Collect your income records :   Employers/companies send out W-2s and 1099s by the end of January.  Review these documents carefully as soon as you receive them; if you find a discrepancy, you have plenty of time to get a corrected document. 

*Collect copies of year-end bank, brokerage, and investment account statements:   These may contain needed cost-basis, transaction type, gain/loss information.  They can also serve as proof of IRA contributions. 

*Organize and validate your deductible expenses and eligible tax credits (some may include) :
*Work-related receipts
*Receipts/payment records for charitable donations
*Payment records of eligible medical co-payments
*Education costs/student loan interest
*Mortgage interest statement
*Homebuyer tax credit

*Check out one-time benefits that might apply:   Investments in certain energy-efficient products (such as water heaters, central air conditioners, new windows and doors, and insulation) could make you eligible for tax credits this year.  If you installed a solar energy system (or other type of renewable energy system) you may be eligible for a tax credit. Details about these types of tax credits are available at: www.energysavers.gov.

**Locate last year’s tax return:   You may need to reference important information for this year’s return.
0 Comments

Fidelity to Introduce a Direct Indexing for Retail Customers

1/26/2022

0 Comments

 
Direct indexing offers investors the opportunity to purchase shares of the component companies of an index itself, rather than a mutual fund or ETF tracking the index, creating opportunities for tax-loss harvesting when the prices of individual companies within the index fall.

Because of the previous inability to purchase fractional shares and the transaction costs of buying each company in an index, this strategy was generally only available to those with significant assets (in addition, those in higher tax brackets would also get more benefits from the tax-loss harvesting). But with the now-wide availability of fractional share purchases and zero-fee transactions, direct indexing has been opened up to a wider range of investors.

And now, 
Fidelity plans to take the next step by offering its Fidelity Managed FidFolios direct indexing products to individual investors with as little as $5,000 to invest. Investors will initially be able to choose from three account strategies: U.S. Large Cap, International, and Environmental Focus.

The latter strategy represents a potential growth area for direct indexing platforms, 
with Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI) becoming increasingly popular. Rather than relying on the ESG/SRI criteria of a given mutual fund or ETF, direct indexing allows investors to customize the index for their particular preferences (e.g., removing gun manufacturers or tobacco companies).

The FidFolios will have an initial expense ratio of 0.40%, creating a fee hurdle to overcome (compared to index ETFs which have expense ratios near zero) through its tax advantages and/or its customization abilities. 
0 Comments

A Case Study on Maximizing Income in Early Retirement

1/25/2022

0 Comments

 
Below is a case study from AIG about how to maximize income during the early years of retirement.
0 Comments

Crypto and Equities Are Increasingly Connected

1/24/2022

0 Comments

 
The International Monetary Fund warned in a recent blogpost that sentiment in equities and crypto appear increasingly connected, raising the "risk of contagion across financial markets".

Bitcoin's correlation to the S&P 500 was just 0.01 from 2017 to 2019, which suggests equity and crypto prices were moving independently.  That changed in 2020 - 2021, as the correlation jumped to 0.36, indicating the asset classes were moving closer together.

What's the implication?  It means the Bitcoin and the broader crypto world aren't likely to offer protection against downturns in equities.

0 Comments

Barron's View on 2022 Stock Markets

1/23/2022

0 Comments

 
​In 2022 the global economy is in transition and big  questions exist. Here is our perspective on factors playing into market risk as we survey the investing landscape for the coming year.

Is the financial impact of Covid over? We believe so. The Omicron spike appears to be high but short-lived. While this may create supply chain disruptions, we don’t expect markets to react to these in the near term.

Will inflation persist? Yes. Inflation is likely to be the most important factor driving financial markets in coming years.  Structural factors that have kept inflation low for the past several decades are shifting. This will have a profound impact on asset class relative performance going forward.

Will the Great Resignation last? No. A September Harvard Business Review analysis found that resignations are highest among mid-career employees, suggesting this labor market dynamic is transitory. But the wage pressure effects are likely to linger.

Will tensions grow between China and the U.S.? Yes. There’s a diplomatic boycott of the Beijing Olympics, and Congress approved the Uyghur Forced Labor Prevention Act. How global leaders respond to China’s human rights violations will have financial implications. If China feels victimized, it could respond with sanctions or tariffs, which could jolt financial markets.

