Author Archives: Edi

Financial Guidance for the Younger Generation

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Modeling positive financial behaviors for the younger generation especially in affluent communities can pose unique challenges. Here are some key topics I’d like you to consider:

1.    Understanding the concept of “enough”: In affluent communities, where material possessions are abundant, it’s essential to teach the young (and not so young!) that wealth is not solely defined by possessions.  I like to keep my focus on President Roosevelt’s quote “Comparison is the thief of joy” and encourage a focus on spending that has lasting satisfaction rather than buying the next ‘in thing’. Usually, this includes understanding the role that money plays in their lives and how they wish to integrate financial security, spending, saving, and investing.

2.    Value of Budgeting and Understanding their Spending: Teaching younger generations to follow and understand their income and expenses is crucial for financial independence and achieving life goals like homeownership and retirement. Helping them understand their spending patterns provides opportunities for money conversations and creates comfort around money conversations. The goal is to encourage them (however slowly) to plan their spending and create sustainable financial habits that will last them a lifetime.

3.   Understanding the value of employment: Encouraging loved ones to recognize the value of a job or career is part of growing up. We all know that employment provides value beyond earning money since it can add unique opportunities. It will also provide them with a steady source of income, so they have money to eat out, do fun things with friends, and hopefully also begin saving.

Financial literacy for the younger generation is challenging since so much of their world is imbued by marketing. The challenge is how to model or engage with them not to crave what others seem to have but rather to understand what brings them long term satisfaction.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

QCDs – An Age Disconnect with Regular RMDs

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QCDs or Qualified Charitable Distributions transfer money from pre-tax accounts directly into a Charitable account. This direct distribution of pre-tax dollars to a charity will not be recognized as income and not added to your tax filing since it is under a QCD transaction. The distribution sent to the charity is usually part or the entire annual RMD (required minimum distribution) amount. QCDs are often used when they help avoid income taxes and increased Medicare premiums for RMDs that are not needed to fund lifestyle spending.

The pairing of QCDs and RMDs used occurs at the same age but not anymore.  This has created a disconnect between the QCD and the RMD age for regular pre-tax accounts. QCD rules permit that QCDs begin at age 70½ but Required Minimum Distribution (RMD) age has changed from 70½ to 73+ (depending on your birth year) on saved regular pre-tax accounts. Since there is no requirement to make a pre-tax distribution until age 73+, QCDs shouldn’t be used until the start of RMD age.

On the other hand, for inherited IRAs, QCDs can begin at age 70½.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Interest Rate Easing Soon?

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The Federal Open Market Committee’s last meeting (in May) clearly described their concern over stubborn inflation (at 3.4%) and indicated they would keep the same Federal interest rate (at 5.25%-5.5%) until inflation consistently approaches the 2.0% target. They were also in agreement to increase the interest rate if inflation and unemployment increases significantly. Next meeting is on June 11-12 (next week).

On the other hand, this month, we saw the first of the Group of Seven central banks kick off an easing cycle when The Bank of Canada cut interest rates by a quarter of a percentage point (now at 4.75%). The rationale provided is that inflation in Canada (measured at 2.6%) is heading towards the 2.0% bank target.

Is this a sign that the Feds will do the same at their next meeting? Maybe, if inflation has dropped below 3%.

Any drop-in interest rate is beneficial to those seeking a new loan or mortgage BUT the opposite is true for those seeking to retire early (before age 59½) and use an exception to withdraw from the pre-tax accounts without paying a penalty … see the ‘Early Retirement:’ article below.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Early Retirement: Distributions Without Penalty Before Age 59½

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If you are considering retiring early and would like to use your pre-tax retirement accounts before age 59½ then you have significant planning to ensure you make the most of your retirement assets. One possibility is to use a 72(t) exception to avoid the early withdrawal penalty from pre-tax accounts. This 10% penalty is in addition to ordinary income tax.

An exception to the 10% penalty is the 72(t)(2)(A)(iv) OR “a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary”. This exception allows for regular payments from pre-tax accounts but must be tailored to your specific situation.

In general, the 72(t) exception requires that a calculated payment be withdrawn from a pre-tax account annually for the longer of five years or at age 59½. The advantage is that the 10% penalty can be avoided but the disadvantage is that changes to withdrawals or distributions are NOT permitted, or penalties apply. When calculating the annual payment, we consider the age of the pre-tax account owner, the balance in the pre-tax account, and the current interest rate. Higher payments are obtained at later ages, with higher account balances and at higher interest rates.

To help you visualize how the 72(t) amortization works, the table below shows annual payments for a single person at different ages on an account with $100K in pre-tax savings given that the current interest rate is at 6.16%.

