Inheriting an investment account can significantly impact your financial situation, but it also comes with important tax considerations. Whether you’ve inherited a regular brokerage account, an IRA/401(k), Roth IRA, or a trust, understanding the tax implications is crucial for managing your newfound wealth effectively. This article will guide you through the key tax issues related to these types of accounts, including stepped-up basis, required minimum distributions (RMDs), and other factors that could affect your financial planning.

1. Regular Brokerage Accounts

When you inherit a regular brokerage account, such as one holding stocks, bonds, ETFs, or mutual funds, one of the most significant tax advantages is the "stepped-up basis." The stepped-up basis allows you to reset the cost basis of the inherited assets to their fair market value at the date of the decedent’s death. This can substantially reduce the capital gains tax you would owe if you decide to sell the assets.

Example: If your benefactor bought a stock for $10 per share and it’s worth $50 per share at their death, your cost basis is "stepped up" to $50. If you sell the stock at $55, you’ll only owe capital gains tax on the $5 increase, rather than the $45 increase from the original purchase price.

However, this benefit applies only to assets in taxable accounts. If the value of the assets increases after the date of death, those gains will be taxable when you sell the assets. Additionally, any dividends or interest earned after the decedent's death will be taxable as income to you.

If inherited assets are transferred to your name from another financial institution, it's essential to make sure that the cost basis is updated. Correcting this ensures you don't pay unnecessary capital gains taxes when selling the assets, preserving more of your inheritance.

2. Inherited IRAs, 401(k)s, and Roth IRAs

Inheriting a traditional IRA or 401(k) involves a different set of rules, primarily because these accounts typically consist of pre-tax contributions. This means that any distributions you take will be subject to ordinary income tax.

RMDs: If you inherit an IRA or 401(k) from someone who was already taking required minimum distributions (RMDs), you must continue taking RMDs based on your life expectancy or follow the 10-year rule, which requires you to deplete the account within 10 years of the original account holder's death. If the account owner had not yet reached the age for RMDs, you generally have more flexibility but still need to comply with distribution rules within the 10-year timeframe.

Roth IRAs: Inheriting a Roth IRA is more advantageous from a tax perspective. Since contributions to Roth IRAs are made with after-tax dollars, distributions are generally tax-free as long as the account has been open for at least five years. You still need to follow the 10-year rule for depleting the account, but you won’t face the same tax burden as with a traditional IRA.

Spousal Inheritance: If you inherit an IRA or 401(k) from a spouse, you have additional options. You can treat the account as your own, either by rolling it into your own IRA or by remaining the beneficiary and taking distributions according to your life expectancy. This allows for greater flexibility and can provide more control over the tax impact.

3. Inherited Trusts

Trusts are often used to manage and distribute assets according to the grantor’s wishes, offering both tax advantages and protections for beneficiaries. When you inherit a trust, the tax implications will depend on the type of trust:

Revocable Trusts: Also known as living trusts, these are still considered part of the grantor’s estate and are subject to estate taxes. Upon the grantor’s death, the trust assets receive a stepped-up basis similar to regular brokerage accounts. Distributions to beneficiaries are typically not taxed directly, but are instead tied to the trust’s income and capital gains.

Irrevocable Trusts: With an irrevocable trust, the assets are removed from the grantor’s estate, which can help reduce estate taxes. However, the tax treatment of distributions depends on whether the trust retains the income or distributes it to beneficiaries. Beneficiaries who receive distributions will generally pay income tax on the income generated by the trust, rather than on the distributions themselves.

Special Considerations: Trusts can also be subject to high tax rates on undistributed income, so it’s often advantageous to distribute income to beneficiaries, who may be in lower tax brackets. Additionally, trusts can have complex rules regarding how assets are managed and distributed, so it’s essential to work closely with your financial advisor and your attorney to understand the implications fully.