Will monetary policy tighten? Yes. The Fed outlined a plan to remove monetary accommodation and start hiking rates. The market is pricing in interest rate hikes in the coming quarters, but will the economy allow the Fed to raise short term rates beyond 1.75%? We think the Fed may need to acknowledge this pace is inadequate. The longer the Fed is wrong about inflation, the more credibility it loses. In 2022, we expect that the Fed will hike more than it has currently signaled.

Should we be worried about tech valuations? Yes. Weighted by market capitalization, tech shares currently trade at higher multiples than the rest of the market. The Nasdaq 100 is close to its all time high as are the five largest tech stocks. By contrast, the fastest growing unprofitable tech names saw their valuations cut by 20% in 2021 and are 37% below peak. Valuations remain rich and if discount rates move higher, stocks valued based on distant future earnings could fall further.

Other risks we’re concerned about. Geopolitical unrest: An escalation between Russia, the main provider of energy to Europe, and Ukraine could send energy prices significantly higher.  If China becomes aggressive toward Taiwan it could impact semiconductor production, which is crucial to everything from smartphones to cars. 

Leverage: Its high in private credit, crypto and non-profitable tech equities. 

Fiscal cliff: The drop in Covid-related stimulus could drag down growth.

In summary, we expect economic reflation and are overweight real assets including TIPS, oil, and industrial metals. Higher sustained inflation would cause cash to lose value quickly, turning it into a risk-increasing rather than risk-reducing asset. With yields still low, we have turned to proprietary liquid alternative strategies to replace traditional fixed income and are avoiding most credit. As to equities, we don’t believe valuations are justified by low rates. The valuation premium will decline if rates move higher.
0 Comments

​New Year, New Life Expectancy Tables

1/22/2022

0 Comments

 
RMD Factors Revised for 2022

IRS regulations have updated the life expectancy tables used in calculating required minimum distributions (RMDs). The new tables are effective for distribution years beginning on or after January 1, 2022. They replace old tables that were last updated in 2002.

Need to Know: Taxpayers turning 72 in 2021 and having a required beginning date of April 1, 2022, cannot use the new tables to calculate their RMD for 2021 (even though they have until April 1, 2022 to take that first distribution).

The Effect: RMDs Reduced The new tables contain updated distribution periods that reflect increased life expectancies since the last tables were issued. The differences in the tables are not huge. However, use of the new tables will result in smaller RMDs. The below compares a small portion of the Uniform Lifetime Table.

The new tables are easy to use for lifetime RMDs. Taxpayers simply use the new table to calculate their RMDs for their 2022 distribution year.

For Example: IRA Owner, Age 75 Patty turns 75 in 2022. Her one IRA had a value of $550,000 as of 12/31/21. She must distribute a minimum of $22,357.72 ($550,000/24.6) before 12/31/22. This is $1,659.75 less than the $24,017.47 that would have been required under the old table ($550,000/22.9).
Picture
0 Comments

​It’s Time to Invest in Commodities. How to Do It.

1/21/2022

0 Comments

 
Below is a recent article from MarketWatch.com -

​Commodities are rarely exciting—and the price of copper, corn, or even oil doesn’t stir investors the way a
tweet from Elon Musk does. Yet commodities sit at the crossroads of three of today’s biggest investment
themes—rising inflation, a changing China, and the transition away from fossil fuels amid increased attention to
climate change.

Barron’s highlighted this opportunity a year ago as commodities emerged from a decadelong bear market. It
was a good call: The Bloomberg Commodity Index rose 27% in 2021, its best year in decades. Those three big
trends are still going strong, so more gains could be ahead for some commodities, like oil, and agricultural
commodities such as corn. But the price run-ups mean that investors need to pick their spots carefully. The
factors affecting commodity prices—and determining which ones investors should focus on—often overlap and
have different short- and long-term implications. Actively managed funds are better able to spot and take
advantage of changing trends; for three good fund options, see this article.

