Author Archives: Sue Danson

Spring Cleaning!

Everyone thinks of January 1st as the time to start fresh and change things we want to change, but I see spring as an even more opportune time for this.

Here are eight SPRING CLEANING items you can tackle now:

  • Tax planning: Did you owe more than you expected on your taxes? Was it a one-time thing or does this tend to happen every year? Review your current paycheck and adjust your withholdings as needed (using form W4), or talk with your tax preparer about paying estimated tax payments throughout the year.
  • Tax planning: Did you get a very large refund? You need to adjust how much is being withheld. Don’t give the IRS an interest free loan. That extra money could be put to much better use for your benefit
  • Tax planning: Could you have saved more on taxes in 2023 if you had increased your retirement contributions or added money to a deductible IRA? Make adjustments to your paycheck contributions now so you are not in the same position next year.
  • Employer Benefits: If every year feels like “crunch time” during open enrollment, now is great time to review the benefits offered to you and ask your HR team for deeper explanations or clarifications if you do not understand something.
  • Emergency Fund Checkup: Make sure your emergency fund is fully funded or consider boosting it if needed. Aim to have enough saved to cover 3-6 months’ worth of living expenses.
  • Investment Portfolio Review: Evaluate your investment portfolio to ensure it aligns with your risk tolerance and both short and long-term goals. Consider rebalancing if necessary. Do you have the right types of investments in the best type of account? It can make a big difference over the long term.
  • Educate Yourself: Use this time to learn more about personal finance topics that interest you. Whether it’s investing, retirement planning, or debt management, increasing your financial literacy can pay off in the long run. Working with a trusted advisor will speed up this learning tenfold.
  • Make a list: what is in your head that keeps you up at night regarding your finances? One of my clients refers to this as her “financial brain dump”, which she then sends to me for safekeeping. 😉 Just writing it all out can help take a load off your shoulders and give you more clarity, making tackling each one over the next several months seem less daunting.

Let’s face it, when the sun is shining, the days are longer and the temps are rising, we are typically more motivated in just about anything we do!


This Triple Scores You a Homerun

Despite the snow on the ground and freezing temperatures outside, we are at least beginning to see the daylight lasting a little longer, the first sign that we “are on the other side” of winter.

Another sure sign of spring approaching for us hearty New Englanders is when the Red Sox report to Florida for spring training, and that time has arrived!

With baseball in mind, this month I introduce an underutilized and often misunderstood savings vehicle being offered by more and more employers.

Read on to learn how using a health savings account (HSA) can offers a TRIPLE TAX SAVINGS, ultimately scoring you a HOMERUN.

The Basics of an HSA

An HSA is a savings account for health care expenses tied to what’s known as a High Deductible Health Plan, offered as a health care option through your employer.

This type of account is different from a Flexible Spending Account (FSA), where you can lose any unused portion of your dollars set aside for a given year.

The money set aside in an HSA stays with you forever.

Even if you leave your current employer, your HSA dollars go with you. And as an added bonus, you are also allowed to invest your contributions. You don’t have to use them in that year.

How the high deductible health plan works and whether it is right for your circumstances is a newsletter for another time, but many who currently have this type of plan with an HSA don’t understand the benefits of the HSA in and of itself.

Triple Tax Advantaged

Your contributions are pre-tax, so they lower your taxable income in the year they are made. Think of this tax savings in the same way you think of your pre-tax 401(k) contributions.

You can invest your contributions and they will grow tax free forever, meaning any growth of your contributions is also NOT taxed. This account is like a Roth IRA in this regard, so for high income earners who are phased out of making direct Roth contributions, this is an excellent tax savings vehicle that offers the same tax free growth one gets from a Roth.

Withdrawals, AS LONG AS USED FOR QUALIFED MEDICAL EXPENSES, are 100% tax free.

Boom!!! A Triple Tax Homerun!

With ever increasing health care costs in this country, this is a great tool for your future self to have a bucket of tax free money to help cover your future medical care costs, and a great tool in the current year to reduce your taxable income.


‘Tis the Season to be…Fearful?

Elf on a Shelf

Earlier this week, I was engaging in the nightly ritual of moving the Elf on the Shelf to a new location. As the tale goes, he had flown back to the North Pole overnight and reported to Santa whether my children were naughty or nice that day. Given my boys are now 16, 14 and 12, (edited: now 16, 18 and 20 Yikes!), there’s a whole lot of not so nice around here and long gone is the fear that Ruckert the Elf is going to tell Santa about it.

