Well, the SECURE Act was signed into law yesterday (20Dec2019)...

What is the SECURE Act? Beyond the acronym (Setting Every Community Up for Retirement Enhancement), it is the most sweeping retirement legislation that Congress has enacted within the past decade. Is this new legislation good or bad? While there are potentially some benefits, I am not the hugest proponent of it. Let’s cover why.

Here are some of the major provisions of the SECURE Act:

• Required Minimum Distributions will now begin at age 72 (versus 70.5 years of age), as long as you turn 70.5 years of age after 01Jan2020 - I LIKE this provision!!;

• You can contribute to your traditional IRA after age 70.5 as long as you have earned income - I LIKE this provision, but it does mean folks are working longer;

• Most inherited IRAs will now need to be distributed within 10 years - I really DISLIKE this provision (the SECURE Act funds its passage through this revenue provision);

• You may see more annuity options through your 401k provider - I generally dislike this provision because annuities often carry high charges and expense ratios, which benefit the insurance companies and NOT the investor (although annuities can have their place for a select few investors).

With the elimination of the stretch IRA and the addition of higher cost annuity options for 401k participants, some of the beneficial SECURE Act provisions are seeming outweighed by these less beneficial provisions.

If you have questions about the effects of the SECURE Act upon your retirement plan or investment portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

Taxes (and Rebalancing)!

We all should rebalance our portfolios at least annually or when they deviate from our desired asset allocation by a set percentage. I know, I know … portfolio rebalancing is right up there with pulling out the refrigerator and cleaning behind it. However, may I propose that rebalancing your portfolio is much more financially rewarding from a risk reduction perspective than one might imagine.

Now that we are entering our eleventh year of a bull market, an individual’s stock allocation could be off by more than 20% from their original 2009 asset allocation. For example, if your asset allocation in 2009 was 50% stock and 50% bonds, your stock exposure could exceed 60% or even 70% stock at this point (if you have not been rebalancing along the way). And, if you are on the cusp of entering retirement, this level of stock exposure is just too high for most investors.

If this sounds familiar, then the question you should be asking yourself is not “if” the stock market will experience a correction, but “when.” Since a decline in the stock market is inevitable at some point in the future, it then becomes a question about your sequence of returns risk (i.e., the order of your annual investment returns and withdrawals) and do these sequence of returns forecast a statistically successful retirement. Stated another way, if your stock allocation is too high and you experience a significant market decline in the early years of your retirement, you may be going back to work. Yuck.

With the before mentioned premise in mind, some folks might still balk at rebalancing because they are worried about triggering tax consequences. As such, here are some ways to rebalance while minimizing tax consequences:

• Rebalance inside of your tax advantaged accounts first (think IRAs and your 401k) because these trades will not trigger taxable events;

• If you are still directing money into your portfolio, use the “new” money to purchase additional shares of your underweight asset class(es);

• If you are subject to a Required Minimum Distribution (RMD), use the RMD to sell assets from the appreciated or overweight asset class(es);

• Rebalance by selling assets with a high cost basis, thereby reducing your tax liability; and/or

• Gift low cost basis assets to a charity, thereby removing these high capital gain assets from your portfolio while receiving the full appreciated value as a deductible donation.

If you have question about rebalancing your portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

An interesting article about the "FIRE" (Financial Independence Retire Early) lifestyle! Frugality to the MAX?

Do you want to retire early? Do you have what it takes to retire early? Can you live (extremely) frugally while preparing for retirement? If so, and beans and rice for dinner 5 out of 7 nights a week seems acceptable for such a cause, then read on.

This “frugal” lifestyle can be best summed up as a minimalist lifestyle. If you don’t have a lot of possessions and/or expenses when heading into retirement, then your overhead (or cost of living) in retirement should be pretty minimal as well. Stated another way, if your household expenditures heading into retirement are around $100K annually, then your retirement investment portfolio may need to be somewhere between $1M and $2M to support your lifestyle (assuming a 4% withdrawal rate). However, if you overhead heading into retirement is $40K per year, then you may be able to retire with a nest egg of less than $1M and some intermittent part-time work sprinkled in throughout the year. This may not be an ideal retirement for everyone, but for some, it sure beats putting in 2,000+ work hours a year, in addition to their commute.

Here are some ideas for achieving such a goal:

1) Cut existing expenses to a bare minimum (no cable TV, streaming services, lattes, new clothes, etc.); during this phase your debt should decrease while your savings increase; utilize budget tracking software to help find unnecessary expenses and to help track your newly growing savings.

2) Now that you have cut all unnecessary expenses (and I mean ALL), you will need to find a second job or additional sources of income (added bonus, since you will have even less free time with your second job, you will probably spend less money); also, as you make more money, do not spend it, but save it (this part is key)!