Inflation
Inflation has been one of the biggest drivers of many recent economic and market trends. The most recent
consumer price index, or CPI, inflation report showed that prices rose across the board in November—by quite
a lot, 6.8%. And in December, the Federal Reserve acknowledged that inflation was indeed a sustainable
trend—not transitory—and that it’s moving ahead with plans to raise interest rates to battle inflationary
pressures. Even as the Omicron variant spreads, the world is snapping back from pandemic lockdowns. There
is pent-up demand for household items, corporate endeavors, municipal projects, and, of course, for the
commodities that are needed in all kinds of production. Meanwhile, many of those commodities are in short
supply. Add in supply-chain problems in getting those commodities into production and the produced goods to
the end user, and it’s no wonder that prices are rising.

Investors wanting to hedge against inflation, which makes stocks more volatile, have long turned to
commodities. It’s a broad “if- you-can’t-beat-’em, join-’em” strategy: If inflation is rising, the prices of
commodities are typically rising, as well, so part of your portfolio will benefit even as some investment returns
are muted. Energy futures have the best correlation with U.S. inflation, but over the long term, agriculture,
livestock, and industrial metals are all positively correlated. Since 2000, the Bloomberg Commodity Index’s
monthly year-over-year returns have had a 76% correlation with U.S. consumer-price-index data, according to
J.P. Morgan. And today’s inflation is driven by structural factors that are changing the economy, business, and
how we all live.

“Greenflation” is an additional factor driving inflation, and will benefit commodities needed for the green energy
transition—especially copper, which is used in all things digital; lithium, used for batteries; aluminum, used to
build solar panels and wind turbines; and cobalt, a catalyst for producing clean fuels. More companies and
governments are setting goals to reduce or eliminate the use of fossil fuels such as coal, oil, and natural gas.
These efforts are the basis for plans to become carbon neutral or “net zero” that many companies and nations
have made. These institutions are setting dates by which their operations won’t add to the release of carbon
dioxide into the atmosphere, and any emissions they do produce will be offset by green projects that reduce
carbon. These are costly, decadeslong plans that will change the supply-and-demand profile of many
commodities.

While inflation is a broad argument for investing in commodities, the influence of China—the biggest consumer
of commodities—the dynamics around specific trends, and the already big run-up in the prices of some
commodities mean that investors would benefit from a more targeted approach.

China

The health of the Chinese economy is one of the biggest determinants of commodity pricing—and the near-
term outlook isn’t great. The world’s second-largest economy was the primary driver for the last commodities

supercycle, as the country’s swift urbanization, aggressive stimulus after the financial crisis, and rapid
economic growth created voracious demand. The backdrop is very different today: China’s economic growth
has slowed to 5%, and its policy makers are focused more on creating a balanced, resilient economy than
unbridled growth. One example of this shift in priorities is Beijing’s crackdown on China’s debt-laden property
sector, by implementing fiscal regulations that pushed large property developers like China Evergrande
Group (ticker: 3333.Hong Kong) to the brink of bankruptcy, and left investors concerned that property problems
would drag the economy down even further.

“Instead of a country industrializing, we have a country that accounts for 55% of metals demand slowing
down,” says Natasha Kaneva, J.P. Morgan’s head of global commodities research.

Yet over the long term, China will remain a big driver of demand. Its property market accounts for 30% of the
global demand for copper, which means further gains in copper prices aren’t likely in the near future.
But metals, and especially copper, have a bright future as China embraces green technology. Beijing has
announced plans to be carbon neutral by 2060, a transition that will be years in the making and bodes well for
industrial metals used in electric vehicles. Just a fifth of the cars sold in China today are some type of electric--
think battery, plug-in, or hybrid—compared with 40% in Europe. Demand for EVs probably won’t rival demand
for traditional cars until after 2026, says Kaneva. Until China’s energy transition gets further along and its
property sector stabilizes, industrial metals are not the best near-term option for combating inflation or boosting
returns.

Energy, Green and Black
The energy transition is another big factor in commodity prices, and one that’s creating lots of opportunity. As
anyone who has raised a teenager knows, transitions can be difficult and full of conflict.

There are three big forces at work in energy prices: fuel shortages in the short term, the inexorable march
toward renewable energy in the longer term, and the increasing emphasis from U.S. companies and their
investors on environmental, social, and governance issues, known as ESG.