At best, my youngest is humoring me by even looking for the Elf each morning.

It got me thinking about what we all know as the “fear tactic”, most often used with children, to get them to do or act in a way which we desire…

  • Behave nicely or Santa won’t bring you any toys.
  • Eat your vegetables or you won’t grow big and strong.
  • And let’s not forget about Pinocchio and his nose!

But let’s face it, kids aren’t the only targets of the fear tactic.

If it’s a subject area I know little or nothing about (like car maintenance for example), I could be “told and sold” just about anything. After all, they’re the experts, right? 

And they ALWAYS have my best interest at heart, right?

Well, the financial services industry is no different. There are folks out there trying to instill fear to get you to take action.

And not always, but often, that action is favorable to them in some way.

Statements such as:
What has happened to YOUR 401(k) balance with the recent market volatility? 
Are you afraid of outliving your money?

and my personal favorite….

Don’t let the nursing home take all of your hard earned cash. Come see us before it’s too late!

FEAR TACTIC at it’s best!

The point is, when it comes to financial decisions, making a rash decision to DO or BUY or CHANGE anything out of fear is often met with regret down the road.

You have time… to ask questions and understand, to plan according to your needs and to make a decision from a place of knowledge and clarity.


Punt Returns and Roth IRAs

Family & Football

I’ve been watching my boys play football for years, and I LOVE watching them, but I still struggle with many of the rules.

Recently, I’ve been trying to figure out punt return vs kick return and when you are supposed to touch the ball vs not touch the ball and just let it roll. Go ahead football aficionados, have your laugh.

No matter how many times my husband explains it, or I ask my football guru friend Tricia what is happening, I can never seem to keep it straight.

I mention this because instances like this help me to remember how my clients might feel when I am spurting out planning concepts and recommendations for them.

One topic area that can be difficult to keep straight, even for us advisors, is the rules surrounding Roth IRAs.

Read on to see how I will now differentiate between a punt and kick return.  

When it comes to Roth IRAs, there are TWO ways they can be funded and TWO “5-year rules” that must be differentiated when it comes to distributions from the IRA.

But like the punt and kick return, they may seem like the same thing, but they are not, which is what leads to the confusion.

First, some differences between the two ways a Roth can be funded:

ROTH CONTRIBUTIONS

  1. Contributions are made with after-tax dollars.
  2. Contribution amounts are limited each year by the IRS.
  3. If you earn too much (according to the IRS), your contributions may be phased out, or you may not be able to directly contribute to a Roth IRA at all.
  4. Your CONTRIBUTIONS can be withdrawn at any time, penalty free (but the goal is to keep them in!)

ROTH CONVERSIONS

  1. Conversions are typically made from an IRA. You are converting from a “pre-tax” account to an “after tax” account.
  2. Conversions are not limited by amounts or income levels. You can convert as much or as little as you want at any time, regardless of how much you earn (this is the rule that allows for the back door Roth strategy)
  3. Since you are converting pre-tax dollars, you must pay taxes on the amount being converted in the year it is converted.

Now here is where the PUNT RETURN analogy comes in – Don’t touch it, just let it roll.

There are two 5-Year Rules for Roth IRAs.

5-Year Rule #1 – Pertains to Growth only (for both contributions or conversions)

For the GROWTH in your Roth IRA to become what is called a QUALIFIED DISTRIBUTION (tax and penalty free distribution), two conditions must be met:

  • 5-Year Rule #1 – the account must have been open for at least 5 tax years (there are favorable rules around when the clock starts on the 5-years).   AND
  • The IRA owner must be 59.5 or older (or totally disabled; a few other exceptions exist)

Don’t touch it, just let it roll.

5-Year Rule #2 – Pertains to the CONVERSION amounts

The SECOND 5-year rule pertains to whether the amount you converted can be withdrawn penalty free. Unlike Roth CONTRIBUTIONS that can be taken out penalty free at any time, you cannot pull your conversion amounts out before the 5-year clock is up (unless you are 59.5 or older),or you will pay a penalty on the withdrawal.

Don’t touch it, just let it roll.

It’s too much to dive into the specifics on the ”start clock” for the two 5-Year rules, but know that even the start clock rule has rules. But the gist is… Don’t touch it, just let it roll.

Ultimately, the rules for Roth IRAs exist to keep the “spirit of the law” in place to prevent misuse of this type of tax advantaged account.

