Author Archives: Edi

2022: Current Retirement Savings Limits

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In 2022, 401K plan employee contribution maximums have increased by $1K to $20,500 and the catch-up (at age 50) remains at $6,500 (or a maximum of $27K). Total employer and employee contributions for 401K plans has increased to $61K. On the other hand, pension plan contributions are limited to $260K but the amounts are determined early in 2022. IRA contributions remain at $6K and for those over age 50 at $7K but tax deductibility is dependent on earnings and whether you’ve contributed to a 401K/403b plan. A Roth IRA contribution can be made instead of the IRA contribution, and it also has earning limits. Long-Term Capital Gain federal tax rates this year are still at 0%, 15%, and 20% dependent on taxable income levels but these are expected to increase in the new tax plan. Gifts can be made tax free to the recipient up to $16K in 2022 and for non-US citizen spouses this tax-free gift rises to $164K without additional paperwork. Keep in mind that these annual gifting exclusion limits are in addition to the currently huge lifetime tax-free gifting limit of $12.06M per person. The child tax credit and after-tax Roth conversion are part of the new tax plan under consideration.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Potential Tax Changes & Their Implications

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Over the last six months, a good deal of our time has been spent studying the implications of the many tax proposals that were circulating. From the American Jobs Plan, the Made in America Plan, the 99.5% Tax Act, and others, it is still possible that some tax plan will be passed soon. The critical task for us is to better understand what the implications are and what, if anything, should be done ahead of their passage.

We must accept that funding at the level needed to get us through COVID and now infrastructure improvements will require tax increases. It would seem that Congress was looking to fund the proposed plans using sales tax (example, gasoline tax) but this would impact those earning less than what President Biden promised he would target. There seems to be some agreement on taxing businesses at 25% rather than the current 21% (though 29% is still being discussed). Close to 140 countries agreed in October on a global minimum corporate tax rate of 15% targeting the largest international firms, so that’s already baked in. Other items being considered have large implications for those who earn over $500K a year and who have a large taxable gain (home or portfolio). Those expecting to sell a business or a home with a large gain may need to prepare for alternative ways to lower their taxable income or accept the large one-time tax liability.

Current proposals include long-term capital gains taxed at 43.4% from the current maximum of 23.8% (plus state) for those in the higher tax brackets. A change in the step-up in basis on death is also likely since it makes sense with increased capital gains taxes. This is expected to apply to couples with income over $1M (singles are likely to be at $500K income). Keep in mind, if you sell your home or your business you may find yourself in these higher brackets and therefore pay taxes well over 50% of the gain in one year, making it very important to plan for single-year large capital gain realization (for the time being, there is no exception for single-year events).

These proposed changes encourage us all to annually consider the use of Roth conversions, 401K Roth contributions, charitable planning (Donor Advised funds) and estate planning strategies.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Social Security – Essential Tidbits on Early Benefits

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We normally estimate that we need the same pre-retirement spending budget plus taxes to meet minimum retirement cash flow. Since Social Security was created to be a safety net, it only covers at most 40% of needed retirement cash flow. It is for this reason that additional savings are required to support retirement lifestyle cash flow.

The most important aspect of Social Security is that it is a lifetime benefit that is inflation adjusted and therefore holds a very unique place in any retirement plan and yet I find that it is often undervalued. Misunderstandings and short-term thinking can result in poor use of this very powerful resource.

More than a third of American workers claim Social Security benefits at 62, which is the earliest entitlement age, and also when they will receive the least benefit. This is referred to as early filing. With early filing the new lower-than-expected benefits are locked in for the remainder of one’s life. To highlight the difference, consider a person who at full retirement age of 67 would receive a benefit of $2,291 per month for life. If instead they file at age 62, their monthly benefit would be reduced to $1,487. This amounts to $9,648 less annually for life (or $17,844 instead of $27,492 each year), a significant decrease in retirement cash flow.