The three forces are interrelated. To achieve its goal of carbon neutral by 2060, Chinese policy makers put
restrictions on factories last fall—which resulted in a power shortage that disrupted already tight supply chains
and spurred inflation. Europe, meanwhile, is facing fuel shortages that could cause blackouts this winter, in
part because of its increasing reliance on wind energy and too few windy days in the past year.

In the U.S., alternative energy is in short supply, creating a backdrop for higher prices, thanks to two forces:
Demand for alternative energy has increased while big commodity companies have underinvested in their
businesses for years. That has created a shortage of old-school commodities like oil and copper. Expect these
shortages to continue as companies and countries around the world invest heavily in renewable energy,
decarbonization, and efforts to make buildings more energy efficient.

Investors have also increased their scrutiny of business practices, making it harder to mine for commodities
that are already in short supply. Rio Tinto CEO Jean-Sébastien Jacques and other senior executives resigned
after the company blew up a 46,000-year-old sacred Aboriginal site in Australia to mine iron ore. Likewise, the
best copper deposits have already been discovered, with remaining areas in locations rife with ESG
constraints, says Calvert ESG Senior Research Analyst Suleyman Saleem.

Such challenges have dissuaded energy and mining companies from funding big projects or ramping up
production as demand increased. Instead, companies have use their extra cash for share buybacks or higher
dividends, adding to the supply shortages—all of which point to higher commodities prices over the long term.
“The energy transition helps reinforce the commodities story,” says Nicholas Johnson, who oversees $19
billion in commodity and multi-asset strategies at Pimco and is a manager of the Pimco CommodityRealReturn
Strategy fund (PCRAX).
Agriculture
Higher energy prices cause some agricultural commodities to rise in price, as well. Farmers use petroleum to
power their tractors and other farm equipment, and fossil fuels are used to make fertilizer. The more expensive
these energy inputs are, the more likely it is that farmers will plant less or raise prices on their yield, which
leads to higher prices for commodities like corn, soybeans, and wheat.

Bigger trends are also at work, creating a backdrop for strong gains in agriculture commodities. From 2014 to
2021, the number of vegetarians in the U.S. rose 500%, increasing demand for pulses, soybeans, and
alternative protein sources like nuts and avocados, says Martin Davies, president and CEO of Westchester, a
Nuveen affiliate that invests directly in farmland. Low-carbon fuel standards in states like California, Oregon,
and Washington will cause greater demand for soybeans and sugar cane, which are used in biofuels, he adds.
Climate change has made extreme weather situations—a major source of volatility—more frequent, forcing
investors to rebuild their models using 10-year rather than 30-year averages. This underlines the need to own
a broad array of agricultural commodities, Davies says; diversification will ensure that your investment isn’t
dramatically affected by a single earthquake, tornado, or regulatory change.

The Technical Case
One of the factors that most excites investors is a technical feature that’s a byproduct of the broader industry
backdrop: Most commodities are in “backwardation,” which means prices for a commodity tomorrow are lower
than what it costs today. Backwardation is typically short-lived, but some investors expect it to persist,
particularly in the energy market, where it is a manifestation of the energy transition, shortages, and
underinvestment.

“It’s very different than in the supercycle 10 or 20 years ago, when the price of oil was $85 but no one knew
where the next barrel would come from—so there was an expectation for prices to rise,” says Johnson. Today,
the U.S. shale boom means the U.S. can increase energy supply easily, and the move toward renewables
means that energy prices are headed lower in the long run.
​
Johnson and other managers like backwardation because prices don’t need to rise to make money—managers
can earn a return just by rolling a contract over to the next one to realize an attractive “roll yield.” If an investor
buys the front-futures contract in oil at $80 but the one-year is trading at just $74, they can buy it for $6 less, so
even if the price remains the same, they have banked a 8% return. The average roll yield for the Bloomberg
Commodity Index is about 3.3%.
0 Comments

Where are Gold Price Headed in 2022?

1/20/2022

0 Comments

 
The Federal Reserve has spooked some gold investors lately, as the US central bank has increasingly hinted at moving to withdraw some of its monetary support for the world’s largest economy. More restrictive monetary policy is generally thought to be bearish for gold prices. On the flip side, inflationary pressures are helping provide some support for gold prices—in addition to the primary supply and demand dynamics for the precious metal.
Picture
0 Comments

Pros and Cons of Roth 401K - Part B

1/19/2022

0 Comments

 
In last blogpost, we discussed what is a Roth 401K.  Now we will discuss Roth 401K's Pros and Cons.