Conclusion

Inheriting investment accounts can significantly affect your financial future, but it’s essential to navigate the tax implications carefully. Understanding the differences between regular brokerage accounts, IRAs/401(k)s, and trusts, and how each is taxed, can help you make informed decisions that align with your financial goals. Working with a financial advisor who has an expertise in tax can provide invaluable guidance, ensuring that you maximize the benefits of your inheritance.

Thank you for reading,
The Canty Financial Team

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

Effective estate planning is a cornerstone of financial security, ensuring your assets are managed and distributed according to your wishes after your death. Three essential tools in this process are wills, trusts, and account titling. Each serves distinct purposes and offers unique advantages, making it crucial to understand their differences and how they can work together to protect your legacy and provide for your loved ones.

Wills

A will is a legal document that outlines how you want your assets distributed after your death. It can also name guardians for minor children and specify funeral arrangements. Wills are essential because they provide clear instructions, reducing potential conflicts among heirs.

Key Features:

1. Simplicity and Accessibility: Creating a will is relatively straightforward and can be done with the help of an attorney or through various online services. It is accessible to anyone, regardless of the size of their estate.
2. Flexibility: You can update your will as your circumstances change. This flexibility is crucial for reflecting life events such as marriage, divorce, the birth of children, or significant changes in your financial situation.
3. Probate Process: One major drawback of a will is that it must go through probate, a legal process where a court oversees the distribution of your assets. Probate can be time-consuming and costly, and it may become a public record.

Trusts

A trust is a legal entity created to hold assets for the benefit of specific individuals or entities. Trusts can be established during your lifetime (living trusts) or upon your death (testamentary trusts).

Key Features:

1. Avoiding Probate: One of the most significant advantages of trusts is that they can help your estate avoid probate. Assets held in a trust are distributed according to the terms of the trust, bypassing the probate process. This can save time, reduce costs, and maintain privacy.
2. Control Over Distribution: Trusts offer greater control over how and when your assets are distributed. For example, you can set conditions for distribution, such as reaching a certain age or achieving specific milestones.
3. Asset Protection for Long-Term Care and Estate Tax Planning: Trusts can be strategically used to safeguard your assets from being depleted by long-term care costs and to minimize estate taxes, ensuring that more of your wealth is preserved for your beneficiaries.
4. Complexity and Cost: Setting up a trust can be more complex and expensive than creating a will. It often requires the assistance of an attorney and ongoing management.

Account Titling

Account titling refers to the way assets are owned and named. How you title your accounts can significantly impact how your assets are transferred upon your death.

Key Features:

1. Joint Ownership: Assets held in joint ownership with rights of survivorship automatically pass to the surviving owner(s) upon your death, bypassing the probate process. This is common for married couples.
2. Beneficiary Designations: Many financial accounts, such as retirement accounts and life insurance policies, allow you to name beneficiaries. These assets transfer directly to the named beneficiaries, avoiding probate.
3. Transfer on Death (TOD) and Payable on Death (POD): These designations can be added to various accounts, including bank accounts and brokerage accounts. They allow the assets to transfer directly to the named beneficiaries upon your death, rather than going through probate.
4. Simplicity: Account titling is a relatively simple and cost-effective way to ensure certain assets are transferred according to your wishes without the need for a will or trust.
5. Limitations: While effective for specific assets, account titling does not provide the comprehensive control and protection that a trust can offer. It also may not address all aspects of your estate planning needs, such as guardianship for minor children or detailed distribution instructions.

Combining Wills, Trusts, and Account Titling

For most individuals, a combination of wills, trusts, and account titling provides the most comprehensive estate planning solution. Here’s how they can work together:

1. Use a Will for General Instructions: Your will can serve as the foundation of your estate plan, providing general instructions for asset distribution, naming guardians for minor children, and specifying your final wishes.
2. Establish Trusts for Specific Needs: Trusts can be used for specific purposes, such as providing for minor children, managing assets for beneficiaries with special needs, or protecting assets from long term care expenses. Trusts can also help minimize estate taxes and ensure privacy.
3. Leverage Account Titling for Efficiency: Properly titling your accounts and using beneficiary designations can streamline the transfer of certain assets, ensuring they pass directly to your chosen beneficiaries without the delays and costs of probate.