But when managed effectively, and in the right situations, Roth contributions and conversions can offer great planning opportunities for many clients.


The Critical Last Step

As a parent of teens, part of my role as their mom is to begin letting go of making sure they are on top of everything they need to be on top of.

It was a really hard lesson for one of my boys this past school year when he completed all the work for something that was kind of a big deal, yet failed to take a critical last step.

In fairness to him, he honestly thought he was done and had completed all the tasks. This happens to the best of us. As his mom, it broke my heart that he had put in all the work yet in the end, it did not matter at all, except to teach a valuable, albeit hard, lesson.

I parallel this story to something I see in my role as a financial advisor and a critical last step I make my clients aware of and guide them in completing. It is in regards to estate planning.

Let me start by saying this:

Everyone needs some level of an estate plan.

Regardless of how young or old.

Regardless of income or asset level.

Everyone needs at least some level of life planning in the event of incapacity or death.

That said, if you have trust planning done, there is something that is referred to as “funding your trust”.

CRITICAL LAST STEP

This is an often misunderstood, overlooked or forgotten process.

“Funding your trust” is the act of assigning assets to the trust so that in the event of your incapacitation or death, those assets will be handled according to the terms of the trust you so diligently and painstakingly took the time to create.

Depending on the type of account or asset, this may mean retitling the asset to the name of the trust or making the trust either a primary or contingent beneficiary.

Like the critical last step my son missed after all his hard work, if you don’t fund your trust, then the creation of the trust means nothing.

So please, if you’ve had trust work done in your lifetime and are not sure if you ever properly funded it, take the time now to review all of your assets and make the needed changes. Your loved ones will be so thankful.


A Lost Treasure

A couple of weeks ago, my youngest said to me, “Mom, do you know there is a website for unclaimed property?”

Well, yes, I do. But I told him that does not apply to me.

After all, I know exactly where all my property is!

I’m sure you’ve heard the commercial on the radio as many times as I have…”find your unclaimed property at finadmassmoney.com” they repeat over and over.

According to the Unclaimed Property Division, Massachusetts has over $3 billion in unclaimed property. Unclaimed property includes forgotten savings and checking accounts, un-cashed checks, insurance policy proceeds, stocks, dividends and the contents of unattended safe deposit boxes.

My son continued our conversation with, “well, both you and dad show unclaimed property on the site, so maybe it DOES apply to you”.

I’ve never EVEN ONCE considered checking out the website. Clearly, my son was not missing any opportunity to claim a lost treasure.

He pulled it up on my phone and navigated to where it showed my name.

Well look at that, he’s right!

Long story short, I took the steps to claim my lost property and it said I would receive my property in the mail. Ok, but I won’t hold my breath.

It does not tell you how much or specifically what, at least not in my case. It’s a SURPRISE.

Mine was an immediate auto approval. Super easy.  I had to submit a few supporting documents for my husband’s stuff. I’m not sure what the differentiating factor was.

Well imagine my surprise when, in less than two weeks, I received a check in the mail from the Mass Dept of Treasury for $912!

Turns out, it was from an old credit card through MEFA U-Promise (Massachusetts Education Financing Authority) where you could earn money towards college by using the card and then could transfer the funds to a 529.

Given that college seemed a lifetime away “back then”, I bagged that card for one with immediate gratification in rewards. (The older me with college age kids would perhaps rethink that decision now.)

Coincidentally, I made a tuition payment for my oldest the same day I received the check, so I suppose, theoretically, the money is STILL going towards tuition.

How nice that it reached its intended destination after all these years being lost!

All states have an unclaimed property division, so a simple google search should lead you to the website for your state.

Give it a try –  it’s worth a look!  Let me know if you find a lost treasure!

Something to Ponder

When you try to control everything, you enjoy nothing.
Sometimes you just need to relax, breathe, let go and live in the moment.


The Psychology of Money

In a recent meeting with a client who had just made a significant purchase, I asked the question, “How are you feeling about it?”
 
An emphatic “Great Question!” was her response.
 
We had discussed it often, run the numbers more than once on various options, and the numbers showed she could both afford it and choose how she wanted to finance it.
 
Yet, she still seemed to be a bit wrought with the decision, which prompted my question.
 
Money and feelings are connected? You betcha!
 
You see, the financial industry as a whole is looked at as a “math based” profession, fraught with spreadsheets and formulas telling you which financial decision makes the most sense.
 
But humans are fraught with FEELINGS. And EMOTION. And BIASES. And EGO. And even GUILT, when it comes to making financial decisions.  
 