The Pros
​Potentially tax-free growth

It can be complicated to quantify the value of potentially tax-free growth versus a current tax deferral. You don't know what your income will be in the future, nor what your tax rate will be.

If you expect your marginal rate to be at least as high after retirement as it is currently—which would apply to many younger participants who anticipate growing incomes over time—the Roth option could work in your favor over the long term.  This also sometimes applies to those who plan to move after retirement from a low-tax state to a high-tax state, say Texas to California.

It could also work out that the dollar amount difference in the taxes you'd pay by the time you get to retirement is very small, meaning the income tax you would pay per year on Roth 401(k) contributions could be roughly equal to what you'd pay eventually on distributions after 59½. Your age and your level of income will influence the bottom line.

Help with RMD concerns
Required minimum distributions (RMDs) apply to Roth 401(k)s in the same way they do to tax-deferred 401(k)s, meaning you'd have to start taking out a specified amount once you turn 72 if you are no longer working. However, once you are retired, you can roll over your plan into a Roth IRA, and then it would no longer be subject to the RMD rules (at least during the lifetime of the original owner), and you could withdraw the money on your own timetable.

Access to tax-free growth at higher income limits
High earners start getting restricted from making full Roth IRA contributions above $125,000 in modified adjusted gross income in 2021 for individuals and $198,000 for married couples filing jointly, and this will be $129,000 for individuals and $204,000 for couples in 2022. But Roth 401(k) plans follow 401(k) plan rules on this issue, which means there are no income restrictions.

You can also make higher contributions in a Roth 401(k) than a Roth IRA. An individual can put $6,000 into a Roth IRA per year, or $7,000 if over 50 in 2021 and 2022. In contrast, you can put $19,500 into a Roth 401(k) for 2021 and $20,500 for 2022, plus $6,500 catch-up if you're over 50 in both years. Or you can mix and match percentages and make some pre-tax contributions and some post-tax contributions. You can adjust throughout the year according to your needs and your plan specifications.

The cons
No tax deferral now
The list of cons may be short for Roth 401(k)s, but missing tax deferral is a big one. When faced with a choice of paying more tax now or later, most people choose to pay later, hence the low participation rates for Roth 401(k)s.

Encouraging people to save for retirement is important, and tax deferral has always been a key driver of savings. The financial justification for this has been that historically, people typically had lower tax rates in retirement than during their working years, and the math generally worked in their favor to have a lower adjusted gross income now and take taxable distributions in retirement.

There are a host of other reasons why a taxpayer might benefit from a lower adjusted gross income today, such as the calculation of child tax credits, financial aid for college, or divorce settlements. Then there is the impact on take-home pay.
 
0 Comments

Pros and Cons of Roth 401K - Part A

1/18/2022

0 Comments

 
What's a Roth 401(k)?

A Roth 401(k) is a kind of hybrid between a Roth IRA and a 401(k), with some rules from each kind of plan. Similar to a Roth IRA, an employee makes post-tax contributions, and any earnings grow potentially tax-free.2 But the contributions are made through regular payroll deductions and have the same limits as a tax-deferred 401(k), which are $20,500 for 2022, with catch-up contributions of $6,500 for those over 50.

If you take withdrawals before reaching age 59½ (either because you leave your company or because they allow in-service distributions), your contributions will not be subject to tax, but you must take out a proportional amount of any growth on those dollars, and this may be subject to taxes and early withdrawal penalties if it isn't rolled into another Roth 401(k) account or Roth IRA.

In next blogpost, we will discuss what are the pros and cons of Roth 401K.
0 Comments

New Year's Tax Strategies

1/17/2022

0 Comments

 
No matter your income level, you can always explore tax-smart strategies designed to help you manage, defer, and reduce taxes before making long-term financial planning decisions. Among these: tax-smart asset location, where you use tax-deferred accounts when appropriate, charitable giving, and tax-loss harvesting, where you offset gains with losses.