3) Continue to learn as much as you can about the “FIRE” modus vivendi and join one or more groups that espouses such a lifestyle, as you may need their support and/or knowledge at some point.

Above all persevere. It won’t be easy and there will be some tough times but if it truly resonates with you, it can be done. A minimalist lifestyle is not for everyone, but for those individuals that it does appeal to, it is a way to financial independence and early retirement.

If you have questions about retirement or the minimalist lifestyle, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients.

For more information about this topic, click on the title above.

"Marginal" versus "Effective" Tax Rate? What's the difference?

Succinctly stated, your marginal tax rate is the amount of tax you pay on your last earned dollar and your effective tax rate essentially represents the average tax percentage you pay on all of your earned income.

Why do these two differ? Because the United States employs a progressive tax system, i.e., a system that requires tax payers to fork over more money as their income increases. Although the progressive tax system has its detractors, e.g., fans of the flat-tax, Fair Tax, or Value Added Tax systems, many find it to be inherently fair as those who earn more, pay more in taxes. Stated less abstractly, our progressive tax system currently has seven (7) tax brackets ranging from a low of 10% to a high of 37%.

So why might the concept of a marginal tax rate be of import? By way of example, it becomes important when deciding whether to contribute to a Roth account or a regular tax-deferred account. If you expect to be in a higher marginal tax rate in retirement, then you may decide to utilize the Roth option. However, if you are currently in a high tax bracket (and you may be in a lower tax bracket in retirement), then you may want to utilize a regular tax-deferred account as your tax savings will occur in the year of your contribution, i.e., at the higher marginal tax rate.

If you have questions about your marginal or effective tax rate, feel free to contact Intelligent Investing at www.mynmfp.com/new-clients.

For additional information about the topic, please click on the title above.

Here are the Tax Brackets for 2019!

These are the tax brackets that you will use for filing your taxes in 2020 for the 2019 tax year. As expected, the brackets have increased a little bit since last year.

Tax Bracket Single Married Joint Filer Married File Separately HOH

10% $0 to $9,700 $0 to $19,400 $0 to $9,700 $0 to $13,850

12% $9,701 to $39,475 $19,401 to $78,950 $9,701 to $39,475 $13,851 to $52,850

22% $39,476 to $84,200 $78,951 to $168,400 $39,476 to $84,200 $52,851 to $84,200

24% $84,201 to $160,725 $168,401 to $321,450 $84,201 to $160,725 $84,201 to $160,700

32% $160,726 to $204,100 $321,451 to $408,200 $160,726 to $204,100 $160,701 to $204,100

35% $204,101 to $510,300 $408,201 to $612,350 $204,101 to $306,175 $204,101 to $510,300

37% $510,301 or more $612,351 or more $306,176 or more $510,301 or more

Never a bad idea to keep tax tables in mind when making contributions to your retirement plan, as well as, when investing in taxable accounts. If you have any questions about 2019 tax-deferred account contribution limits or the best funds/asset classes for your taxable accounts, drop me line at www.mynmfp.com/new-clients. For additional information about the topic, please click on the title above.

Should I borrow from my 401k? Not if you don't need to . . .

Why? Well, it might be considered a taxable event and, worse yet, it may be subject to a 10% penalty in addition to your normal tax bracket rate. By way of example, if you are in the 22% Federal Tax bracket and fail to pay back $10,000 worth of your loan, you could end up owing $2,200 in Federal Taxes, plus an additional 10% penalty of $1,000 if you are younger than 59.5 years of age. That $3,200 is quite a bit of taxes to owe for access to your money.

Here are some pros/cons of borrowing from your 401k (provided your 401k plan permits loans):

Pros

I pay interest back to myself (and not to a lender);

I have 5 years to pay back the borrowed money (and even longer if borrowed for a home); and

You can borrow up to $50,000 or 50% of your vested account balance.

Cons

My contributions to my 401k plan during my payback period may be limited or not allowed (also, matching employer contributions may be adversely affected as well);

Your 401k account balance will most likely be smaller at retirement; and

Acceleration of your note balance will occur if you quit your job or are laid off during the repayment period.

Sometimes, a loan from your 401k seems like your only option. But, before doing so, you may want to contact a financial planner (www.mynmfp.com/new-clients) to discuss what other options are available, e.g., do you have a Roth account that has been open for more than 5 years? For additional information about this topic, please click on the title above.

Don't let Divorce wreck your 401k!

Divorce is never easy. And mixing emotions with money can make it even harder. So, seeking the consultation of a financial planner can be very helpful during this stressful time.

What are some things you may want to consider?

