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Post COVID-19 vs Post WWII

4/17/2021

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Fidelity has an interesting article that links the potential stock market performance in post COVID-19 to the post WWII stock market performance.
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What happened to post WWII's stock market?  This chart below shows the details.  This should give you a club about how to allocate your assets in the near term.
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Roth IRA Contribution Rules: A Comprehensive Guide

4/16/2021

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A Roth IRA can be an excellent way to stash away money for your retirement years. Like its cousin, the traditional IRA, this type of retirement account allows your investments to grow tax-free. However, it also lets you take tax-free withdrawals of your contributions (but not earnings) at any time.

​
KEY TAKEAWAYS
  • Only earned income can be contributed to a Roth IRA.
  • You can contribute to a Roth IRA only if your income is less than a certain amount.
  • The maximum contribution for 2021 is $6,000; if you’re age 50 or over, it is $7,000.
  • You can withdraw contributions tax-free at any time, for any reason, from a Roth IRA.
  • You can withdraw earnings from a Roth IRA, but it may trigger taxes and penalties depending on your age and that of the account.
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How Change of 7702 Rules Will Impact Cash Value Life Insurance

4/15/2021

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What Are Changed?
Changes to the 7702 Definition of Life insurance were enacted with the passage of the Hero’s Act on 12/27/2020. This change lowered the interest rates and increased the premium limits defined by the regulation. This includes the Guideline Level, Guideline Single and 7Pay TAMRA premium limits. 


This was effective for policies issued on or after 1/1/2021.

What Will be the Impact on Life Insurance?

Generally, increases in premium limits mean that more premium can be paid into a cash value life insurance policy for a given death benefit.  Or in other words, a lower death benefit can be selected for a given amount of premium leading to higher accumulation and income values. 

Increases in GSP, GLP and TAMRA premiums will be greater where mortality is lower. 


Which means:
  • Increases will be greater at younger issue ages than old issue ages
  • Increases will be greater for non-nicotine users than nicotine users
  • Increases will be greater for females than males
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Asset Repositioning: an Alternative to the New Stretch IRA Rules

4/14/2021

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If you meet the following 2 conditions: 
  1. You have assets in an IRA that don’t intend to use or need during your lifetimes,
  2. You want to leave a meaningful legacy to the people you love. 

Then you will be impacted by the new Secure Act rules.


The Solution
Consider the income tax free alternative to the new stretch IRA rules.  For details, please see a case study below.

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Survivorship Standby Trust as an Estate Planning Solution

4/13/2021

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CHALLENGE:
Find an estate planning protection solution for you and your spouse that also meets your needs during your lifetime. You’re also concerned about using an irrevocable solution that can’t be changed.

SOLUTION:
A Survivorship Standby Trust (SST) funded with survivorship life insurance

​For details, please see the case study from Prudential below.
​

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Which 7 Taxes Affect Your Assets At Death?

4/12/2021

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There are 7 taxes affect your assets when you die.  See detailed descriptions at the Prudential flyer below.

STRATEGIES TO HELP LESSEN THE IMPACT OF TAXES
To reduce or mitigate almost all these taxes, you can use certain strategies, such as:
  • Evaluating the types of assets you have and how they will be taxed; exploring ways to diversify the taxation of your assets.
  • Strategic gifting of highly appreciating assets to exclude future appreciation from estate tax.
  • Creating trusts for a surviving spouse to avoid wasting state estate tax exemption amounts, lowering the size of the survivor’s taxable estate.
  • Allocating generation-skipping tax exemption to transfers to skip persons, such as grandchildren.
  • Ensuring the estate has access to cash to avoid sale of appreciating, illiquid, or cherished assets.

LIFE INSURANCE CAN HELP ENSURE SUCCESS
Life insurance can be a very effective tool in the estate planning process and can help you:
  • Provide your heirs with a death benefit that is generally income and estate tax-free (if structured properly).
  • Provide liquidity to help pay any estate taxes that may be due.
  • Ensure any outstanding debts are paid.
  • Manage probate costs.
  • Protect against potential creditor issues.
​
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Retirement Income Planning - 3 Tips

4/11/2021

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1. Zero Percent Capital Gains Tax Brackets
The 0% capital gains bracket can create unique planning opportunities. The standard deduction for those who are married and filing jointly is $25,100. Those who are married and over age 65 or blind receive an additional $1,350. A married couple filing jointly, both over 65, could have $108,600 of capital gains and pay no federal income tax at all, as long as the gain is the only thing on the return. Understanding the interaction between different types of income like capital gains, ordinary income and Social Security is essential to maximizing this opportunity. 