Here are some strategies to consider:
  • Roth 401(k)
    If you are looking for tax-deferred or potentially tax-free growth, you might want to consider putting some of your retirement savings into a Roth 401(k) instead of a traditional 401(k), paying the tax now instead of later. Note that the contribution limit is the same for both: $20,500 in 2022, with $6,500 in catch-up contributions for those over 50. Many, but not all, 401(k) plans offer the option of a Roth 401(k). Some plans also allow after-tax contributions to traditional 401(k)s, up to the total defined contribution limit in 2022 of $61,000, which includes both employer and employee contributions. Some plans also allow converting those after-tax contributions to Roth 401(k) contributions. But be aware that this strategy, known as the "backdoor Roth," might be eliminated by future legislation. You should consult with your plan administrator if you have questions about your plan details.
  • Deferred annuities
    Some high-income investors, who have already taken full advantage of tax deferral through workplace plans like 401(k)s and/or IRAs, may still seek additional tax deferral. They may benefit from the use of low-cost variable annuities, which can bring a variety of benefits, including deferring investment gains until assets are withdrawn. However, these are complicated investments, so be sure to consult with a financial professional.
  • Estate planning
    Careful estate planning can also help you secure your financial future and generations to follow. The status quo may remain until 2026, when the current estate tax exclusion amount ($12.06 million for 2022) is set to shrink to an inflation-adjusted $5 million. If you already have an estate plan, you may want to ask yourself some follow-up questions and not be caught short if there are changes down the road. For instance, are your trustees or executors still appropriate considering your estate-planning goals? Perhaps they've aged or your relationship has changed. Also, are your children now of age? You may want to update provisions relating to your beneficiaries. You may also have had new family members join the family, or others may have left through divorce, or you could have moved to a state with different estate-planning rules. "An estate plan should evolve as your circumstances do," says Christy.
  • Gifting
    With equity markets hovering around all-time highs, and the prospect of rising interest rates in 2022, some people may also begin to evaluate their annual gifting strategy. For example, if you believe the markets may pull back, you might want to be prepared to make a gift when asset values have declined, with the hope that the appreciation to follow will be outside of your estate. On the other hand, if you believe the markets will continue to increase, gifting at the beginning of the year can help capture the appreciation throughout the year.
0 Comments

Number of Nasdaq Stocks Down 50% or More Near Record

1/16/2022

0 Comments

 
Not long after the start of 2022, 40% of index’s firms have fallen by half from one-year highs, and investors are selling first, figuring out rest later.
​
Picture
0 Comments

10 Good Reasons to Include A Fixed Annuity In Retirement Portfolio

1/15/2022

0 Comments

 
Safety, tax deferral and accumulation are just a few of the many reasons to include a fixed annuity in retirement portfolio.
Picture
0 Comments

Life Insurance in Retirement Planning - Part B

1/14/2022

0 Comments

 
In last blogpost, we compared different retirement income sources.

THINGS TO CONSIDER
The primary purpose of life insurance is for death benefit protection, and this strategy assumes this to be a priority objective for the policyowner.
​
1. Life insurance premiums are not tax-deductible.

2. Life insurance policies classified as Modified Endowment Contracts (MECs) may be subject to tax when a loan or withdrawal is made, and a federal tax penalty of 10% may also apply to a MEC if the loan or withdrawal is taken prior to age 59½.

3. The policy cash value available for loans and withdrawals may be worth more or less than the original investment amount, depending on the performance of the policy crediting rate. Life insurance policies may also have surrender charges in the early policy years. Other factors that will affect cash values are the timely payments of premium and the performance of underlying investment accounts, where applicable.

4. Withdrawals and loans can reduce the policy death benefit and cash surrender value and may cause the policy to lapse. Lapse of a life insurance policy can cause the loss of the death benefit. Lapse of a life insurance policy with an outstanding loan may cause adverse income tax consequences.

5. For life insurance, the cash value available for loans and withdrawals may be worth more or less than the original premiums paid. Withdrawals from a life insurance policy may be subject to income tax after withdrawals exceed cost basis.

6. Taxable investments may be subject to income tax and/or capital gains tax.

7. Distributions from non-deductible IRAs must be pro-rated if the client has deductible IRA monies or earnings in the non-deductible IRA.