Claiming early Social Security benefits can be further reduced if you continue to work between ages 62 and your full retirement age. Early Social Security benefits will be dramatically reduced — up to a dollar for every $2 in earned income if your earnings exceed annual limits (usually the limits are around $19K of earnings though it changes each year).

There is a breakeven point for those thinking to file early. If, for some reason, you expect to die early and without a dependent spouse, then considering early Social Security benefits should be part of your planning.
Finally, many early Social Security claimants assume that Social Security is not taxed. In fact, taxation of Social Security benefits isn’t determined by a person’s age, but instead by income level. For example, if a married couple files jointly, and their income is above $44,000, then they will pay taxes on 85% of their Social Security benefits. On the other hand, if they earn less than that amount, they only pay tax on 50% of their Social Security benefits.

Always consider each available resource fully (including social security) to create the best support for your ideal retirement.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Gamification of Trading

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The suicide of a 20-year-old experimenting with trading on the Robinhood platform
has many calling for new regulations on trading. I think new regulations on the “Robo”
interfaces are required but not on trading. Robo platforms, like Robinhood, provide a
software interface that makes trading more like a game.

Brokerage firms have been on a serious race to engage directly with the young and the
inexperienced. Robinhood, E-Trade, TD Ameritrade, Charles Schwab, Interactive
Brokers, Fidelity, Merrill Lynch, and many others have all embraced commission-free
and zero-minimum balance trading on platforms that focus only on the upside
of trading. These platforms are more reminiscent of an animated game than a
serious financial transaction. Even those who have managed to make a little money on
day trading often fail to understand that there are tax consequences. They usually
reach out for assistance when they receive from these brokerage firms an unexpected
1099 with a large tax liability.

It is clear that what we need is more clarity on what is a game and what has real life
consequences.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

The American Rescue Plan of 2021: Highlights

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The details of the American Rescue Plan 2021 are still being processed BUT we know
that it doesn’t include RMD relief for 2021 nor increased minimum wage. It does
provide both 2020 and 2021 tax filing items. Below, I’ve outlined those that I found
most significant so far.

  1. “Stimulus Checks” For individuals: $1,400 per eligible individual for
    all dependents with stricter phaseout that start at $75K for individuals and at
    $150K for those married filing jointly (MFJ). File early if your 2019 tax filing
    does not qualify you for this stimulus.
  2. Expansion of Child Tax Credit: It provides an increased amount of child
    tax credit for those under $150K (MFJ) AND an increase to $400K (MFJ) in
    earnings for the base credits. In 2021 there should be an opportunity to
    receive more child tax credits for up to $400K.
  3. Extension of Unemployment Compensation: An additional weekly
    $300 Unemployment benefit was added, and coverage was extended until
    September 6th, 2021.
  4. 2020 Tax-free Unemployment Insurance income: For those receiving
    Unemployment Insurance in 2020, up to $10,200 of those earnings will be
    tax-free.
  5. Increased Premium Credit Assistance: Healthcare premium assistance
    extended from 2020 through 2021 with higher earnings.
  6. Tax Credit for Employers to cover COBRA for 3 months: Any
    employee involuntarily laid off will have free full COBRA coverage for 3
    months by the employer who will receive credits for paying their COBRA.
  7. Tax-free student loan forgiveness for the future – if a student loan is
    forgiven by 2025, it will be tax-free.

It will take time to distill what will be relevant for 2021 taxes particularly since we are
all still trying to understand and work through CARES 2020 tax rules and implications
for 2020. For now, it makes sense to slow down the 2020 tax filing and
ensure that your CPA is aware of all of the CARES 2020 and TARP 2021
rules before filing – luckily, we all now have until May 17th.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Resilience of Leaders