2. Social Security Taxation
As your taxable income increases, the potential tax you have to pay on Social Security benefits can also increase quickly. The combination of Social Security income with other taxable income could result in being subject to an effective marginal tax rate as high as 49.95% on a portion of your income. Delaying Social Security benefits increases the monthly benefit you are entitled to receive and gives you more time to withdraw from pretax retirement accounts without creating an overlap between the two income sources.

3. Medicare Premiums
Medicare Part B and Part D premiums are based on modified adjusted gross income. For people who are older than 65 or within two years of enrolling in Medicare, beware that Roth conversions can trigger premium surcharges. Understanding these thresholds will help you identify how much you should convert to the Roth. 


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Life Insurance Gap: Do You Have the Right Amount?

4/10/2021

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This financial planning article reveals that families with income greater than $100,000 tend to be underinsured.

It went on discussing some strategies to close the life insurance gaps and the true consequences if the gap remains.
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A Checklist from Financial Planners to Financially Plan Post-retirement

4/9/2021

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How financial planners help their clients financially plan for post-retirement?  Below is a checklist used by financial planners.
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Can I ​Withdraw Roth Contributions Without a Penalty?

4/8/2021

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Yes, you can!

Savers fund Roth IRAs with after-tax contributions, and the earnings on those contributions grow tax-free. To withdraw those earnings without paying taxes and a 10% penalty, the account must be open for at least five years, and the holder must be at least 59½. But there's a workaround.

The key word is earnings. The timeframe, taxes, and penalties apply only to earnings.

You can withdraw your contributions at any time, without penalty, regardless of your age or when you established the account, because taxes were already paid on that money.

For example, if someone owns a $100,000 Roth that consists of $75,000 in contributions and $25,000 in earnings, the investor can pull out that $75,000 with no penalties.

Because withdrawn Roth contributions can be used for anything, it is one of the most flexible retirement accounts

There are also three qualified reasons why someone who has owned their Roth IRA for five years, but is under the age of 59½, can take distributions on both contributions and earnings without triggering penalties or paying taxes:
  • Buying, building, or rebuilding a first home, with a $10,000 lifetime maximum withdrawal.
  • The account owner becomes permanently disabled.
  • A beneficiary or the person's estate makes a withdrawal after the account owner's death.
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The ABCD of Medicare Costs - Summary of Total Costs

4/7/2021

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See Medigap description here.

Here is an average cost example using the unbundled approach. This example shows Medicare coverage for a married couple with Modified Adjusted Gross Income (MAGI) of less than $174,000 per year.
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The ABCD of Medicare Costs - Medigap

4/6/2021

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See Medicare Part C here.
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See summary of all the Medicare costs here.
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The ABCD of Medicare Costs - Part C

4/5/2021

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See Medicare Part D here.
PART C: MEDICARE ADVANTAGE
Combines parts of Medicare A, B, and D
  • It’s a Medicare health plan offered through private insurers that contract with Medicare to provide you with all of your Parts A and B benefits
  • Available in three formats: managed care plans (HMOs and PPOs), private fee-for-service plans, or medical savings accounts
  • Private insurers may be able to offer lower premiums than Original Medicare, but can limit you to in-network providers
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See Medigap description here.
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The ABCD of Medicare Costs - Part D

4/4/2021

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See Medicare Part B summary here.
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See Medicare Part C - a combination of Part A, B, and D here.
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The ABCD of Medicare Costs - Part B

4/3/2021

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See Medicare Part A here.
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See Medicare Part D here.
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The ABCD of Medicare Costs - Part A

4/2/2021

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See Medicare Part B here.
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PFwise.com April 2021 Newsletter

4/1/2021

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For archived newsletters, please visit here.
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5 Retirement Risks and Considerations

3/31/2021

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Where to Put Your Cash?

3/30/2021

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In deciding where to put your cash, you need to consider your goals, time frame, attitude, and needs.  Once you are clear on them, you have four places to hold cash and we will analyze them one by one below.

Savings accounts
  • Savings accounts at banks offer flexibility and insurance from the Federal Deposit Insurance Corporation (FDIC). 
  • Liquidity and flexibility: Savings accounts are liquid. That means you can access your savings when you need or want to.
  • Insurance: FDIC insurance means the government would insure you against losing your money if the bank were to fail. The insurance covers losses of up to $250,000 per person, per bank, per account ownership category. That limit may require you to spread your money across accounts at several banks in order to make sure all your money is insured.
  • Uses: Savings accounts can be good places to put cash that you need ready access to for bill paying or emergencies.

