Category: Financial Planning Concepts

Financial Planning Concepts

Criminal strategies to steal your wealth are becoming more sophisticated, more numerous, and more successful in achieving their nefarious objectives.¹ Are you prepared to defend the wealth and good financial reputation you spent a lifetime creating?

If you use a cellphone, computer, or other internet-connected device, the chances are high that you have been a target of some malicious scheme. Even if you didn’t click on a suspicious link in an email or respond to a seemingly legitimate text from your bank or credit card company, your adoption of interconnected devices and accounts is fertile ground for bad actors to attempt to steal your wealth or exploit your financial reputation to receive ill-gotten monies. 

How many scams can you name? Is it true if you can’t name a scam you are susceptible to becoming its next target and victim? The implication of this last question is unsettling; however, the U.S. Federal Trade Commission lists over two dozen categories of scams.² To defend against them, review the FTC’s site for articles and best practices to help protect your financial reputation.

A recent FTC consumer alert is entitled “Scammers Hide Harmful Links in QR Codes to Steal Your Information.”³ QR codes can be found in restaurants (to access the menu), public parking decks (to pay), entertainment venues (to gain entrance), etc. Scammers have capitalized on this technology to further their malicious schemes. In addition to the use of strong passwords and multifactor authentication, the consumer alert recommends you inspect the URL offered up by the QR code before opening it (i.e., looking for misspelled words or misplaced letters, etc.).

Another FTC consumer alert provides a timeless best practice in defending against financial scams.⁴ Entitled “Give Yourself Some Credit (Reports),” FTC attorney Seena Gressin recommends you regularly check your credit reports. Once you receive your credit report, review all the accounts listed to ensure no new accounts have been opened that you don’t know anything about. Furthermore, review the list of credit applications to ensure you recognize all of them. If you discover wrong information or suspicious activities within your credit report, take action to correct it. Contact the credit bureau to correct the wrong information in your credit report.  However, if suspicious activity is found in your credit report, contact both the credit bureau and IdentityTheft.gov to report it and begin a recovery plan.

You can find more information on these topics in the links below.

Finally, if you are interested in learning more ways to defend against financial scams and identity theft, please read “Hack-Proof Your Life Now!” written by Sean M. Bailey and Devin Kropp. Some of the topics this book addresses include why you need a secret email address, how to beat the password paradox, spot ransomware with the 10-second email rule, etc. As Sean and Devin state on the back cover of this online security book, “Everyone is vulnerable. But you don’t have to be defenseless.”

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<sub>Sources:
1. https://www.mcafee.com/learn/a-guide-to-identity-theft-statistics/
2. https://consumer.ftc.gov/scams, select “Filter by type of scam.”)
3. https://consumer.ftc.gov/consumer-alerts/2023/12/scammers-hide-harmful-links-qr-codes-steal-your-information)
4. https://consumer.ftc.gov/consumer-alerts/2022/04/give-yourself-some-credit-reports</sub>

Financial Planning Concepts

The Tax Cuts and Jobs Act of 2017 (TCJA), often called the “Trump Tax Cuts,” is scheduled to expire December 31, 2025. Although this feels like quite a long way off, planning now will help you minimize your taxes if the tax cuts are not renewed.

Provisions of the TCJA

The TCJA brought significant changes to the tax code. The marginal tax brackets were lowered and for joint filers the standard deduction was increased from just $13,000 to $24,000. Charitable contribution limits were increased from 50% to 60% of AGI and the medical expense deduction threshold was reduced from 10% of AGI to 7.5% of AGI. The TCJA also eliminated the Pease limitation, which reduced the itemized deductions by 3% of every dollar above a certain income threshold. Finally, the amount families may pass tax-free was increased substantially and is now (2023) $12.92MM for an individual. These are all great provisions for lowering your taxes.

However, it was not all good news in 2017. The state and local taxes (SALT) deductions were capped at $10,000, the mortgage interest deduction was limited to the first $750,000 (instead of $1MM) of mortgage debt, and the interest on home equity loans was no longer deductible unless it was used to buy, build, or improve the home. These changes negatively impacted taxpayers. 

How to Prepare for the Sunset

There are a few strategies we can help you employ to prepare for the possibility the tax law changes will sunset in 2025: First, Roth conversions help move money from your taxable IRAs to your tax-free Roth accounts. If the marginal brackets should revert to the higher rates, everything in a tax-free account will look even better! Especially if you are forced to take RMDs you do not use, Roth conversions at the right times will help you avoid the higher taxes. 