Conclusion

Understanding the differences between wills, trusts, and account titling is essential for effective estate planning. Each tool offers unique benefits and, when used together, can provide a robust strategy for managing and distributing your assets according to your wishes. At Canty Financial we can help you create a comprehensive estate plan that ensures your legacy is protected and your loved ones are provided for, giving you peace of mind now and in the future.

Thank you for reading,
The Canty Financial Team

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

We frequently hear from clients who have a few scattered investment accounts or old employer retirement plans that they’ve left behind. These accounts often end up spread across different institutions, causing stress and concern about potentially forgetting about them and leaving money unclaimed. Managing multiple accounts can become overwhelming and stressful, but consolidating your investment accounts can provide significant benefits, helping you optimize your financial strategy and gain peace of mind. Here’s why you should consider consolidating your investment accounts.

Simplified Management and Tracking

One of the most significant advantages of consolidating your investment accounts is the simplification it brings to your financial life. With all your investments in one place, it becomes much easier to track performance, monitor asset allocation, and make informed decisions. You no longer have to log into multiple accounts to get a comprehensive view of your financial health. Instead, a consolidated account provides a holistic picture, allowing for more straightforward management and oversight.

Reduced Fees and Better Service

Maintaining multiple accounts often means incurring multiple sets of fees. These can include account maintenance fees, trading fees, and advisory fees. By consolidating your accounts, you can reduce or eliminate many of these redundant fees. Additionally, many financial institutions offer lower fees or additional services for larger account balances, so combining your investments can make you eligible for higher-quality service levels.

Optimized Investment Strategy

Consolidating investment accounts allows for a more cohesive and optimized investment strategy. When your assets are spread across different accounts, it can be challenging to ensure that your overall portfolio is properly diversified and aligned with your risk tolerance and financial goals. Consolidation helps you create a unified investment plan that takes into account all your assets, ensuring a balanced and well-coordinated approach.

Easier Rebalancing

Regularly rebalancing your portfolio is essential to maintaining your desired asset allocation and risk level. However, rebalancing can be complicated when dealing with multiple accounts at different institutions. Consolidating your investments makes it much easier to perform this crucial task. With all your assets in one place, you can efficiently rebalance your portfolio, ensuring that it remains aligned with your long-term objectives.

Simplified Tax Reporting

Tax season can be stressful, especially if you have to deal with multiple account statements and tax documents. Consolidating your accounts simplifies tax reporting by reducing the number of forms you need to manage. A single consolidated account provides a unified statement, making it easier to track your taxable events, such as capital gains and dividends, and ensuring accurate and efficient tax filing.

Enhanced Financial Planning

Working with a financial advisor becomes more effective when all your investments are consolidated. Advisors can provide better, more comprehensive advice when they have a complete view of your financial situation. Consolidation allows your advisor to develop a more personalized and strategic financial plan, tailored to your unique needs and goals. It also facilitates more effective communication and collaboration between you and your advisor.

Increased Confidence and Peace of Mind

Finally, consolidating your investment accounts can provide you with increased confidence and peace of mind. Knowing that all your investments are organized and managed under one roof reduces the stress and uncertainty associated with managing multiple accounts. It allows you to feel more in control of your financial future and ensures that you are not leaving any money behind or forgetting about any accounts.

How to Consolidate Your Investment Accounts

Consolidating your investment accounts can seem like a daunting task, but it’s a straightforward process when broken down into manageable steps. Here's how you can roll over your old employer 401(k) and consolidate IRAs and brokerage accounts.