Those thinking to retire early should consider using pre-tax assets (with the 72(t) exception) to support their planned cash flow but only if it is the best way to deploy all available assets. When using the 72(t)-exception you need to understand the implications of the rules since large penalties apply for errors or misunderstandings. If you are considering retiring early, we would determine how to best deploy your assets throughout your retirement plan.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

H.S.A. Contributions – Did You Know?

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Health Savings Accounts (H.S.A.) in retirement can be useful tax-free pools of money that can be used for health care expenses without increasing taxable income and potentially increasing Medicare premiums (through IRMAA). Contributions to H.S.A. accounts are only permitted if you participate in a specific type of health care insurance (High deductible) and only prior to Medicare enrollment.

Since H.S.A. contributions are NOT permitted with Medicare it often leads to misunderstandings on how to contribute maximally to an H.S.A. during the year in which you have both a high deductible H.S.A. insurance plan and eventually change to a Medicare plan. H.S.A. contributions must be pro-rated for the months prior to Medicare engagement (unless you are in an employer funded H.S.A.).

Couples contributing to a family H.S.A. who are over age 55, are entitled to contribute an additional $1K each as part of their catch-up annual contribution. Unfortunately, H.S.A. accounts can only accept one catch-up contribution, so couples are often uncertain how to fund their H.S.A.’s fully. The couple must contribute $1K catch-up each to two different H.S.A. accounts and only contribute the family core amount to one of the two H.S.A. accounts. Let us know if you have questions.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Small Business Owners: New BOI Filing Under Appeal

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The potential for harm caused by less-legitimate entities compelled Congress in 2021 to pass the Corporate Transparency Act (CTA), which created a new requirement for many small businesses (mostly LLCs and corporations) to report information on their “beneficial owners”. The main purpose is to uncover ownership within ‘Shell’ companies. The Beneficial Ownership Information (BOI) report will need to be filed with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). It requires filing contact information on those who own at least 25% of, or who otherwise have substantive control over the business. Failure to file (or file it incorrectly) will result in penalties of up to $500 per day.

Most companies with just one or a handful of owners will have relatively simple BOI reporting and we can help you complete these (for which the primary hurdle is simply remembering to submit an initial BOI report ahead of the January 1, 2025, deadline for pre-existing companies). On the other hand, companies with more complex ownership and leadership structures will need legal assistance to ensure they record all beneficial owners.

But before you begin looking at filing your BOI or whether you will be required to file, keep in mind that the CTA was ruled unconstitutional earlier this year by U.S. District Judge Liles C Burkeand is currently under appeal. It is generally accepted that this is a valuable anti-money laundering tool and will be ruled constitutional.

We’ll monitor and revisit BOI filing in November/December with our business owner clients.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Schwab Alliance Platform & Cyber Security Updates

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The transfer from TDAI to the Schwab Alliance platform has been completed and I wanted to provide you with an update. We are still experiencing longer delays to complete tasks on the Schwab platform (than we did on the TDAI platform) but we have started to see improvements.

We have noticed that Schwab likes to email and send mailers far more often than we experienced when TDAI was the custodian. I would like to double down on my usual recommendation that you NOT click on hidden links within emails – Schwab appears to send many emails with hidden links. You could instead log into your Schwab online account directly and address Schwab’s emailed request. Our concern stems from potential spoofing of both the email and the Schwab website. Our priority should be to keep your Schwab Alliance login credentials safe and secure so that we can maintain digital safety of your portfolio. To do so please be sure you only log in using the Schwab legitimate website and from a safe electronic device.

Mid-January, Schwab sent an email to those who participate in the Schwab sponsored individual 401k plan regarding a new ROTH 401K plan feature. This is good news but for now, please ignore it. We can discuss how it works at our next meeting particularly if it might be useful for your financial plan.

If you are having difficulty logging into the Schwab Alliance website, please let us know. If you have not yet logged in to the Schwab platform then you will begin receiving paper reports in April unless you log into your account before March 27, 2024.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Social Security Benefits Primer

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Social Security benefits were never intended to be the sole financial support during retirement but for 21% of retirees Social Security benefit is the only source of income. For most American workers, Social Security benefits are the only guaranteed retirement income that is also inflation adjusted each year.

All workers in America are entitled to pay into Social Security and based on their pay history, to receive a lifetime income each month starting from ages 62 to 70.

Ideally prior to retirement, you’ll also maximize other income sources that include taxable savings, IRAs, ROTH, Qualified plans (401K, 403b, 457b), annuities, deferred compensation, and employer pension plans.

Since your future Social Security benefit is calculated from your Social Security work history, you must ensure (and correct if necessary) that this history has been recorded correctly at www.socialsecurity.gov/myaccount OR the new www.ssa.gov/myaccount.

Social Security benefit calculation uses your top 35 highest earning years and projects your estimated benefit at your FULL RETIREMENT AGE (FRA).