• Do you live in a community property state or a common law state? Under community property laws, property acquired during marriage is to be split evenly. Under common law, various states apply various factors in determining equitable distributions, such as: length of marriage, education levels of each party, career earning potential, size of the accounts, etc.

• Craft your Qualified Domestic Relations Order (QDRO) carefully (with your 401k plan description in mind) - your Judge will sign off on this and your plan administrator will execute it in accordance with the Employee Retirement Income Security Act (ERISA).

• Remove funds only after your plan administrator has signed off on the QDRO - no penalties or taxes should be incurred at this point, as distributions of property under a properly executed QDRO are typically not seen as taxable events.

• How to take your distribution? Preferably as a direct IRA rollover or TSP rollover (if you were a federal employee), as a cash out (if the QDRO permits), or wait until your ex (the account owner) retirees. Needless to say, a cash out should be your last option.

Distributions from a tax-deferred vehicle, e.g., a 401k or a SEP IRA, pursuant to a QDRO can be very complicated and one should seek legal, tax, and financial advice before embarking on this endeavor. If you have a question about distribution of assets during a divorce proceeding please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients. For more information about this topic, please click on the title above.

You can save more for retirement in 2019!

After not rising for many years, retirement savers can rejoice as they can save a few extra dollars in 2019. The increase is not an astronomical increase, but an increase, nonetheless. Here’s the breakdown:

IRA’s - contribution limit for an individual is now $6,000 in 2019 (plus a $1K catch-up contribution for those 50 and older); deductible phaseouts are up $1K for singles/head of households and up $2K for married couples

401k/403b/457/Federal TSP - contribution limit for an individual is now $19,000 in 2019 (plus a $6K catch-up contribution for those 50 and older)

SEP IRA’s/Solo 401k’s - contribution limit for an individual is now $56,000 in 2019

For more information about additional defined contribution and defined benefit plan contribution limit changes please click on the title above.

A quick primer on tax loss harvesting . . . in light of recent market turmoil!

Nobody likes selling a loser, but sometimes there can be a silver lining. Tax loss harvesting allows an investor to reduce their tax liability by selling selected stocks that have lost value. And, everybody appreciates not having to pay more in taxes. As such, here are some tax loss harvesting tips:

• tax loss harvesting works best in taxable accounts

• remember, investment losses are first used to offset capital gains of the same type (e.g., short term losses offset short term gains)

• net losses of either type (short or long term capital gains) can be used to offset the other

• additionally, overall net capital losses can be used to offset up to $3,000 of ordinary income (and any excess net capital losses can also be carried forward for future tax years)

• determine whether first-in-first-out (FIFO) or choosing specific shares will allow you to pick shares with the highest cost basis

• if tax loss harvesting, don’t buy a “substantially identical” security within 30 days of your tax loss sale (i.e., be aware of the wash sale rule) as this may prevent your ability to take a tax loss on the sale

As always, before conducting any tax loss harvesting activity, it is best to consult with a tax professional. Click on the title above for more information.

Tax planning in retirement? Here are some ideas . . .

They say you should never let the tax tail wag the dog, but why pay more in taxes than you need to. Enter, taking some time to plan your income streams during retirement; wherein, a little planning regarding your income sources can save you a lot in taxes.

Some new retirees may not be aware that their social security benefits can be subject to increasing levels of taxation and that they may need to file quarterly tax payments. Moreover, some folks may not be aware that if their income rises too high during retirement that up to 85% or their social security benefit can be subject to taxation. Maybe then a little tax planning is in order.

With that thought in mind, generally, investors would prefer to have three sources to draw from during retirement: taxable accounts (e.g., brokerage accounts), tax-deferred accounts (e.g., traditional IRAs and 401k accounts), and tax-free accounts (e.g., a Roth IRA). By utilizing these three different accounts at different times, one can best control their tax liability,

For example, some folks may enter retirement in a low tax bracket, so generally withdrawing from tax-deferred accounts and taxable accounts will minimize their tax liability when their income is lowest (while also reducing future RMD tax liability). Since a married couple can report up to $77K in 2018 income while still remaining in the 12% tax bracket, it can be advantageous to use this income bracket for taxable and tax-deferred account income. For other folks who may enter retirement with high income levels (e.g., due to pension income and/or rental income streams) and anticipate that they will drop over time, they may wish to consider using their tax-free accounts if they still require additional income (thereby, avoiding taxation at their highest marginal rate).

Remember though, that everyone’s tax situation is different and that you should check with a qualified tax professional to see if these tax strategies would work for you. The key is though, a little advance planning about your anticipated income streams can reduce the amount of taxes that you pay.

For more information, please click on the link above!

Got the RMD (Required Minimum Distribution) blues? Rebalance!

Some older investors love to hate their RMDs. Why, you may ask?