Second, it may be beneficial to begin harvesting capital gains and preserve your capital losses if you expect to be in a higher tax bracket in 2026. As we get closer to the sunset, we will help you prepare a multi-year tax plan to see if capturing gains or accelerating income makes sense for your plan. 

To prepare for lower estate tax thresholds, it may be beneficial to begin a regular gifting program to your heirs. You may want to give appreciated assets (like stocks, mutual funds, or ETFs) to your heirs (instead of cash) to postpone or possibly even lower the tax liability on the sale of these assets. You can also accelerate gifts to 529 plans for your relatives for higher education. Current tax law allows you to gift $85,000 in a single year ($170,000 for married couples) to each individual and the assets are then out of your estate. 

It may be beneficial to consider tax-free bonds in your taxable investment portfolio. With the lower tax rates, tax-free bonds have been somewhat less compelling. With higher bond yields and higher tax brackets, they become far more interesting.

Finally, as we get closer to the sunset, you may want to consider postponing your large charitable gifts. You will want to maximize your gifts during the years when tax rates are higher so you may postpone your gifts until 2026. We’ll know more as we get closer. 

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<sub>Sources:
1. https://www.kiplinger.com/taxes/what-to-do-before-tax-cuts-and-jobs-act-tcja-provisions-sunset, https://www.taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions#:~:text=The%20TCJA%20eliminated%20or%20restricted,because%20of%20the%20tax%20overhaul</sub>

Financial Planning Concepts

The recent SECURE 2.0 Act creates several retirement planning opportunities, particularly with Roth accounts in previously restricted traditional retirement accounts.

SIMPLE Roth IRAs and SEP Roth IRAs

Beginning in 2023, SIMPLE IRAs and SEP IRAs are allowed to accept Roth contributions.  SEP IRAs are funded exclusively by the employer (i.e., employees are not permitted to contribute to SEP IRAs); therefore, all employer contributions to a Roth SEP IRA are classified as taxable compensation to the employee.  In contrast, employer contributions to a traditional SEP IRA will not be classified as taxable compensation (i.e., employees will not be taxed on employer contributions to traditional SEP IRAs).

As previously mentioned in a prior Brown Financial Advisory Newsletter, in 2024 “ALL catch-up contributions for employees with incomes above $145,000 (i.e., indexed for inflation starting in 2025) will be required to be deposited into a Roth account.”  An exception exists for SEP IRAs and SIMPLE IRAs in that the new catch-up contribution rule does not apply to these accounts.

Matching Contributions in 401(k), 403(b), and 457(b) Defined Contribution Plans

Effective December 29, 2022, employers with 401(k), 403(b), and 457(b) defined contribution plans may provide employee participants in these plans the option of receiving matching contributions on a Roth basis.  Like employee elective Roth contributions (i.e., after-tax contributions), employer matching contributions paid into a Roth account on behalf of the employee will be classified as additional taxable compensation to the employee.

After SECURE 2.0 Act, the employer’s elective contributions and matching contributions are no longer limited to traditional accounts.  Provided an employer’s plan offers the SECURE 2.0 Act’s option of receiving matching contributions on a Roth basis, employees will have additional decisions to make as to the placement of their elective retirement contributions and the employer’s contributions.  Employer-provided retirement education to the plan participants will need to address these new accounts and help guide the employee in making the right allocation of any employee and employer contributions to the proper account type.

Rolling Section 529 Education Savings Accounts to Roth Accounts

After December 31, 2023, individuals that have a Section 529 Education Savings Account for at least fifteen (15) years can elect to make a direct rollover to the beneficiary’s Roth IRA.  SECURE 2.0 Act qualifies this trustee-to-trustee transfer on Section 529 account funds (and earnings on those funds) that have been held for at least five (5) years prior to the rollover distribution to the Roth IRA.  There are several requirements and limitations to this Section 529 strategy; however, it provides a nice financial planning solution for those individuals concerned about overfunding their children’s Section 529 accounts and the resulting penalties that would be assessed for non-qualified education distributions. 

Please contact us to discuss how these provisions may impact you.

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_{Source: 2022/2023 Federal and California Tax Update, SECURE 2.0 Act, Spidell Publishing, LLC.}