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Financial planning explained

Here’s some good news: you can positively affect your level of economic success by planning for your future instead of “winging” it. Without a goal, and a plan to get there, people usually spend years chasing short-term objectives while their long-term objectives get farther away.

Financial Planning: Closing In On Retirement

Most of the people who have come to us for a financial plan are getting very close to retirement. They want to know:
• If they can retire,and when to start financial planning
• When they can retire and
• If they can live in the style to which they are accustomed.

But waiting until retirement is just around the corner leaves little time to make corrections. The ideal time to create a financial plan is when you’re young.

Financial Planning: Roadmapping

A financial plan is like a roadmap. It’s a map in time instead of space. Like a road trip, there are places you want to stop along the way, and a destination you want to reach. The stops along the way may be marriage, a home, college for the kids, cars, vacations or starting your own business. The destination may be retirement or leaving a legacy.

Along the route there are hazards to contend with: financial risks, illness, disability or even death.
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Financial planning forces you to focus on the things you can control – like earning and saving – and understand that part of the future is outside of your control. It can point out ways to protect against risks that are outside your control.

A plan will identify resources you will need to reach your objectives; the professional advisors who will help you with the legal issues and determine who will provide the financial guidance you will require. A plan will even guide your beneficiaries and heirs once you are gone.

A plan does not execute itself. Like a map, you need to check it from time to time to make sure you are on the right road.

And, if you make the wrong turn and get lost, you need to be able to stop and ask directions. This is where a financial planner, the one who helped you set up your plan in the first place, is the right person to ask.

Financial Planning: Protect Against Risks

Arie and Stephen Korving are both CFP™ (CERTIFIED FINANCIAL PLANNER™) Practitioners. To find out more about Financial Planning and what it can do for you, call us 757-638-5490 or use our contact page for a free consultation.

Golden Piggy Bank

6 Charitable Tax Moves to Consider Before Year-End

The recently passed Tax Cuts and Jobs Act is the most extensive and far-reaching change to the tax code in more than thirty years.  In addition to altering the existing tax brackets, the standard deduction has also been nearly doubled, which means that going forward taxpayers will need to provide more itemizable deductions in order to exceed the standard deduction.  If you plan to give to charity before year-end, here are six planning moves to consider.

1. Donate Highly Appreciated Stocks or Mutual Funds.

The stock market has been on a terrific run, and you may have highly appreciated stocks or mutual funds that you are holding on to because you do not want to pay capital gains taxes.  By donating appreciated investments, you avoid paying the capital gains tax and can receive a deduction for the fair market value of the investments.

If you are considering gifting mutual funds, do so before they declare their year-end dividends and capital gains and you will save on taxes by avoiding that income as well.  While a deduction for appreciated securities is now limited to 30% of your Adjusted Gross Income (AGI), you can still carry the unused portion to future tax years.  When making a gift of appreciated securities, you should notify the charity that you are doing so in order for them to know who to send the record of receipt to (so that you can have that on hand when filing your taxes).

2. Combine Giving from Multiple Years Into One Year

Because the standard deduction has now been nearly doubled, consider lumping several years’ worth of contributions into one year to occasionally exceed the standard deduction. The strategy here would be to “lump” our charitable giving in one calendar year so that our itemized deductions exceed the standard deduction, and then simply claim the standard deduction in the following year(s).  The following graphic attempts to illustrate what this might look like for an individual taxpayer:

3. Use a Community Foundation or a Donor Advised Fund

If you want to create a legacy, are unsure of where to contribute right now, or want to consider “lump” giving, use a Community Foundation or Donor Advised Fund (DAF) to max out your contributions. A DAF is a unique type of account that is maintained an operated by a qualifying charitable organization, including most Community Foundations.  Once you create a DAF and contribute to it, your contribution qualifies for a charitable deduction on your tax return.

However, even though you can deduct the entire amount in the year that you make the contribution, you can make distributions from the DAF in future years to the charities of your choice.  In other words, you aren’t required to distribute all the DAF’s funds in the year that you make your contribution to it.  So, you could “lump” several years’ worth of charitable giving into your DAF and then make annual distributions to your favorite charities over the course of the next several years until your next “lump” contribution.

Additionally, the money in your DAF can be invested, creating the potential for even greater giving in the future via the power of compounding interest.

4. Create a Charitable Lead or Remainder Trust

If you are considering an even larger donation, or are interested in asset-protection, you may want to consider creating either a charitable lead or remainder trust. With a charitable remainder trust, you get a deduction for your gift now; generate an income stream for yourself for a determined period of time; and at the expiration of that term, the remainder of the donated assets is distributed to your favorite charity or charities.  A charitable lead trust is essentially the inverse of the remainder trust: you get a deduction for your gift now; generate an income stream for one or more charities of your choice for a determined period of time; and at the expiration of that term, you or your chosen beneficiaries receive the remaining principle.  The deduction you receive is based on an interest rate, and the low current rates makes the contribution value high.