Well, some may not need the money, while others are not sure what to do with the proceeds of their distribution (e.g., how to reinvest or how to minimize the tax consequences of their distribution).

Enter: rebalancing.

Not necessarily a solution to the above mentioned RMD problems, but possibly a silver lining to the cloud of unwanted distributions. For you see, although rebalancing may be something we all find nerve racking (and counter-intuitive because we are selling our winners to buy more of our losers), it, nevertheless, improves a portfolio’s returns while also reducing a portfolio’s risk. So, the next time you are dreading your RMD, use it as an annual reminder to rebalance your retirement accounts. Something you needed to do anyways!

**Remember, you don’t need to wait for an RMD opportunity to rebalance your portfolio. All investors can rebalance inside of their tax-deferred accounts without incurring tax consequences whenever they want!

These metrics can help you decide how tax-efficient your fund is?

Generally, index funds and total-market index funds are tax-efficient due to their inherent low turnover. Moreover, some ETFs can also be tax efficient because they can exchange securities in kind (which avoids tax liability) instead of selling. But, what other metrics can be tracked to help us determine a funds tax efficiency? Here are some interesting ones you should be following:

• after tax returns vs. “tax efficiency;”

• the tax cost ratio (a measure of a funds annual return reduced by taxes paid on distributions); and/or

• the potential capital gains exposure of a fund (a metric that measures all the gains yet to be distributed by the fund)

By paying attention to not only a funds turnover ratio, but also the funds after tax returns, the tax cost ratio, and its potential capital gains exposure, you will help better ensure its true tax-efficiency. Clink on the link above to learn more!

How much $$ can I save in my retirement accounts?

A good article detailing 2018 contribution limits for different retirement account options for all parties saving for their future. Thankfully, our retirement account options permit a pretty penny to be saved if one’s income allows. For example:

IRA (below age 50) - $5,500

IRA (age 50+) - $6,500

401k (below age 50) - $18,500 + employer match

401k (age 50+) - $24,500 + employer match

Solo 401k (below age 50) - up to $55,000

Solo 401k (age 50+) - up to $61,000

HSA (below age 55) - $3,450 (single); $6,850 (family); add $1K for those 55+

As such, if funds are available, a person below the age of 50 can save $24,000 rather easily (IRA $5,500 plus 401k $18,500). However, that $24K can increase once you add in employer matches, as well as, HSA contributions, if permitted.

Possible penalty free withdrawal options from an IRA before 59 and 1/2 years of age . . .

A great article detailing how, in limited situations or circumstances, one can potentially withdrawal money from an IRA without incurring a 10% penalty. As imagined, these situations are rather limited:

• disability (i.e., where an individual cannot participate in gainful activity or employment);

• one’s medical expenses exceed 10% of their AGI;

• to cover health insurance for themselves, their spouse, and their dependents;

• to cover qualified higher education expenses;

• a first time home purchase;

• withdrawals that meet I.R.C. section 72t exceptions (see earlier post for a further explanation of this option); and

• beneficiaries of an inherited IRA (these beneficiaries are required to take withdrawals).

Saving for College? Do I use a 529, a Coverdell, an UGMA/UTMA account, or a Roth IRA?

A great article explaining the different options that folks have when investing for college. With a 529 college savings plan, you might enjoy a state tax deduction and the potential of contributing up to $150K as a married couple in a single year when utilizing the 5 year election method; however, plan fees and limited investment options can diminish a 529’s luster. That being said, it is still probably one’s best option when planning for college. Click the link above to discover your best options for your particular situation.

Taxable Accounts and when to use them . . .

A good article about when to use taxable accounts.  Generally, it is best to use an employer sponsored tax-deferred account (e.g., an IRA or a 401k plan) when saving for retirement.  Such accounts typically allow for pre-tax contributions, tax free growth of your money, and sometimes even include employer matching contributions.  However, some folks may not have access to an employer sponsored plan and are limited to the $5,500 or $6,500 (for those 50 and over) one can contribute per year to an IRA.  Although, saving approximately $6,000 per year is not a bad start, saving even more improves your likelihood of retiring earlier and living life a little more comfortably.  Hence, the first instance of utilizing a taxable account is to save more for retirement.  Such taxable accounts should take advantage of tax managed assets, i.e., securities that don't provide regular capital gains and dividend income but focus on stock price appreciation, index funds, or tax free bonds.  Other instances ripe for utilizing a taxable account include:

• You wish to retire before age 59 1/2; such taxable accounts would not be subject to the early withdrawal 10% penalty;

• You are saving for a long term goal (a long term goal other than college - you can use a 529 for college goals); or

• You may wish to actively trade or speculate with a small portion of your money.

A penny saved is a penny earned, even in taxalbe accounts!