Rolling Over Your Old Employer 401(k) or 403(b)

1. Contact Your Old Employer’s Plan Administrator: Reach out to the plan administrator or HR department of your former employer to inform them of your intention to roll over your 401(k).
2. Choose Your Destination Account: Decide where you want to roll over your 401(k) funds. Typically, this will be an Individual Retirement Account (IRA) due to the flexibility and variety of investment options available.
3. Complete the Rollover Paperwork: Obtain the necessary rollover forms from your old employer. Complete these forms, ensuring all information is accurate.
4. Direct Rollover: Request a direct rollover, where the funds are transferred directly from your old 401(k) plan to your IRA. This method avoids potential tax penalties and ensures your funds are not counted as a distribution.
5. Confirm the Transfer: Follow up with both institutions to confirm the rollover has been completed successfully. Ensure that all funds have been transferred and properly invested in your new IRA.

Consolidating IRAs and Brokerage Accounts

1. Identify Accounts for Consolidation: Make a list of all IRAs and brokerage accounts you wish to consolidate.
2. Choose a Primary Institution: Decide which financial institution you want to use for your consolidated accounts. Consider factors such as fees, investment options, and service quality.
3. Complete Transfer Forms: Obtain transfer forms from the institution where you plan to consolidate your accounts. Fill out these forms, providing details of the accounts to be transferred.
4. Submit Forms: Submit the completed transfer forms to the receiving institution. They will handle the process of transferring your funds from the existing accounts to the consolidated account.
5. Monitor the Transfer: Keep an eye on the transfer process, ensuring that all funds are moved correctly and that your investments are allocated according to your strategy.

Conclusion

Consolidating your investment accounts offers numerous benefits, from simplified management and reduced fees to optimized investment strategies and easier tax reporting. It enhances your ability to maintain a well-balanced portfolio, work effectively with your financial advisor, and ultimately achieve your financial goals. If you have multiple investment accounts, now is the time to consider consolidation as a strategic move towards a more organized and efficient financial future.

At Canty Financial, we are here to help you navigate the consolidation process and create a streamlined, effective investment strategy tailored to your needs. Contact us today to learn more about how we can assist you in consolidating your investment accounts and optimizing your financial plan.

Thank you for reading,
The Canty Financial Team

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

Whether you're considering selling your home now or in the future, understanding the tax implications of this significant financial decision is crucial. The sale of your primary residence can have various tax consequences, and being informed can help you make the best choices for your financial well-being. This newsletter aims to provide you with valuable insights into the tax aspects of selling your home, ensuring you are prepared and confident in your decisions.

The Basics of Capital Gains Tax

When you sell your primary residence, you may be subject to capital gains tax on the profit from the sale. The capital gain is calculated as the difference between the selling price of the home and its purchase price (plus any improvements made over the years). However, the tax code provides some relief for homeowners through the primary residence exclusion.

Primary Residence Exclusion

The primary residence exclusion allows homeowners to exclude up to $250,000 of capital gains from their income if they are single, or up to $500,000 if they are married and file jointly. To qualify for this exclusion, you must meet the following criteria:

1. Ownership Test: You must have owned the home for at least two of the five years preceding the sale.
2. Use Test: The home must have been your primary residence for at least two of the five years preceding the sale.
3. Frequency: You can only claim this exclusion once every two years.

Calculating Capital Gains

To determine your capital gains, subtract your home’s adjusted basis from the sales price. The adjusted basis includes the original purchase price plus the cost of any improvements made to the property as well as closing costs. For example:

• Original Purchase Price: $300,000
• Home Improvements: $50,000
• Closing Costs: $15,000
• Adjusted Basis: $365,000
• Selling Price: $615,000
• Capital Gain: $615,000 - $365,000 = $250,000

In this scenario, if you are single, you could exclude the entire $250,000 capital gain from your taxable income, owing no capital gains tax.

Reporting the Sale

If you qualify for the primary residence exclusion and your gain is below the exclusion limit, you typically do not need to report the sale on your federal tax return. However, if your gain exceeds the exclusion limit or you do not qualify for the exclusion, you must report the sale on Form 8949 and Schedule D of your tax return.