5. Donate Unused Belongings

Donate your extra property, clothes, and household items to charity. Make time to clean out your closets, spare bedroom and garage, and donate those items to one of the many charitable organizations in our area.  CHKD, Salvation Army, Purple Heart, ForKids, Hope House are just a few organizations that will take old clothes, appliances, household items and furniture.  Some of them will even come to you to pick up items.  Make sure to ask the charity for a receipt and keep a thorough list of what you donated.  You can use garage sale or thrift store prices to assign fair market values to the donated items, or you can use online programs (such as to figure out values.

6. Qualified Charitable Distributions (QCD’s)

If you are over age 70 ½, regardless of whether you itemize or not, make a qualified charitable distribution (QCD). We discussed this charitable donation method in detail in an earlier post, which can be found here.  Essentially a QCD allows you to donate all or a portion of your IRA Required Minimum Distribution to a qualifying charity.  The donated amount is not included in your taxable income and also helps to lower your income for certain “floors” like social security benefit taxation and Medicare Part B and Part D premiums.  QCDs are very tax-efficient ways to make charitable donations.


Disclaimer:  This material has been prepared for general information purposes only, and is not intended to provide, and should not be relied on for, personal tax, legal, investment, financial planning or accounting advice.  You should consult your own tax, legal, investment, financial planning and accounting advisors before engaging in any transaction.

Positive Change

2 Great Ways to Give to Charity That Can Help Save on Taxes

With year-end tax planning looming in the next few months, we are bringing you two ideas for donating to charity that could save you additional money at tax time.

Donate Appreciated Stocks or Mutual Funds

The first idea is to donate appreciated stocks or mutual funds from your taxable accounts.  Donations of highly appreciated securities actually receive double tax savings.  First you get to deduct the full market value of the donation, up to 30% of your adjusted gross income, which can help to reduce your taxable income.  Second, the donation of securities also allows you to avoid paying the state and federal capital gains taxes that you would have owed if you had sold the stock.

Qualified Charitable Distribution

The second idea is something called a “Qualified Charitable Distribution.”  A few years ago, Congress passed a law that allows those who are over 70 ½ years old to give up to $100,000 to charity directly from your Individual Retirement Account (IRA).  You may use these qualified charitable distributions (QCDs) to satisfy all or part of your annual required minimum distribution (RMD).  Those who give to charity using this method get special tax treatment of their gift.

Typically, taking money out of your IRA is a taxable event – the withdrawal adds to your taxable income and inflates your adjusted gross income (AGI).  However, QCDs do not count as taxable income and therefore have no effect on your AGI.  This is significant because your AGI determines a number of things, including Medicare premium costs, the net investment income Medicare surtax, the taxability of Social Security income, itemized deduction phase-outs, and exemption phase-outs, to name a few.

So making a qualified charitable distribution allows you to satisfy all or part of your RMD without increasing your taxable income or your adjusted gross income.

What are the rules?

  • You must be over 70 ½ on the date of distribution.
  • QCDs are limited to $100,000 per person per year.
  • Only distributions from a Traditional IRA, Rollover IRA or Inherited IRA (where the beneficiary is over 70 ½) are eligible. You may not make QCDs from SEP or SIMPLE IRAs, nor from any type of employer retirement plan; those types of accounts must be rolled over into a Rollover IRA before they may qualify.
  • Your QCD must go to an organization designated by the IRS as a “qualified charity.” This list includes all 501(c)(3) public charity organizations, but explicitly excludes donor-advised funds, private foundations and other grant-making organizations, as well as “split-interest” charitable trusts (such as charitable lead trusts or charitable remainder trusts).
  • The QCD must be made directly to the charity. This is non-negotiable.  The distribution will not qualify if the check is made out to you, or if the money is first transferred into a non-IRA account of yours before it goes to the qualifying charity.  The IRS does not provide a way to correct mistakes.  Most trustees and custodians already have forms and procedures in place to help you make these transfers; make sure you are specific with them about your intent, and that they know how to handle your request.  (Checks should be made out directly in the charity’s name and mailed to the charity’s address.)
  • Ensure that no tax is withheld from your QCD to the charity (no withholding is necessary since this is a non-taxable distribution).
  • Make sure to alert the charity that you are making a QCD to them, as some custodians may not put any information on the check or wire transfer that would personally identify you.
  • Make sure you get a confirmation letter from the charity acknowledging your gift and stating that you received no goods or services in exchange for it.
  • To report a QCD on your Form 1040 tax return, you generally include the full amount of the charitable distribution on the line for total IRA distributions (15a). On the line for the taxable amount (15b), enter zero if the full amount was a QCD (or calculate the taxable amount if your QCD was less than your total required minimum distribution) and write “QCD” in the blank space next to the line.