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Resilience is a required skill that is learned and leads to tangible results for all of us
and particularly for small business owners. It is during a crisis that a resilient leader
will be able to take calculated risks and think outside the box to create opportunities
and forge new ways to meet new challenges. It takes an immense amount of grit and
dedication to try new things and to find a new way particularly when things don’t work
out as expected. A resilient leader will always find a way to move forward. I was
encouraged to read a recent survey (The American Psychological Association (APA)) of
1,000 business owners which found that 61% are optimistic about business in 2021
(Millenia optimism was even higher at 75%). The resilient optimism of entrepreneurs
is inspiring. Here are takeaways from resilient entrepreneurs during this crisis:

Revisiting definition of success: I always encourage everyone to know their
definition of success and not let it be defined for them. The pandemic has caused many
to rethink their goals in life and what they find is truly valuable to them. For some, this
is about how they live each day and for others it is about their legacy. Your definition of
success allowed you to make tough decisions with confidence. It should allow you to be
at peace regardless of the outcome.

Changing what your business does: The pandemic has forced change or
disruptions that have illuminated a new path for some businesses. The American
Express Entrepreneurial Spirit Trendex found that 76% of businesses have already
pivoted or made a change and 73% of those that pivoted say they will change again in 2021.

Resilience allowed many to keep those things they most valued while making
essential changes. In some cases, new businesses were started and in others a new way of doing the same business was developed.

Changing the tools used: It is important that a business be aware and ready to
implement useful tools when appropriate. A study from Google and the Connected
Commerce Council found that 75% of business owners are using more digital tools
since early 2020. Among those who use these tools, the majority project less revenue
loss and more business revenue. These tools do require an investment of time to
evaluate since there are too many technology tools were the hype exceeds the
deliverable.

Starting a new business: According to the increase in Employer Identification
Numbers (EINs) applications in quarter 3 of 2020, we have a dramatic increase in new
businesses compared to 2019. Entrepreneurs are starting new businesses at record
speeds. Resilience and optimism are essential characteristics of entrepreneurs who
take the financial and personal risks to create, organize and operate a business.

Pausing your business: For some businesses, temporarily ceasing operations has
been hard but a necessary financial decision. It takes a lot of courage to go down this
road either to allow for an easier exit to meet personal goals or, more often, to allow
the business to restart and survive once it is reshaped to meet the new challenges.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Preparing Your Family Finances and Our Role

