Author Archives: Sue Danson

The Critical Last Step

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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

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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

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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!

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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?

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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

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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

Inherited IRA Distribution Rules Will Make Your Head Spin

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There has been some confusion in both the financial planning and tax worlds recently regarding the “new rules” around inherited IRA distributions. Congress was clear as mud when they decided to change all the rules in 2020.

You see before 2020, if you inherited an IRA, the rules were pretty straightforward, whether you were the spouse, child, sibling or any other named beneficiary of the IRA. Generally speaking , your annual required minimum distribution (RMD) was based on your life expectancy.

So, if a deceased 75 year old father bequeathed their IRA to their 50 year old son, the original RMD of the father was recalculated for the longer life expectancy of the son. The RMD was now much lower than what the father was required to take and pay income taxes on.

Which meant, Uncle Sam had to wait AGAIN to recoup the deferred taxes on this glorious tax advantaged account. 

The SECURE ACT changed all this.

The “Setting Every Community Up for Retirement Enhancement” Act addressed the issue by eliminating what had been the “stretch provision”, where one’s RMD was calculated based on their life expectancy, as described in the example above.

I won’t get into all the nuances of the new rules here. Suffice it to say, there have been entire publications at this point regarding the changes, attempting to break down the confusion Congress presented two years ago and was forced to revisit and clarify in 2022.

Painting with a broad brush stroke, if you are a non-spouse and inherited an IRA in 2020 or later, you now have only 10 years to completely liquidate the account.

And the rules are different if the deceased was not yet required to take RMDs when they passed.

Most interpreted the original change to mean there were no longer RMDs, the account just needed to be empty in 10 years. Meaning, if it made sense for your situation, you could leave the assets invested for the next 9 years to continue growing tax deferred.

For the first two years of the SECURE ACT, many who were required to take distributions did not.

The IRS realized this blunder and put the brakes on it, telling everyone they had interpreted the changes incorrectly. RMDs were indeed still required, at least for some.

When you take it, whether or not you are required to take it and how much you have to take are the big questions you’ll need to answer, while also understanding the tax implications.

It is is a traditional IRA, as most that I see are, every dime you take out is 100% taxable as ordinary income, as if you earned that money from an employer.

To make things even more interesting and to keep us advisors on our toes, SECURE ACT 2.0 (that really is what it’s called) has just changed the age at which RMDs begin.

Honestly, SECURE ACT 2.0 made some sweeping changes that affect pretty much all of us. I plan to address many of them in my next newsletter, so stay tuned!

But for today I’ll leave you with this:

If you’ve inherited an IRA since 2020, you should check in with your financial or tax advisor to make sure you (and they) have a full understanding of your required distributions.

Front of Mind Thoughts

The Financial Brain Dump

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Happy New Year to you!

The craziness of year-end tasks and the holidays seems to carry right over into the new year, with a sense of urgency on a whole new list of things. But hopefully you found some respite along the way before diving in to 2023!

Last year at this time, I wrote to you about “real change” taking time, suggesting that it doesn’t just happen overnight.

I highlighted not beating yourself up over “failed” new year’s resolutions by February or March, because real change seldom comes about that quickly.

Here is my INSPIRING message that kicked off 2022!

But for this month, I’d like to add another concept that one of my clients recently employed. She completed what she called her “financial brain dump” and sent it over to me. She got all of the financial items that were swirling around in her head written down.

I could almost hear the sigh of relief through her email.

Not because all tasks were miraculously completed, but because she got it all out of her head, onto paper and over to me. And by sending it to me, she knows we will address these items together in the new year.

The brain dump is not a new concept. It is a proven method to help untangle our thoughts, serving to relieve some of the stress and anxiety created by our never ending reel of to-dos and uncertainties.

Tying it into last year’s message, I had discussed taking broad resolutions like “save more money” or “get finances organized” and breaking them down into smaller, more specific and manageable tasks.

THE FINANCIAL BRAIN DUMP will help accomplish that for you. So give it a try this month and see what it does for you. Then share the psychological load by sending it to your advisor, knowing they will help elicit “real change” for you in your financial life this year!

Front of Mind Thoughts

What is Your Earliest Money Memory?

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The first impactful memory I have around money always comes to me right away. It’s a story I shared at my dad’s 70th birthday celebration. I was about 10 years old and was with him at the ATM. He always counted the money before putting it in his wallet.

When he counted it on this particular morning, there were two $20’s stuck together.

My 10-year old mind thought, “How AWESOME is THAT”?

I must have not only thought it but also said something along those lines because I remember CLEAR AS DAY my father’s response:

“Susan, this is not my money. I’ll return it to the bank on Monday”.

IMPACTFUL.