With either of these charitable donation and tax-saving strategies, it’s always a best practice to let the organization that you’re making the gift.  This way they will know who to send the record of receipt to, so that you will have documentation to hold on to for your tax returns.

As we’ve mentioned before, we are not accountants and therefore suggest that you consult with your accountant to see if either of these ideas would make sense for your particular situation.

Financial Questions Millennials Ask: “What is the best way to save for the future outside of a work retirement plan?”

A young professional asks: “I am 27 years old and have finally worked myself into a well-paying job. I want to make the most of it by setting myself up for success down the road. I am currently investing into my thrift savings plan (TSP) once a month with the drill paycheck I receive for being in the National Guard and I also will be joining my company’s retirement plan. Other than these two methods of saving that I am currently contributing to, what is the best way for me to save for the future? I don’t want to put all of my money into a standard savings account which will not grow much over time. Should I consider online savings accounts with higher interest rates? I am also intrigued by dollar-cost averaging. Should I consider index funds?”

Here’s my answer:

Thank you for your question and congratulations on being so forward looking. At age 27 you have about three decades of saving and investing before retirement. Your future is in your hands in more ways than you may know. For example, by the time you retire the Social Security Trust Fund may well be exhausted and your benefits may be a lot lower than current retirees.

You should put as much as you can into your TSP and participate in your company’s retirement plans, which probably includes either a regular 401(k) or a Roth 401(k) plan. At your age I would consider contributing to a Roth plan. A Roth plan does not reduce your current taxes, but when you retire you can get your money out tax free, and meanwhile your money grows tax free.

You should try to save about 15% of your income for retirement. You should first create an emergency fund. You may be surprised to learn that four in ten people in this country can’t afford a $400 emergency without borrowing. An emergency fund equal to 6 months of your net income should be adequate. After funding your TSP and 401(k) plans you should open an investment account with a discount broker. Fund it with extra savings beyond what put in your tax-free accounts. Keep in mind that tax free accounts like IRAs, TSPs and 401(k) plans are not readily accessible without taxes or penalties.

Over the next few decades you will need money for things such as a home purchase, weddings, children, vacations, etc. That’s why taxable investment accounts are needed. Your tax deferred, tax free and taxable accounts all provide you with the assets you need to retire when you are ready. Based on your question I am assuming that you are not an experienced investor. Few people your age are. In fact, most people of any age are poor investors. I suggest you shop around for a good fee-only financial advisor who is willing to spend time teaching you the basics of investment management. He will charge you a fee, but it will be well worth it because learning by making mistakes is a lot more expensive.

Good luck and give me a call if you need more advice.

4 Keys to Financial Peace

Financial peace arrives when you no longer have to worry about your income being sufficient to cover your expenses.  It’s a great feeling. Unfortunately, many people are financially insecure. They earn less than they spend and borrow the difference.

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Written Retirement Plans Double Your Chance of Success

A study by the Charles Schwab brokerage firm found that people with a written retirement plan are 60 percent more likely to increase their 401(k) contributions and twice as likely than others to stick to a monthly savings goal. But only 24 percent of Americans have a financial plan in writing, according to the study. Those with a plan are also more likely to have a budget and an emergency fund.

Call us for a customized written retirement plan just for you.

The Trouble with 401(k) Plans

The 401(k) plan is now the primary retirement plan for employees in the private sector and Ted Benna isn’t happy.  Benna is regarded as the “father” of the 401(k) plan but now he calls his child a “monster.”

There are several problems modern with 401(k) type plans.

  1. They are too complicated. The typical 401(k) plan has dozens of investment options. These are often included to satisfy government regulatory demands for broad diversification.  For the plan sponsor, who has a fiduciary responsibility, more is better.  However, for the typical worker, this just creates confusion.  He or she is not an expert in portfolio construction.  Investment choices are often made when an employee gets a new job and there are other things that are more pressing than creating the perfect portfolio.  Which leads to the second problem.
  1. Employees are given too little information. Along with a list of funds available to the employee, the primary information provided is the past performance of the funds in the plan.  However, we are constantly reminded that past performance is no guarantee of future results.  But if past performance is the main thing that the employee goes by, he or she will often invest in high-flying funds that are likely to expose them to the highest risk, setting them up for losses when the market turns.
  1. There are no in-house financial experts available to employees. Employee benefits departments are not equipped to provide guidance to their employees; that’s not their function.  In fact, they are discouraged from providing any information beyond the list of investment options and on-line links to mutual fund prospectuses.  Doing more exposes the company to liability if the employee becomes unhappy.