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How do we prepare for the loss of someone who plays a lead role in your family’s financial life? This can be a partner, a spouse, a parent, or even yourself. Aikapa’s role during such a crisis focuses on ensuring that the family will have the available cash flow until the transfer of the estate is completed AND on providing the information that the Estate attorney and CPA require to transition the estate efficiently. Below, I’ve outlined how we can prepare for such a loss.
1. Short-Term Cash Flow: Make certain that emergency accounts have enough cash to support family expenses for 6 months and that the account is available to those left behind. That means that the family has access to the login information and that the account is titled properly (T.O.D., Joint or Trust are the usual titles).
2. Consolidate Financial and Legal Records:  It is useful if the family has access to financial and legal records.
a. We can easily generate financial information needed for accounts that we directly manage.
b. It would be useful for the family to also have original financial records for accounts or finances not under our purview.
c. Similarly, we would benefit from information on former and current employer benefits and contact information.
d. Finally, the estate documents should also be easily available by the family or we should have a copy filed with us for reference.
3. Verify that you have the Appropriate Account Titling:  The accounts that take more effort to transfer are those titled under the individual’s name unless they have a wrapper to make them non-probate assets. We will use a T.O.D. (Transfer On Death) wrapper that bypasses Probate Court if your Estate plan doesn’t indicate otherwise.
a. We can easily adjust the title for those accounts that we directly manage. We regularly review these against your wishes and your Estate plan. 
b. Accounts held at other institutions AND under an individual’s name will need your management and update (check with us if unsure). We will consult with your Estate plan and make recommendations, but it will be up to you to ensure these are implemented. Example of accounts that we find are often missed include checking accounts, savings accounts, employer stock accounts, options, 529 and inherited accounts held at other institutions.
c. Other assets, such as real estate, need to be titled correctly as specified in your Estate plan. We can guide you, but you must implement these yourself.
4. Complete and Update Beneficiary: We sometimes find that although everyone is well intentioned, beneficiary designations are missed. Though we find this most often with employer accounts, we do see it also with other accounts.
a. We can easily review and update beneficiaries on accounts under our management and we do so regularly.
b. Accounts at your employer require that you check and make any needed changes yourself. Ideally you will also keep a copy of your beneficiary selection with your financial records.
c. Your home or other real estate may also need a beneficiary designation, but we follow your Estate plan since different states use different rules.
d. Accounts held at other institutions will also need to be updated with beneficiaries.
5. Availability of All Logins and Passwords. It is essential for the family to have access to login and passwords. This includes your computer, phone and online passwords. If you would prefer not to share this information then let us know WHERE the information is located, and we’ll share the location with family when and if needed.
As you would expect, we each respond in our own way to the death of someone close to us. Some focus on getting things done while others find themselves unable to function. The range of reactions spans the full spectrum of emotions. This is the way it should be and ideally, we strive to let them take the time to grieve without anxiety over finances. If we know all is in order, we can delay most of the initial tasks and allow the family the peace they need to deal with the loss while we create what will be needed by the Estate attorney. Once we know that the family has cash to support spending for 3-6 months, we work on generating a list of assets that are part of the decedent’s estate. We generate this initial information from our records (based on the financial plan and visual asset map). We then work with the family to update this information, but it is only after the family obtains death certificates that we can reach out and obtain exact information on items on this asset list. We need to ensure that we have the correct information on the title, beneficiary on record, total account balance and custodian for each asset. The Estate attorney will be able to begin their work only after they are provided with death certificates, estate documents, and our detailed list of assets. They will create an action plan, outline the process, estimate the costs and provide a potential timeline to settle the estate. The Estate attorney is the one responsible for legal filings and letting us know when the assets are ready for transfer. We are responsible for the actual transfer and settling of accounts. Dependent on the time of the year and with the guidance from the Estate attorney, we may want to delay the involvement of the CPA or bring them on immediately.

Once this process begins, it is imperative that we keep the lines of communication open throughout the process as the Estate settles and assets transition. There are time constraints associated with certain filings and activities related to settling the estate which makes it doubly important to work together. But it all begins with having your documents available, titled correctly, and beneficiaries clearly stated. We will focus on reviewing your estate documents during 2021 meetings.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

How does a tax-deferred IRA differ from a Roth?

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Tax-deferred savings (to an IRA or employer pre-tax retirement plan) reduce your tax liability today BUT are fully taxable (including gains) on withdrawal. The tax-deferral accounts are an excellent way to minimize your current taxable income. The goal is to use what would have been tax dollars as part of your savings. The main rules to keep in mind are that withdrawals shouldn’t be expected before age 59.5 AND that you MUST take mandated distributions (called RMD) when you reach age 72 (according to the new tax rules). Unfortunately, these accounts are now also not inherited in the same beneficial manner as in the past (these now follow the new Secure Act of 2019 rules).

A Roth on the other hand, doesn’t provide tax deferral when saved but it does provide tax-free dollars, on withdrawal. Contributions to a Roth are limited in amounts each year and not easily available for high earners. Whereas Roth conversions require income tax payment on converting pre-tax IRA dollars, not everyone is permitted to make Roth conversions. Fortunately, Roth IRAs are not impacted by the Secure Act of 2019 and remain free of RMD. They are also still inherited tax-free to individual or trust beneficiaries and are likely to be favored for those considering leaving a legacy.

As income tax rises (likely, given our debt load), Roth accounts will become even more powerful tools in retirement for those in the higher tax brackets. Currently they help us regulate your taxable income and keep taxes and Medicare costs reasonable during retirement.

We’d like to consider Roth conversions for you in years when you expect a lower tax rate. It is particularly useful when tax-deferred accounts are undervalued and when you have accumulated large tax-deferred accounts.

