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Advanced Tax Planning Tips for 2024

Advanced Tax Planning Tips for 2024

As the tax season draws near, it presents a perfect opportunity for both business owners and employees to refine their financial strategies and ensure a brighter, more efficient fiscal future. Whether it’s exploring advanced tax planning, making the most of employee benefits, or simply understanding the wealth of options at your disposal, being informed is the first step toward financial empowerment. In this article, we dive into some key tax planning insights, aiming to navigate this tax season with ease and set the stage for a year filled with prosperity and informed financial decisions.

For Business Owners:

Surround yourself with a team of professionals, including a tax professional and financial advisor, to explore tax deductions, credits, and strategies to fit your business into your overall financial picture.

Consider retirement savings options like SEP IRAs for self-employed individuals or SIMPLE or 401(k) plans if you have employees. Consult with your professional team to choose the best option for your situation.

Restricted Stock Units (RSUs) for Employees:

Restricted Stock Units (RSUs) are a form of stock compensation given by employers, which vest over time. Understanding your RSUs’ vesting schedule is critical, as it dictates when you can sell or hold your shares. Deciding whether to keep vested shares or sell them involves assessing the company’s potential growth against immediate financial gains and considering the tax implications of each choice.

Due to the complexities of RSUs, including their potential impact on your taxes and investment portfolio, consulting with a financial professional is highly recommended. An advisor can guide you through the intricacies of your RSUs, helping you to integrate them into your overall financial strategy effectively. This way, you can make informed decisions that balance immediate benefits with your long-term financial objectives, optimizing the value of your RSUs in alignment with your personal goals.

Employee Stock Purchase Plan (ESPP):

An Employee Stock Purchase Plan (ESPP) allows you to buy company stock, typically at a discounted rate, which can be a great financial opportunity. Key considerations include the discount rate, its fit within your financial plan, and its effect on your investment diversity. Before participating, assess how the plan impacts your financial goals and risk tolerance. Consulting a financial professional is beneficial for navigating ESPPs’ tax implications and integrating this investment into your overall strategy efficiently. Deciding on ESPP participation should align with your broader financial health, and professional advice can ensure it complements your portfolio effectively.

Rollovers: Combining Retirement Accounts:

Consider consolidating multiple 401(k) or 403(b) accounts from past jobs into one account for easier management and to simplify future required minimum distributions. Though not mandatory, consolidation can streamline your financial management.

If you are considering rolling over money from an employer-sponsored plan, you often have the following options: leave the money in the current employer-sponsored plan, move it into a new employer-sponsored plan, roll it over to an IRA, or cash out the account value. Leaving money in a plan may provide special benefits including access to lower-cost investment options; educational services; potential for penalty-free withdrawals; protection from creditors and legal judgments; and the ability to postpone required minimum distributions. If your plan account holds appreciated employer stock, there may be negative tax implications of transferring the stock to an IRA. Whether to roll over your plan account should be discussed with your financial advisor and your tax professional.

Pension Plans:

If you’re entitled to a pension plan, explore all payout options carefully to choose the best option for your financial situation. Discuss with your financial advisor to fully understand how your choice integrates with your broader financial goals.

Engaging with knowledgeable professionals and staying informed about your financial options allows for informed, strategic decisions that support your long-term financial success. Proactive planning is key. For personalized advice and to integrate these tax planning tips into your financial strategy, consider reaching out to financial professionals like the Blakely Financial team.

If you are considering rolling over money from an employer-sponsored plan, you often have the following options: leave the money in the current employer-sponsored plan, move it into a new employer-sponsored plan, roll it over to an IRA, or cash out the account value. Leaving money in a plan may provide special benefits including access to lower-cost investment options; educational services; potential for penalty-free withdrawals; protection from creditors and legal judgments; and the ability to postpone required minimum distributions. If your plan account holds appreciated employer stock, there may be negative tax implications of transferring the stock to an IRA. Whether to roll over your plan account should be discussed with your financial advisor and your tax professional.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM  to see what other financial tips we can provide towards your financial well-being.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Electing Delayed Social Security Retirement Benefits

Electing Delayed Social Security Retirement Benefits

What is it?