What’s the answer?  Until there are major revisions to 401(k) plans, it’s up to the employee to get help.  One answer is to meet with a financial advisor – an RIA – who is able and willing to accept the responsibility of providing advice and creating an appropriate portfolio using the options available in the plan.  There will probably be a fee associated with this advice, but the result should be a portfolio that reflects the employee’s financial goals and risk tolerance.

How Do I Start Saving and Making My Money Grow?

We contribute to several forums that provide advice to novice investors. One of the most popular questions goes like this:

• I’m 28 and will start a new job soon. I have accumulated $10,000 in a savings account and will be able to save an additional $1000/month when I start my new job. I need advice on how to start an investment plan.

It’s a good question. The person asking it usually has some money in the bank and has enough income to add to his or her savings. But because interest rates are so low the savings are not growing. There are three common reasons for not starting an investment program.
Not knowing where to start. The mechanics of opening an investment account can be complicated.
Fear of making a mistake. People work hard for their money and don’t want to lose if because they made some rookie error.
Not knowing who to trust. Who will provide good, honest advice for you?
Here’s how to begin an investment plan that works for people of all ages.

  • Find a Registered Investment Advisor (RIA) who is a fiduciary: who put their clients’ interests ahead of their own and provide unbiased investment guidance. They will help you through the process.
  • Find someone with experience. You don’t want to deal with someone who’s learning with your money.
  • Find someone who is accredited. A CFP™ (Certified Financial Planner) is trained to give advice on all aspects of financial planning.
  • Find someone who does not charge commissions. It eliminates conflicts of interest.
  • Find someone who has a good reputation in the community.

At Korving & Company, we’ve been helping people just like you make better decisions about their money and their lives for thirty years.

Five things you need to do with retirement accounts

The average household is juggling no fewer than eight different retirement savings accounts, according to a recent survey.  Many investors are looking to simplify their lives by consolidating at least some of those accounts.  And nearly three-quarters of them consult with a financial advisor rather than seeking information from their employer, a fund provider or another source.

So what should you do if you have two, three or more retirement accounts?  First you have to keep in mind the rules about rolling or transferring retirement accounts to avoid paying taxes.

  • First, find a financial advisor you can trust, preferably an independent RIA, who can give you unbiased advice and guide you to your goal.  He should be able to create a retirement portfolio that’s designed just for your and will result in growth with the least amount if risk.
  • Second, make sure that assets from the various retirement accounts are transferred from custodian to custodian without passing through your hands to avoid taxes or penalties.
  • Third, make sure that fees are reasonable so that you, rather than the advisor, gets most of the gains.
  • Fourth, be sure that your advisor provides you with a performance review at least once a year so that you know how you are doing.
  • Fifth, remember that once you reach 70 1/2, you have to begin taking money our of your “regular” retirement account.  If you have a Roth retirement account you can delay until you need the income.

For more information, contact Korving & Company.

“An existing relationship, lower fees and good product selection are the three top factors driving IRA rollover decisions for retirees and pre-retirees,” says the website. So, for example, advisors helping a retired client decide what to do with a lifetime’s worth of 401(k) plan assets — scattered over three or four accounts — should probably pick a fund company with which the client has already had a positive experience. Millionaire investors care even more about prior relationships than the less affluent, according to the research. But they’re less swayed by a famous name. Among survey respondents with less than $1 million to invest, 28% said they’d choose a firm with a well-known “retirement brand” when rolling assets over. Among millionaires, only 19% said brand is a priority.

What is an ETF?

Exchange Traded Funds, otherwise known as ETFs, are essentially index mutual funds that trade like stocks.  ETFs’ popularity is growing in part because some of the biggest names in the financial services industry are promoting them as alternatives to regular, or open-ended, mutual funds.

Benefit of ETFs?

What’s the benefit of an ETF?  First, most have a low expense ratio.  An expense ratio is simply the amount of money that the fund charges in fees.  A second advantage is that an ETF can be traded (bought or sold) any time that the market is open.  For example, if you believed that the stock market was going to go up during the day, you could buy a stock market index ETF in the morning and sell it in the afternoon and capture the gain (or loss).  You can’t do this on an intra-day basis with a regular open-ended mutual fund.

What are the disadvantages?  Up till now the buyer or seller of an ETF incurred a commission, just like the individual who bought or sold a stock.  This is not the case with no-load mutual funds that don’t charge a fee for either buying or selling.  That is in the process of changing as some of the biggest names like Schwab and Fidelity are offering free trades on a growing number of ETFs.

The other disadvantage for the typical investor is that most ETFs are index funds rather than actively managed.  That means that there is no-one actually making a decision about what stock or bond to buy, sell or hold.  Buying an EFT requires your active participation and management or you risk putting your investments on auto-pilot and hoping that they don’t crash.

©  Korving & Company, LLC