Sometime not too long after, he called me over to his chair where he sat every night to watch the evening news and read the paper. He showed me a piece of mail he had just opened. It was a letter from the president of the bank thanking him for his honesty in returning the $20.

IMPACTFUL.

I’d be remiss to leave out my mom in my earliest memories around money and the impact they’ve had on me. Mom handled all the day to day family finances and taught me how to balance a checkbook…to…the…penny. Of course, with today’s technology I don’t balance a checkbook anymore, but I do still watch every penny. It was also her influence that taught me that just because you can afford something doesn’t mean you should buy it and that if you can’t afford something, then you definitely shouldn’t buy it.

That’s Cash Flow Planning 101: Needs vs Wants and Spend less than you make.

And from all this, a trusted financial advisor was born. Thanks Mom and Dad!

My clients have heard me say that not every decision around money is black and white, that there is often an emotional component to our decisions that can make things a bit gray. Behavioral Finance has become a field of study in and of itself and is often a seminar topic at  financial industry conferences.

I’m sure my parents had NO IDEA at the time that all these little things would serve as defining moments for me and my approach to all things money in the future.

But it’s something I try to remember when working with my clients; we all have a money history that started way before we ever knew it was happening.

Quote

Great things never come from comfort zones.

Open Enrollment Serves Up a Bowl of Alphabet Soup

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The fall tends to be open enrollment time and you are likely in the middle of it now, or will be soon, so I thought this month would be a great time to review some of the crazy acronyms you see as your eyes glaze over the 50+ page benefits guide from your employer.

I can’t say here which benefits are the “best fit” for you.  Reviewing benefit options is part of what I do with my clients each year. Lives change. Jobs change. Families change. Benefit packages change. For many, the confusion stays the same.

The Biggest Offenders

FSA – Flexible Spending Account

HSA – Health Savings Account

HRA –  Health Reimbursement Account

These are very similar acronyms, but these are NOT the same thing.

I’ll get the HRA out of the way, as it is not as common as the other two. This is an EMPLOYER owned and funded account an employee can use for medical expenses. It generally stays with your employer if you leave, unless they offer a retirement continuation.

FSAs are offered with a standard HMO or PPO (I’m going to assume you know these two old friends).

I wrote a newsletter on HSAs a few months ago and the triple tax benefit they offer. They are only offered in conjunction with a HDHP. Yes, here’s yet another acronym for you!

HDHP – High Deductible Health Plan

Similarities

  • Both are employee funded, although some employers will make contributions as an added benefit.
  • Both are funded with pre-tax dollars. Always a PLUS.
  • Both are used to pay for qualified medical expenses.

Differences

  • Pre-tax contribution limits are higher for the HSA than the FSA. The HSA also offers a catch up contribution for those over age 55.
  • The up front, out of pocket medical expenses are higher for Team HSA/HDHP.
  • FSA contributions are forfeited if not used in the same calendar year. There is some flexibility for carry over and grace periods, but forfeiture is the general rule. Use it or lose it.
  • HSA contributions are yours forever. No “use it or lose it” here. AND they can be invested. AND they grow tax deferred/tax free. As long as used for medical expenses, it’s tax free growth and distributions forever.
  • Your FSA is not portable. If you leave your company, the funds in the account do not go with you. Assets in your HSA are yours forever.

While the HSA offers more flexibility and tax advantaged benefits than the FLEXIBLE Spending Account (oh the irony), it does not mean it is the right choice for you, even if both are offered by your employer. Every situation is unique.

So those are the big acronym offenders for your health care options, but a distinction I explain in this next section is REALLY important.

STD  – Short Term Disability

LTD – Long Term Disability

Granted, you may actually know these two acronyms already, but are you aware of the distinction when it comes to whether this benefit it taxable or not?

It all comes down to how the premium is paid. I’ve worked with many clients who were not aware of the key difference because most benefit guides don’t do a great job of explaining it.

It makes a big difference in how much money you actually take home, should you become disabled.

  • If premiums are paid by you with after-tax dollars, then the disability benefit will not be taxable.
  • If premiums are paid by your employer, then the disability benefit will be taxable.

Most LTD benefits offer coverage for “60% of salary”. If that 60% is not taxed, you are in OK shape.

If that 60% is taxed, your monthly benefit will be significantly less than your regular pay.

One final scenario offering a TAX FREE disability benefit:

  • Your employer pays the premium BUT adds the amount paid on your behalf to your gross earnings and you pay tax on the “phantom income” with each paycheck.
  • Because you pay the taxes on the premium, any disability benefit you receive will be tax free.

If your employer offers a tax free disability benefit option, this is usually the option you want. Otherwise, you may want to consider a private policy to supplement your employer plan.

Quote

Your mind is a garden, your thoughts are the seeds. You can grow flowers, or you can grow weeds.

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