Money market mutual funds
  • Money market funds are mutual funds that invest in short-term debt securities with low credit risk. There are 3 main categories of money market funds—government, prime, and municipal.
  • Liquidity and flexibility: Government funds, including US Treasury money market mutual funds, are priced and transact at a stable $1.00 price per share or net asset value (NAV) and are not subject to the potential restrictions on withdrawals such as liquidity fees or redemption gates.
  • Insurance: Money market funds are not insured by the FDIC. The Securities Investor Protection Corporation (SIPC) provides insurance for brokerage accounts that hold money market funds. SIPC protects against the loss of cash and securities—such as stocks and bonds—held by a customer at a financially troubled SIPC-member firm. SIPC protection is limited to $500,000 and has a cash limit of $250,000. SIPC does not protect against declines in the value of your securities and is not the same as FDIC protection.
  • Uses: Money market funds can offer easy access to your cash and may make sense as places to put money you might need on short notice, or that you are holding to invest when opportunities arise.

Certificates of deposit
  • CDs are time deposit accounts issued by banks in maturities from 1 month to 20 years. When you buy a CD, you agree to leave your money in the account for a specified period of time. In return, the bank pays you interest at a rate that is fixed at the beginning of that time period.
  • Liquidity and flexibility: It makes sense to hold CDs until maturity. If you own a CD in a brokerage account and need access to your savings before maturity, you might have to sell it for a loss and also pay transaction fees. One way to improve access to your money and avoid fees with CDs may be by building what is known as a ladder. 
  • Insurance: CDs are eligible for FDIC insurance. A brokerage account can aggregate brokered CDs from different FDIC banks in one account, so you may be able to put more than $250,000 in CDs without running into the FDIC insurance limit.
  • Uses: Because they should be held for specific lengths of time, CDs are more useful for earning yields and preserving cash rather than for holding cash that you may need to access before the CD matures.

Individual short-duration bonds
  • If you have cash that you don't need access to immediately, you may want to consider putting some in short-duration bonds, which carry slightly more credit or interest rate risk than savings accounts, money markets, or CDs while potentially offering more return.
  • Liquidity and flexibility: You can sell your bonds before maturity if you choose. However, you may not be able to find a buyer, forcing you to accept a lower price if you need to sell your bond. If interest rates rise, the price of your bond will fall, so if rates have gone up since you bought your bond, you may experience a loss if you sell it before maturity. 
  • Insurance: SIPC insurance is available for brokerage accounts that hold bonds, subject to the limits previously mentioned.
  • Uses: Short-term bonds' prices can rise and fall more than those of other cash alternatives, so they are more useful for those seeking income over the longer term than for holding cash that you may need soon.
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6 Phases of Retirement

3/29/2021

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​The classic view of retirement is that it is the third and “final” phase of life - after we go through the first phase of youth and learning (from birth to adulthood), and the second phase of our ‘productive’ working years (from adulthood until we can no longer work anymore), allowing us to reach a final stage of rest, relaxation, and leisure.

However, in practice, retirement itself is really a multi-phased experience – given both the substantive nature of the transition itself from what precedes it and the sheer duration 
of retirement that encompasses many years and decades (throughout which our lives continue to change).

Accordingly, Andy Millard highlights a series of 6 key phases of retirement, including:
  1. Honeymoon (when the initial retirement transition happens, and suddenly you’re free from work and have the time to take that extra-long cruise, finish that home project, or pick up an ad hoc hobby);
  2. Rest and Relaxation (once you’ve gotten through the honeymoon activities, where you settle into the ongoing routine of retired life and the extra time it allows);
  3. Disenchantment (when eventually it settles in that all this rest and relaxation is nice for a while, but then begins to lead to a sense of lost purpose and a gnawing wonder of “is this all?” and “what’s next?”);
  4. Reorientation (where we try to break ourselves out of the disenchantment phase by finding a new way to become engaged and have purpose, looking for new ideas and new possibilities, from taking up a new hobby to joining a new club, getting involved in a non-profit or even starting a new business);
  5. Retirement Routine (as the new reality becomes the new normal, with the new more-meaningful activities in retirement becoming the new retirement routine); and then, alas,
  6. Termination (the harsh reality that all good things come to an end… and that it is important to plan for it, even if only so we can better enjoy retirement as long as we can?).
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Comparison of Retirement Income Sources

3/28/2021

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Family Bank Trust 101 - Part C

3/27/2021

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In last blogpost, we discussed why including life insurance in family bank trust.  Now we will introduce a case study.

Example
  • Rosemary Mills, age 71, is a retired professional with two children and two grandchildren.
  • Her children are polar opposites. One child is an advertising executive who is married with two children. The other has never been married and has a history of trouble with the law and some substance abuse.
  • Her current estate value exceeds $10 million, so she will probably have an estate tax liability.