Your FRA is based on your birth year and, as you can see on this table, it has been increasing. In fact, since 1983 when the FRA was 65, it has been increased gradually so that by 2025 (for those born in 1960 or later) the FRA will be 67. To understand Social Security, you must first determine your FRA.

When can you collect Social Security? At FRA, you can file and receive your full benefit (100%) based on the amount of Social Security tax paid to your Social Security number. The earliest you can collect Social Security benefits on your record is at age 62 (when your FRA amount is reduced ½% for each month or 6% less each year until FRA) and the latest at age 70. If you delay past your FRA, you earn Delayed Retirement Credits (DRC) and for each month it will grow two-third of a percent or 8% per year until age 70.

Example of how benefits are calculated: If you were born in 1960 and your FRA amount is $1K/month then collecting at age 62 will result in a lifetime amount of $700/month but delaying until age 70 would result in $1,240/month (plus annual COLA adjustment).

When creating your financial plan, we will consider different Social Security timing strategies based on your financial and longevity expectations. When deciding on your best timing we always request that you consider your health, your family’s longevity, and known increases in population longevity.

Compared to what you earned, what can you expect to receive?
As an example, an average earner ($58K) could receive $1,907 or $23K per year in benefits for life, starting at FRA. On the other hand, those who paid Social Security at maximum earnings for 35 years would receive $3,822/month or $45K per year if 2022 was their FRA.

What if you take early benefits while still working? It seldom makes sense to work and take Social Security benefits early because your benefits are reduced by $1 for each $2 earned above an annually set earning level (in 2024 you can only earn up to $22,320 per year ($1,860/month) before your benefits are reduced). Once you reach FRA your Social Security benefits are NOT reduced (regardless of earnings).

We encourage each of you to work with us to review your Social Security history and then use your financial plan to make the best Social Security timing decision for you.

Applying for Social Security should be started three to four months prior to your chosen Social Security benefit start date. You would apply online at www.socialsecurity.gov or call (800-772-1213) or go to the local Social Security office.
One last and very important cyber security reminder: Protect your Social Security log in information (or credentials) – make certain that you are using a secure device when you log into your account.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

FDIC Changes for Trust Accounts

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Effective April 1, 2024, accounts held under the name of a trust will be insured by FDIC for up to $1.25 million, rather than the current $250,000 limit. Revocable trust (which include informal trust accounts such as Pay on Death (POD) or As Trustee For (ATF)) accounts are insured up to $250,000 per beneficiary per FDIC bank.

If we have created several taxable accounts at different FDIC banks, we may be able to consolidate into fewer accounts with higher balances (while retaining FDIC protection) if the trust has more than one beneficiary (to a maximum of 5) after April. We will review this at our meeting(s) if it is relevant to your finances.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

The Crypto Saga Continues

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Though Bitcoin gets the Crypto headlines, I continue to remind you that it is Blockchain that is the promising digital technology that has a place in investment allocation in a long-term retirement portfolio.

Though in 2017 Crypto looked promising, in 2022 we saw the complete collapse of Terra (4th largest cryptocurrency and its related Luna coin) that was believed to be the most stable crypto (it was linked to US dollar) and in 2023 we saw the high-profile collapse of cryptocurrency exchange FTX (Sam Bankman-Fried was convicted of fraud and is awaiting sentencing in 2024). Bitcoin was at $64.4K in November of 2021 and the same single coin was worth $16,500 by November 2022 and was back at $34K by November of 2023. That is certainly too much volatility for a retirement portfolio and yet speculators, media, and pundits promote that it be included. The most stable Cryptocurrency platform and coin are currently Ethereum and its Ether coin, but it is still very volatile.

The progress and growth of Blockchain as a financial digital technology (rather than as a currency) has increased and it looks like it may be an important part of productive AI (Artificial Intelligence) technology development. In addition, Blockchain technology has already seen much revenue growth. Consider that the revenue was around $35M in 2019 and in 2023 increased to $1.75B.

As time passes, we are seeing more acceptance and conversation on how to best allocate digital assets in a portfolio. The most recent was the SEC acceptance of Cryptocurrency-based exchange-traded funds (ETFs) which are primarily for currency allocations. Unfortunately, we are also seeing danger signs. Use of cyber/virtual currency to fund terrorism and destabilize governments may be its undoing since a significantly large and obvious connection between Blockchain and terrorism will cause a global crackdown. My hope is that a crisis will instead generate protective processes/tools which may allow Cryptocurrencies to compete directly with fiat currency.

For now, Cryptocurrency is an investment to be consider like you might consider investing in art, collectible cars, rare coins, and stamps. It can gain and lose a lot of value and not be liquid to use in a crisis particularly during your retirement.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com