And that’s not just for big financial decisions, it goes for smaller, less impactful financial decisions too.
 
Like buying ice cream.
 
I have become a food shopping ninja since prices began to skyrocket last year. I have no choice. I can’t put into words the amount of hard core food my three boys eat in a week.
 
And for some reason, I have put my foot down when it comes to buying ice cream – I refuse to pay more than $2.99 for what is not even a half gallon of ice cream!
 
I can’t tell you exactly why, I just refuse.
 
And although I can’t tell you exactly why the price of ice cream has become my chosen boycott, I CAN tell you what is working in the background of this albeit small, financial decision. It’s the same as what is at work with my client’s big financial decision.
 
The PSYCHOLOGY OF MONEY is at play.
 
And I know it’s this, because the night after I go food shopping and refuse to buy ice cream for more than $2.99, I’m willing to spend $16.00 at Three Pugs Creamery for HALF the amount of ice cream I would have gotten at the store.
 
That’s FIVE TIMES the amount of money for HALF the amount of ice cream.
 
It doesn’t take a math wiz to figure out that I am making the “wrong” financial decision when it comes to my ice cream purchases.  
 
EXCEPT for the understanding that in nearly every financial decision we make, there is more at play than just the numbers.
 
There is the PSYCHOLOGY OF MONEY at work.
 
When I spend $16.00 at the quaint ice cream shop in town, I’m buying quality time spent with one or more of my kids, I’m buying a future memory they’ll have of the small town where they grew up, I’m supporting local small business.
 
These are all touchy feely things, but they have a price I’m willing to pay.
 
So even though ON PAPER it makes perfect financial sense for my client to make her large purchase and no financial sense for me to be buying ice cream at Three Pugs Creamer instead of Shaw’s, our humanness will often be telling us otherwise.
 
The point is, we all have our own unique “money story” that has been developing and shaping our views since the time we were first learning to count our pennies. It can be helpful to have this awareness as you make financial decisions, big AND small.

Favorite Quote

Everything has a price, but not all prices appear on labels.

― Morgan Housel, The Psychology of Money


Wait! Don’t Throw That Out!

Do you ever get so much “stuff” piled up on your kitchen counter…or desk, or side table or wherever you keep the “papers I may need but don’t have time to address right now” pile…that you just want to take it all and throw it in the trash?

Poof! Gone. Out of your mind, off your list. Except for the little voice in your head saying, “I hope I don’t need that for anything.”

You may not even know if you need to keep it because YOU DON’T EVEN KNOW WHAT IT IS!

Please allow me to introduce you to tax Form 5498.

Yes, I know, I touched on tax stuff last month – BORING – but hey, some things are just good to know. 

I’ll keep it short and sweet and introduce just this one tid bit today.

Form 5498 is mailed to clients in late May (that’s NOW) from their brokerage firm when the client has either contributed to or rolled over retirement assets into their IRA.

Why not until May? The tax deadline was last month!

That’s your answer.

Because we can make contributions for the prior year up until the tax filing deadline in April, they don’t send them out until AFTER the filing deadline.

“But didn’t I need it to file my return”, you ask? After all, it very officially looks like an official tax document!

NOPE! (is that officially a word?)

You do not. It is for informational purposes only. HOWEVER,…

You should review it (sorry), make sure it is accurate (mistakes do happen) and then retain it for your tax records.

Preferably not on the kitchen counter.


Are You REALLY Paying More in Taxes?

Many folks feel overwhelmed by any talk around taxes. This is understandable. Our federal tax code can be a tough code to crack. It is a moving target of rules, income phaseouts and brackets which seem to change on a near constant basis.

And then there is simply the tax terminology in general that can be very confusing.

Effective Tax Rate vs Marginal Tax Rate

We follow a progressive tax system in the US. This means the amount of tax we pay on the first dollar we earn is less than the tax we pay on the last dollar we earn.

This progression results in a taxpayer’s Effective Tax Rate, or average overall tax rate, being less than their Marginal Tax Rate, or the tax rate of their final dollar(s) earned.

It tends to be a taxpayer’s marginal tax rate that is referred to most often, however it is the effective tax rate that more accurately reflects the average amount of tax you pay.

When a taxpayer falls into the 24% tax bracket for example, this is their marginal tax rate…24%. This simply means that the highest level of tax paid was 24%, even if it was only $1 of income in that bracket.

But their effective tax rate, the amount of tax they paid as a percentage of their overall income, is typically lower.