The basic takeaway is that a tax-deferred account should be maximized during years with high earnings (to reduce taxes) and high tax rates. When you expect a low earning year then a Roth conversion may provide you with an ideal situation BUT ONLY IF your retirement tax rate is expected to be high enough to trigger additional taxes or Medicare costs.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

New tax rules (Secure Act of 2019)

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As you know, we believe strongly that managing tax liability is essential to building wealth. The Secure Act of 2019 has made significant changes which we will use to create and action strategies best suited for each of you.
Everyone, near retirement, is aware that there was an extension to the Required Minimum Distribution (i.e., RMD) from age 70.5 to age 72. This is good for many since it gives you more control over your tax liability early in retirement, but it also has made the Roth accounts an even more powerful tool for some.

Sadly, the Secure Act of 2019 has made inherited IRAs a big tax burden for beneficiaries, particularly trust beneficiaries. Because of this, IRA accounts that use a trust as a beneficiary may need to be re-examined to ensure that the language allows beneficiaries to minimize their tax liability.
Let me know if these topics are of interest and we’ll include them at our next financial planning meeting.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Your Portfolio Allocation and Emotional Reactions: The Coronavirus and Portfolio Discipline

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Here we go again – we’ve been down a similar road before, so none of this is news to those who have been with us through prior overreactions by market participants.

Volatility is part and parcel of participating in the market. When fear grips the market, selloffs by those who react to that fear provide portfolio opportunities for those who understand and adhere to a strategy. It is AIKAPA’s strategy to maintain your risk allocation and either ride out the volatile times or rebalance into them. Meaning that if you don’t need cash in the short-term, we buy when everyone else is selling.

As news of the Coronavirus (or other events outside of our control) stokes fear and uncertainty on a variety of fronts, it is only natural to wonder if we should make adjustments to your portfolio. If you are reacting to fear, then the answer is a resounding NO. On the other hand, if you are applying our strategy in combination with an understanding of the impact on business, then the answer is likely YES. When an adjustment is indicated we look for value and BUY while selling positions that are relatively over-valued. If the market continues to respond fearfully (without a change in value) then we will likely continue to buy equities and may sell bonds to fund those purchases. The only caveats to this strategy are that we must know that you don’t have short-term cash flow needs, that we stay within your risk tolerance, and that we are buying based on current value (keep in mind that value is based on facts not fear).

If you feel compelled to do something, then consider the following:

  1. Contact your mortgage broker and see if it makes sense to refinance (likely rates will drop soon after a significant market decline).
  2. Seriously examine the impact this has on your life today and let’s talk about changing your allocation once markets recover.
  3. Review the money you’ve set aside for emergencies and prepare for potential disruptions if these are likely.
  4. Business owners should consider the impact (if any) on their business, vendors and employees. Particularly important will be to maintain communication with all stake holders and retain a good cash flow to sustain the business if there is a possibility of disruptions.
  5. Regarding your portfolio, if you have cash/savings that you want to invest, this is a good time to transfer it to your account and have us buy into the market decline.

Market changes are a normal part of investing. Risk and return are linked. To earn the higher returns offered by investing in stocks, it is necessary to accept investment risk, which manifests itself through stock price volatility. Large downturns are a common feature of the stock market. Despite these downturns the stock market does tend to trend upwards over the long-term, driven by economics, inflation, and corporate profit growth. To earn the attractive long-term returns offered by stock market investing, one must stay invested for the long-term and resist the urge to jump in and out of the market. It has been proven many times that we can’t time stock market behavior consistently and must instead maintain portfolio discipline (if you want a historical overview of markets, see the “Market Uncertainty and You” video on our website www.aikapa.com/education.htm).

It is your long-term goals and risk tolerance that provide us with our guide to rebalancing and adjusting your portfolio, not short-term political, economic or market emotional reactions. In your globally diversified portfolio, we will take every opportunity to rebalance and capture value during portfolio gyrations. This IS the benefit of diversification and working with AIKAPA.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com