You can elect to delay receiving Social Security retirement benefits.

You can choose to delay receiving Social Security retirement benefits until you are past normal (full) retirement age. Perhaps you want to work longer because you enjoy it, or maybe you want your retirement benefit to be higher when you finally do retire.

Your benefit will be increased by the delayed retirement credit.

If you are eligible to receive Social Security retirement benefits but you delay receiving benefits until after normal retirement age, you will be eligible to receive the delayed retirement credit. The delayed retirement credit increases your retirement benefit by a predetermined percentage of your primary insurance amount (PIA) for each month you delay receiving retirement benefits up to the maximum age of 70. The amount of the credit you receive depends upon two factors:

  • What year you were born
  • How many months you delayed receiving retirement benefits past normal retirement age

If you were born in 1943 or later, you will receive 2/3 of 1 percent more per month or 8 percent more per year if you delay receiving retirement benefits. So, for example, if your normal retirement age is 66, and you delay retirement until age 70, your benefit at age 70 will be 32 percent more than it would be at age 66. If your normal retirement age is 67, and you delay retirement until age 70, your benefit at age 70 will be 24 percent more than it would be at age 66.

Although the delayed retirement credit increases your Social Security retirement benefit, it does not increase your PIA.

When can it be used?

You must be eligible to receive delayed retirement benefits.

In order to receive delayed retirement benefits, you must meet the following criteria:

  • You must be at least one month older than normal retirement age, and
  • You must be fully insured for retirement benefits (in most cases have 40 quarters of coverage).

You must apply for benefits.

Receiving delayed retirement benefits is not automatic. You must apply for benefits when you want to begin receiving them. The Social Security Administration (SSA) recommends that you contact an SSA representative two or three months before you want to begin receiving benefits. You can call the SSA at 1-800-772-1213 for more information.

Strengths

Your retirement benefit will increase.

If you continue to work past normal retirement age and delay receiving Social Security retirement benefits, you may increase your retirement benefit in two ways. Not only will you receive a delayed retirement credit, but your earnings after normal retirement age may be substantial enough to increase your average indexed monthly earnings (AIME), upon which your benefit is based.

Your surviving spouse’s benefit will increase.

If you elect to receive delayed retirement benefits, then die, your surviving spouse (at normal retirement age) may receive 100 percent of the benefit you were receiving. Therefore, if your spouse has a life expectancy substantially greater than your own, you might consider delaying retirement so that your spouse may receive a higher benefit after you die.

Your delayed retirement credit isn’t counted toward your family maximum.

When you retire, your family may be eligible to receive benefits based on your PIA. These benefits may be limited by the family maximum, which generally ranges from 150 to 180 percent of your PIA. However, if you delay receiving retirement benefits, your delayed retirement credit won’t count toward your family maximum and can be paid whether or not your family’s benefits are limited by the family maximum.

Tradeoffs

Delaying retirement won’t necessarily increase your lifetime retirement benefit.

Just because you receive a higher monthly benefit when you delay retirement doesn’t necessarily mean you’ll receive a higher overall lifetime benefit. If you delay receiving retirement benefits, the amount of each benefit check will be higher, but you’ll receive fewer benefit checks than you would have if you begin receiving retirement benefits at normal retirement age. How many fewer checks you receive will depend upon how many years you delay receiving retirement benefits.

For example, assume the following facts apply to you:

  1. You delay retirement by 4 years, and retire at age 70 instead of at age 66, making you eligible for an 8 percent delayed retirement credit for each year you delay retirement. You will receive 48 fewer benefit checks.
  2. Your PIA is $1,000, so if you retire at age 66, your annual benefit will be $12,000. If you retire at age 70, your monthly benefit will be increased by $320, so your annual benefit will be $15,840.
  3. Assume that even if you’ve saved or invested all or part of your benefits, your real rate of return is 0 percent.