Planning Ahead

Effective tax planning can help you maximize the benefits of selling your primary residence. Here are a few strategies to consider:

1. Timing the Sale: Plan the sale of your home to maximize the primary residence exclusion. If possible, wait until you meet the ownership and use tests to qualify for the full exclusion.
2. Documenting Improvements: Keep detailed records of all home improvements, as these can increase your adjusted basis and reduce your capital gains. This is specifically important for those who believe they will be above the $250k/ $500k exclusion threshold.
3. Consulting Professionals: Work with a financial planner and tax advisor to understand your specific situation and develop a strategy that aligns with your financial goals.

Special Considerations

While the primary residence exclusion is generous, there are several special considerations to keep in mind:

1. Partial Exclusion: If you don’t meet the two-year requirements due to unforeseen circumstances such as a job change, health issues, or other unforeseen circumstances, you may still qualify for a partial exclusion.
2. Home Office Deductions: If you have used part of your home for business purposes and claimed depreciation, that portion of the home may be subject to depreciation recapture, which is taxed at a higher rate.
3. Second Homes and Rentals: The primary residence exclusion does not apply to second homes or rental properties. However, if you converted a rental property to your primary residence, you might be able to exclude some of the gain.
4. State Taxes: In addition to federal capital gains tax, you may also owe state taxes on the sale of your home. State tax laws vary, so it’s important to consult with a tax professional familiar with your state’s regulations.

Conclusion

Selling your primary residence is a significant financial decision with important tax implications. By understanding the rules and planning ahead, you can make informed decisions that protect your financial interests. If you have any questions or need assistance with your financial planning, please do not hesitate to contact us. We are here to help you navigate the complexities of the tax code and achieve your financial goals.

Thank you for reading,
The Canty Financial Team

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

Retirement planning is a crucial aspect of financial health, and understanding how to manage your retirement withdrawals can make a significant difference in your financial security during your later years. This newsletter will explain the rules regarding when you can begin withdrawing from various retirement accounts, discuss detailed retirement withdrawal strategies, provide updates to required minimum distributions (RMDs), and look at how to integrate these withdrawals with other income sources.

When Are You Allowed to Take Withdrawals?

Each type of retirement account has specific rules for withdrawals:

• IRAs (Traditional and Roth): You can make penalty-free withdrawals from the age of 59½. Roth IRAs allow you to withdraw contributions at any time tax and penalty-free, but earnings are subject to the same age rule as traditional IRAs.
• 401(k)s and 403(b)s: Withdrawals are allowed from age 59½ without penalties, with some plans having special considerations if you terminate service prior to this age.
• Thrift Savings Plan (TSP): Like the others, the TSP allows for withdrawals from age 59½. There are also exceptions to this rule which allow withdrawals from age 50 to 55 penalty-free if you meet certain criteria.
• Deferred Compensation Plans (457 plans): These plans are unique, allowing for penalty-free withdrawals once you leave the employer, regardless of age.

Retirement Account Withdrawal Strategies

Choosing a strategic approach to withdrawing your retirement funds can help ensure that your savings last throughout your retirement. Many withdrawal strategies evolve over time as needs and life changes occur:

1. The 4% Rule: This strategy involves withdrawing 4% of your total portfolio each year of retirement. This approach is designed to balance income needs with the goal of maintaining capital longevity over approximately 30 years.
2. Equal Systematic Payments: Under this method, you withdraw the same amount periodically, whether monthly or annually. This strategy offers predictability but does not account for changes in personal expenses or inflation.
3. Dynamic Strategies: These strategies adjust your withdrawal amounts based on specific factors such as economic conditions, market performance, or changes in personal financial needs. They often include:
   • Dynamic Spending Rules: Adjust withdrawals based on portfolio performance. If investments perform well, you might increase withdrawals slightly, and vice versa.
   • Guardrails: Establish upper and lower limits on withdrawals to ensure the portfolio isn't depleted too quickly during downturns or overly conserved during upturns.
4. Bucket Strategies: This involves dividing your retirement funds into different 'buckets' assigned to different periods of your retirement. For example, the first bucket might contain cash for immediate expenses, the second might be invested in bonds for medium-term needs, and the third in stocks for long-term growth.