8. Contributions to qualified plans and traditional IRAs may be tax-deductible, subject to certain limits.

9. While qualified distributions from a ROTH IRA are generally federal income tax-free, if the ROTH IRA is a rollover IRA, a waiting period may apply before distributions will be tax-free.

10. The tax treatment of income from municipal bonds will vary with the type of bond and the issuing municipality.
0 Comments

Life Insurance in Retirement Planning - Part A

1/13/2022

0 Comments

 
LIFE INSURANCE IN RETIREMENT PROVIDES THE FOLLOWING BENEFITS:

​1. In the event of premature death during your working years, the income tax-free death benefit can protect your family, replace income, and complete financial obligations.
​
2. The policy’s cash value can be used to help supplement the income from your other retirement assets.
Picture
BENEFITS OF LIFE INSURANCE IN RETIREMENT PLANNING
1. The life insurance death benefit will generally be received income tax-free by heirs.
2. The life insurance cash values can grow tax-deferred.
3. As long as the policy is not a Modified Endowment Contract (MEC), the client can generally take tax-free withdrawals up to basis out of the policy, and tax-free loans thereafter from the available cash value.
4. Accumulated cash value may be accessed by you or remain in the policy.

In next blogpost, we will discuss 10 things to consider related to the table above.
0 Comments

3 Questions to Uncover Any Gaps in Your Retirement Plan

1/12/2022

0 Comments

 
​3 questions to help uncover any gaps in your retirement plan -
Picture
0 Comments

Life Insurance Options - Part B

1/11/2022

0 Comments

 
Picture
0 Comments

Life Insurance Options - Part A

1/10/2022

0 Comments

 
Picture
0 Comments

10 Common Life Insurance Mistakes

1/9/2022

0 Comments

 
​1. Your estate should not typically be the named beneficiary of the policy. This will avoid:
  • Inheritance and death taxes, which many states have
  • Delays and the expense of probate
  • Full access to proceeds by creditors

2. Two or more backup (secondary) beneficiaries should be named.

3. At least every three years, a written confirmation of the status of policies and beneficiaries should be requested from the insurer’s Home Office.

4. The insurance product should match the problem. Be sure you have the right policy for your needs.

5. Above all, verify there’s enough life insurance to provide food, clothing and shelter, and to pay off debts so that those you love can continue in their present lifestyle.

6. Don’t name minors as outright beneficiaries. Instead:
  • Consider a trust for your spouse and children, and name the trust as recipient. When your children reach adulthood, you can change the beneficiaries to them directly.
  • Or, use a settlement option to pay the proceeds over a long period of time.

7. Consider an ownership transfer of life insurance to others to save federal estate taxes.

8. Check to see if your business or practice can provide your family with insurance on a more cost-effective basis.

9. Remember that term insurance, by definition, will expire and contractually becomes more expensive as you grow older.

10. Don’t buy life insurance as though it were a commodity. The knowledge of your financial professional, the integrity of the insurer, and their commitment to service can make a major difference as to the cost effectiveness of the life insurance.

0 Comments

Life Insurance as an Asset - Part B

1/8/2022

0 Comments

 
In last blogpost, we discussed life insurance as an asset strategy.  Now we will show it in action.

Helen’s objectives:
Helen wants to make sure that her children and grandchildren receive a meaningful inheritance. While Helen expects to receive a 7% return on her investments over time, she is concerned that, in today’s environment, the assets might underperform. For example, if her assets receive only a 5% average annual return over time, her beneficiaries might receive substantially less than her expectations. Assuming a blended income and capital gains tax bracket of 27.5%, that 2% difference in return rate over 28 years could result in a difference of more than $3,000,000 in the legacy for her children. A down market near Helen’s death could have that type of effect on years of wealth accumulation.

Helen’s wealth transfer strategy:
As a hedge against that risk, Helen’s financial professional suggests she take $30,000 each year, or 1% of her accessible assets, and direct the funds to a life insurance policy on her life. She can own this policy outright, although she may want to consider using a trust. If structured properly, life insurance owned by an irrevocable trust will generally keep the proceeds of the life insurance out of the insured’s estate. This will prevent the proceeds from being subject to estate taxation. Estate taxes aren’t an issue for Helen, but for others they could be an issue.