Goals and Objectives:
  • Rosemary is considering transferring a large portion of her estate directly to her grandchildren and would therefore like to leverage her GSTT exemption.
  • She places a strong value on education and wants future generations to incorporate this value in their own lifestyles; therefore, she would like to provide incentives in her trust document that would encourage all of her descendants to obtain a college degree.
  • Because of her son’s history, Rosemary is nervous about leaving him a lump sum inheritance. Additionally, she would like to encourage him to settle down and get a steady job. Consequently, she decides to include an incentive provision in the trust which requires the trustee to match her son’s salary—hoping this will provide him the incentive to get his life in order.
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Family Bank Trust 101 - Part B

3/26/2021

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In last blogpost, we discussed what is a family bank trust and why one needs it.

Why Include Life Insurance in Planning with a Family Bank Trust?

There are 2 major benefits:

1. Instant Liquidity
With a life insurance policy, one can rest assured that instant cash will be available to their loved ones upon their passing.

2. Tax-Efficient
Life insurance proceeds owned by a Family Bank Trust will ultimately pass income tax-free to beneficiaries.  In addition, the money that one gifts to the trust to pay premiums may be sheltered from gift tax and will reduce one's estate for estate tax purposes.  Furthermore, life insurance policy cash values grow on a tax-deferred basis and the death benefit of a Family Bank Trust-owned policy will be sheltered from estate tax.

What are the Profiles of One Who Needs a Family Bank Trust?
  • Anyone - not just an “ultra-wealthy” individual - who would like to create a family legacy to benefit successive generations over a long period of time
  • People who plan to leave substantial assets to grandchildren and therefore want to utilize GSTT exemptions as effectively as possible
  • Those who would like to promote specific goals and values in future generations

In next blogpost, we will introduce a case study - how a family bank trust works for someone.

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Family Bank Trust 101 - Part A

3/25/2021

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What is a Family Bank Trust?

A Family Bank Trust is a form of irrevocable life insurance trust; also known as a Generation Skipping Transfer Trust or Legacy Trust.  The trust allows its creator to minimize transfer taxes and maximize the legacy left behind to children, grandchildren and future generations. 

The Generation Skipping Transfer Tax (GSTT) applies to both outright gifts and transfers in trust to either related persons who are more than one generation below the donor or to an unrelated individual who is more than 37½ years younger than the donor.  Now that the estate, gift and GSTT exemption amounts are unified at $5.43 million for 2015, with proper planning significant amounts of wealth can be transferred without transfer taxes being imposed.

Why a Family Bank Trust?

A Family Bank Trust can help accomplish multiple goals:
  • Passes wealth from generation to generation without the burden of transfer taxes.
  • Minimizes a beneficiary’s potential to mishandle an inheritance and keeps trust assets out of the reach of a beneficiary’s creditors or divorcing spouse.
  • Promotes positive behavior in beneficiaries by requiring that they adhere to specific standards in order to be entitled to trust distributions, such as graduating from college, maintaining a career, and getting married.

In next blogpost, we will discuss how life insurance play a role in a family bank trust.
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Who May Benefit the Most by Using Life Insurance for Legacy Building

3/24/2021

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​People who can most benefit from legacy building are those usually within retirement age that have dormant assets.  These are typically assets they plan on leaving for heirs, a church, charity, or possibly to help pay educational costs for grandchildren. 

These assets are often held in low interest-earning accounts or vehicles, which may not be an efficient method of wealth transfer for the purpose of legacy building. These “legacy assets” may be leveraged into a greater benefit and a more efficient method of wealth transfer using life insurance.  Let’s take a look at a typical profile:

  • Is within the retirement ages of 55-75 and has a retirement plan in place
  • Needs death benefit protection or may have an underperforming life insurance policy that needs to be reviewed
  • Holds funds designated to leave to heirs or children savings vehicles such as savings accounts, or money market accounts, especially accounts designated as “payable/transfer on death” or POD/TOD
  • Has titled assets jointly with heirs
  • Has annuities coming out of surrender
  • Currently takes required minimum distributions (RMDs), but doesn’t have a current need for the funds

Usually, there are two types of people - those fully committed to the strategy and those who are committed now but may want to change their strategy down the road.
  • For the fully committed: Find a life insurance product that can provide maximum death benefit that meets their needs. Consider a guaranteed death benefit product.
  • For those committed now, but who may want to change: Find a life insurance product that offers the opportunity to build cash value.  The cash value may provide the client with alternative options, like using the potential cash value to help supplement retirement income.
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PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

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