Using these factors, it would take you more than 12 years from the time you retire at age 70 to reach the point at which your benefits would crossover with the amount you would have accumulated if you began receiving benefits at age 66 (does not take into account annual cost of living increases):

By this Age Accumulated Benefit if Retirement Age is 66 Accumulated Benefit if Retirement Age is 70 (32% credit has been earned)
70 $ 48,000 $0
76 $120,000 $95,040
82 $192,000 $190,080
83 $204,000 $205,920

If you were to die before reaching this crossover point, your lifetime benefits would be lower than if you had retired at your normal retirement age. Conversely, if you were to die after reaching this crossover point, then your lifetime benefits would be higher. That’s why life expectancy is one of the factors to consider when deciding whether to delay receiving Social Security retirement benefits.

The delayed retirement credit won’t increase benefits paid to most family members.

When you earn the delayed retirement credit, your retirement benefit will increase. However, because the delayed retirement credit doesn’t affect your PIA, benefits that are paid to family members won’t increase (unless you die, at which time your surviving spouse may receive the same benefit you were receiving).

How to do it

Decide whether you want to delay receiving retirement benefits by comparing your options.

You can estimate your retirement benefit online using the Retirement Estimator calculator on the Social Security website (ssa.gov). You can create different scenarios based on current law that will illustrate how different earnings amounts and retirement ages will affect the benefit you receive.

Consider the following questions before making your decision.

  • Why do you want to delay receiving retirement benefits?
  • Can you afford to delay receiving retirement benefits, or do you need Social Security retirement income as soon as possible?
  • Do you expect to live long enough to benefit from delaying your retirement benefits?
  • How important is it to increase the amount of survivor income available to your spouse?

Apply for delayed Social Security retirement benefits.

Three months before you’re ready to retire, fill out an application for benefits with the SSA.

Don’t forget to apply for Medicare benefits at age 65. See Questions & Answers.

Tax considerations

If you continue to work past normal retirement age, you will continue to pay Social Security or self-employment tax on your covered earnings. Even though your earnings may increase your AIME (and thus your retirement benefit), you may not be able to recoup those payroll taxes.

Questions & Answers

If you delay receiving Social Security retirement benefits, can you still receive Medicare at age 65?

Yes. Anyone age 65 or older who is entitled to receive Social Security benefits is eligible to receive Medicare, even if he or she has not yet filed an application for Social Security benefits. However, enrollment in Medicare is automatic only for individuals who are receiving Social Security retirement benefits for at least four months before reaching age 65. If you elect to delay receiving retirement benefits, you will need to apply for Medicare benefits online, in person, or through the mail.

Can you delay receiving Social Security retirement benefits until you’re 71 or older?

Yes, but there’s no advantage to waiting longer than age 70 to begin receiving Social Security retirement benefits. You can earn the delayed retirement credit only up until age 70. In addition, if you want to work, any money you earn from working after age 70 won’t decrease your Social Security retirement benefit. So why wait?

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM  to see what other financial tips we can provide towards your financial well-being.

Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

Decoding the Debt Ceiling Crisis: An Update

Decoding the Debt Ceiling Crisis: An Update

Presented by Steve LaFrance, CFP®

We’ve discussed the debt ceiling crisis in past articles, and now it’s back in the headlines. What does this mean, and why are we watching it now? Several months ago, the U.S. borrowed as much money as it’s legally allowed to borrow and, since then, has been prohibited from borrowing more. In the language of the headlines, we have hit the debt ceiling.

If that sounds like an awkward situation, it is. It also raises very real economic and market risks, which are being played out in the news. Let’s analyze in detail what this all means.