Helen’s results:
Assuming a policy on Helen’s life (a 60-year-old female who receives an underwriting category of preferred non-tobacco user), her beneficiaries might see the following results. Each year’s life insurance premium is $30,000. That may purchase a life insurance benefit of $2,000,000. Helen’s portfolio is reduced slightly due to the premium expense, but the life insurance benefit gives her a potentially more effective transfer strategy.

Additionally, the death benefit will ensure a return of the funds contributed, something few other financial assets can offer.

In effect, by using her assets to buy life insurance, Helen is giving up some upside potential for greater safety in her wealth transfer strategy. By directing this relatively small amount of her net worth into life insurance, she adds a stabilizing element to the dollars ultimately transferred to her family (provided the policy stays inforce).

If Helen received a lower rate of return, using life insurance could help offset the risk of loss or underperformance. Through the purchase of life insurance, Helen has, at least in part, shifted the risk of underperformance from her to the insurance company, provided she continues to pay the required premiums.

Make a difference with life insurance
Ultimately, at her life expectancy, Helen’s purchase of life insurance increases the amount passing to her beneficiaries.
  • If Helen continues to receive the expected pretax return of 7% average annual growth, her beneficiaries would gain an additional $137,000.
  • If Helen receives a lower pretax return of 5% on her assets, the gain to beneficiaries would be $533,000. In fact, if Helen had invested the $30,000 annual premium at a 5% return, she would have to wait until she was age 93 before the funds would grow to a level greater than the $2,000,000 life insurance death benefit.
0 Comments

Life Insurance as an Asset - Part A

1/7/2022

0 Comments

 
​The greatest strength of life insurance lies in the ability to provide money to a family when someone passes away. Sometimes this amount can be many multiples of the premiums that were paid into the insurance policy.

Many people think of life insurance only as a way to provide for a family after the loss of a breadwinner. But some families are also using life insurance as an asset to ensure that an inheritance can be passed on to their family, regardless of how their other assets perform. This is increasingly important to many families who are still uneasy after the 2008 market crash and unsure of where the market is headed. A badly timed down market can devastate a planned legacy for years. The chart below shows market fluctuations in recent years, based on the 5-year S&P 500® Index, without dividends.

By taking a portion of your assets each year to cover the cost of life insurance premiums, you may be able to hedge a portion of your portfolio against fluctuations in the marketplace, because payment comes from the life insurance company, not your assets directly. Knowing that your beneficiaries will be cared for may also allow you to make other choices with your remaining assets — perhaps a more aggressive, growth-oriented strategy, or you might invest more conservatively, knowing you don’t need as much growth. 

How the strategy works
A hypothetical example of how the strategy works can be seen in the chart below. It shows what you might expect from the same dollars if they were paid into a life insurance policy as premiums, or if they were placed in a hypothetical investment account.

In the early years, life insurance death benefits typically offer substantially more than the hypothetical investment. As time goes on, the leverage offered by life insurance may be reduced as the non-life insurance assets grow and compound. At some point there is a crossover, where the growth in the investment account outweighs the benefit provided by the life insurance policy. Of course, it’s hard to know which strategy is more beneficial unless someone knows their precise life expectancy, and whether it is before or after this crossover point.

However, this is a conversation you can have with your financial professional. They can run numbers for you and estimate the internal rate of return in the years before and after your life expectancy.

For you to get the most out of your policy’s life insurance benefit, it has to stay inforce until you pass away. If your policy ends or terminates, or if you otherwise dispose of your policy before your death, your beneficiaries would receive a substantially reduced benefit, and any proceeds they would receive above the premiums paid into the contract could be subject to income taxation.

Picture
In next blogpost, we will show a case study to illustrate life insurance as an asset in action.
0 Comments
<<Previous

    Author

    PFwise's goal is to help ordinary people make wise personal finance decisions.

    Archives

    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013

    Categories

    All
    Annuity
    Book Reviews
    College Finance
    Finance In Formula
    Financial Scams
    For Entrepreneurs
    Healthcare
    Insurance
    Investment
    Miscellaneous
    Real Estate
    Retirement
    Savings
    Savings Ideas
    Stock-ideas
    Tax
    Tax-related

    RSS Feed

Powered by Create your own unique website with customizable templates.