If your accountant supplies a comparison worksheet, you may be able to see your marginal and effective tax rates at the bottom of the worksheet.

Amount You Owe vs Total Tax Liability

If you look at page 2, line 37 of your 1040 for 2022, you’ll see “Amount You Owe”.

This is NOT your total tax liability for the year, which is up above on line 24, aptly named “total tax”.  

Amount you Owe is what is still left to pay of your total tax liability for the year, unless of course, you are getting a refund (which is on line 34 this year).

Your total tax liability in any given year depends on many different factors, so even if the figure on line 37 is higher this year, it doesn’t necessarily mean you are paying more in taxes.

You have to take into account what percentage of your overall income that number represents, which as you read above, is your effective income tax rate.

Let’s compare apples to apples:

In 2021, I picked 100 apples and had to give 20% of them to Uncle Sam.

That’s 20 apples (Total Tax, line 24).

I paid in 1 apple each month for the year (12 apples), so in April I still owed 8 more apples (Amount You Owe, line 37).

In 2022, I picked 200 apples and had to give 20% of them to Uncle Sam.

That’s 40 apples (Total Tax, line 24).

I paid in 1 apple each month for the year (12 apples), so in April I still owed 28 more apples (Amount You Owe, line 37).

Since owing 28 in 2022 is a lot more than owing only 8 in 2021, it would appear I paid more in taxes in 2022, and as a flat number of apples I did.

As a percentage of my overall apple income, I owed the same amount – 20%. 

I picked more apples (earned more income) but paid in the same number of apples each month (paycheck withholdings), so I had to play catch up in April and give a whole bunch of apples at once (amount you owe).

And despite the fact that I just explained to you how we have a progressive tax in this country, for the purposes of this illustration, I wanted to keep it simple and not overturn the apple cart.

I know, even trying to keep taxes simple can sound confusing, but I hope this helps shed at least some light on this intimidating subject!

Happy Thoughts

Always have eyes that see the best, a heart that forgives the worst, a mind that forgets the bad, and a soul that never loses hope.

– Unknown


Fun Facts 2.0

In my newsletter last month, I talked about some of the changes and confusion around new distribution rules for Inherited IRAs and promised this month I would share a few other changes of the SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement).

With some 90+ changes that pertain to individuals, employers, trusts and estates, it is a lot to keep straight, but here I’ve summarized 5 that may affect you:

1. Employer Match can now be made to a Roth account (Section 604)
Your employer “may” (but is not required) to allow an employee to elect a matching Roth contribution, versus past law which has required all matching contributions be made to a pre-tax account on behalf of the employee.

2. “Catch up” contributions for certain employees MUST be made to a Roth (Section 603)
Catch up contributions by those age 50+ can currently go to either a pre-tax account (and thus lower an employee’s taxable income) or to a Roth, or to a combination of both if the employee chooses.

Beginning in 2024, employees whose income is over $145,000 will only be able to elect Roth contributions for the catch up portion.

3. Student loan payments treated as elective deferrals for employer match (Section 110)
Beginning in 2024, employers are allowed to treat student loan payments as if they were an employee’s contributions to their retirement plan.

Consider for example an employee who is not making 401(k) (or other employer plan) contributions because they are saddled with monthly student loan payments, thus missing out on the “free money” they could be getting through an employer matching contribution.

With the new ruling, whatever loan payment they are making on a monthly basis can now be matched, according to their employer plan matching rules, even if they are not directly contributing to the plan.

4. Increased age for Required Minimum Distributions (Section 107)
The first version of the SECURE Act raised the age to 72. It has now been raised again to age 73 and then to age 75 beginning January 2033.

Here is a breakdown by year of birth:
1950 or before: No change
1951 – 1959: Age 73
1960 and later: Age 75

5. Reduction in penalty for failure to take timely RMD (Section 302)
Through 2022, the penalty was 50% of the required amount that you failed to take. Beginning in 2023, the penalty has been reduced to 25% and can be further reduced to 10% if corrected “in a timely manner”. The proper tax form must be completed.

For anyone interested in delving further into some of the changes, here is a link to a 19-page “summary” from the senate finance committee.

Happy reading – just don’t try to memorize. 

Favorite Quote

The women of today are the thoughts of their mothers and grandmothers, embodied and made alive. They are active, capable, determined and bound to win. They have one-thousand generations back of them …. Millions of women dead and gone are speaking through us today.

– Matilda Joslyn Gage