The Current Situation

The U.S. government runs a deficit, meaning it spends more than it brings in. So, it continually borrows more to pay the outstanding bills. The problem is that Congress has put a limit on the total amount the government can borrow, also known as the debt ceiling. Congress needs to raise that limit on a regular basis to account for approved deficit spending. Raising the debt limit has become a regular political football, which is why we’re having this conversation again. Congress has not raised the limit, and we have reached the debt ceiling again.

Once the debt limit is hit, the Treasury cannot issue any more debt but must keep paying the bills. There are “extraordinary measures,” tested in previous debt-limit confrontations, which would allow this to be done in the short term. These include shifting money among different government accounts to fill the gap until more borrowing is allowed. Two examples of this are affording the debt by suspending retirement contributions for government workers or repurposing other accounts normally used for things such as stabilizing the currency. The idea is that this will buy time for Congress to authorize more borrowing. This is where we are now, and where we have been for the past several months.

The Consequences If Congress Doesn’t Act

At a certain point—tentatively estimated to be around June or July, but this is very uncertain—the Treasury will run out of money to pay the bills. Among those bills are salaries for federal workers. So, at some point, the government will largely shut down. Some bills will get paid, but many government obligations will go unpaid.

Why We Should Care

Setting aside the political aspect of the situation, this affects investors for several reasons. First, cutting off government payments will hurt economic growth. Limits on social security payments, for example, would severely hurt economic demand and confidence. Although social security would likely be the last thing cut, other cuts would also hurt growth and confidence. We saw this in prior shutdowns, and the damage was real.

The bigger problem, however, is if payments to holders of U.S. debt are not made and the Treasury market goes into default. U.S. government debt has always been the ultimate low-risk asset, where default was assumed to be nearly impossible. Adding a default risk would raise interest rates, potentially costing the country billions over time. The economic risk, both immediate and long term, is very high—and that’s what the headlines are emphasizing.

Possible Solutions

We have been down this road before, and while the ending could be bad, we’ve resolved the problem every previous time. There are a few ways we could do this without systemic damage.

The easiest and most likely course of action is for Congress to cut a deal. At this point, it seems the group of Congresspeople really looking for an extended confrontation is quite small. If that’s true, a deal is very possible, and even likely, as pressure mounts.

On the other hand, if Congress cannot or will not come to an agreement, there are other ways the government can resolve the problem before it blows up. These range from the reasonably credible, such as using a line from the Fourteenth Amendment of the U.S. Constitution to justify ignoring the limit entirely, to the reasonable but iffy, such as issuing lower face value bonds with higher coupons. There are also borderline crazy solutions, such as issuing a $1 trillion coin. In short, there are many options other than default. As we saw in the financial crisis, the government is willing to do many things that were previously unimaginable to avoid a crisis, and I am quite certain that will be the case here as well.

What Happens If We Default

Defaulting is not the end of the world, and here’s why. First, a default happened in 1971 for technical reasons. Since the reasons weren’t economic, investors looked through the default and the long-term consequences were minimal. Second, a default this time around also would not be economic; it would be political. When countries default because they can’t pay, that is a systemic problem—the lenders won’t be getting their money. In this case, though, we can and will pay. It will just take some time to get through the political process. If you think about it in personal terms, a late mortgage payment is quite different from foreclosure. No one is talking about repudiating or actually defaulting on U.S. debt over time, and the markets are reflecting that. Real default won’t happen, even if temporary default does

The Takeaway Message for Investors

Don’t panic. This has happened before and will likely happen again. The headlines are making the most of potential consequences, and the worst case would indeed be bad. But there are enormous incentives to cut a deal before we reach the worst-case scenario. And even if a deal is not cut, there are other non-default options. If we do get to default, the likely market volatility will drive a deal at that time. Failure to solve this problem really isn’t an option.

This is a big deal, and worth watching, but not worth worrying about yet. We’ll be keeping an eye on it and writing about any developments. In the meantime, keep calm and carry on.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.

 

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Blakely Financial, Inc. is located at 1022 Hutton Lane Suite 109 High Point, NC 27262 and can be reached at 336-885-2530.
Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network®.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.
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