Required Minimum Distributions (RMDs)

Recent legislative changes have altered the age at which RMDs must begin from age 72 to age 73 and eventually age 75:

• The Secure Act 2.0 increased the age at which RMDs begin. For individuals who turn 73 in 2024, their first RMD will be in 2024. This will increase to age 75 in 2033.

Failing to meet RMD requirements can lead to significant penalties, including a 25% excise tax on the amount that should have been withdrawn. It’s crucial to incorporate RMDs into your withdrawal strategy to avoid these penalties and to optimize your tax liabilities.

Coordinating Withdrawals with Other Income Sources

Many retirees will also receive income from Social Security, pensions, or may even continue to work part-time. Strategically integrating these sources with your withdrawal plan can help manage your tax bracket each year and provide a balanced approach to generating retirement income. For example, you might delay taking Social Security benefits to maximize the monthly payout, relying more on personal savings in the early years of retirement.

Another example of coordinating your withdrawals with other retirement income sources involves strategically timing the withdrawal of funds from tax-deferred accounts (like traditional IRAs or 401(k)s), taxable accounts (individual or joint brokerage accounts), and tax-exempt accounts (like Roth IRAs) to manage tax liabilities effectively.

For instance, if a retiree expects a higher taxable income in a particular year—perhaps due to selling a property or receiving a large payout from an investment—they might choose to withdraw less from their tax-deferred accounts to stay in a lower tax bracket and instead use funds from their Roth IRA, which can be withdrawn tax-free. This strategy helps minimize the overall tax burden by balancing the types of withdrawals to take advantage of lower tax rates in other years.

Conclusion

Managing retirement withdrawals effectively involves understanding the rules that apply to your accounts, choosing a strategic approach to withdrawing funds, being aware of recent changes to RMDs, and coordinating these withdrawals with other income sources. We regularly consult with our clients to determine the most appropriate strategy for their specific situation, ensuring their retirement funds are managed wisely.

If you have any questions about your retirement withdrawal strategy, please feel free to reach out to us.

Thank you for reading,
The Canty Financial Team

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

Tax planning is a cornerstone of a solid retirement plan, ensuring you can enjoy retirement while maximizing the savings accumulated throughout your career. Understanding how different income sources are taxed, and leveraging strategies to minimize these taxes is critical. Additionally, the guidance of a trusted financial advisor who knows your situation, understands the complex tax landscape, and acts as a sounding board for your ideas and questions is indispensable. 

Understanding Your Retirement Income Sources

Retirement income has unique tax implications, depending on the account type or investment:

• Taxable Income: Includes earnings from brokerage accounts, taxed as either long-term or short-term capital gains. Dividends and interest are taxed at ordinary income tax rates and/ or capital gains rates.
• Tax-Deferred: Traditional IRAs, 401(k)s, 403(b), TSP, Deferred Comp, Pensions, and annuities fall under this category, with taxes applied at ordinary income rates upon withdrawal.
• Tax-Free: Roth IRAs and Roth 401(k)s offer qualified distributions that are tax-free, providing a significant advantage in retirement planning. Certain types of bonds can also offer tax-free income.
• Social Security: Social Security is taxed as ordinary income. Between 0%, 50%, or 85% of the benefits received will be considered taxable, depending on your total income.

Utilizing Tax-Efficient Withdrawal Strategies

The strategy you use to withdraw from your retirement savings plays a crucial role in managing your tax impact. Typically, prioritizing withdrawals from taxable investment accounts first, to take advantage of potentially lower capital gains rates, is advisable.

Then, accessing funds from tax-deferred accounts like 401(k)s and traditional IRAs can help, as these are taxed as ordinary income upon withdrawal.

Integrating Roth IRAs into your strategy adds valuable tax diversification and flexibility, given that qualified distributions are tax-free.

Understanding the nuances of Required Minimum Distributions (RMDs) and selecting the appropriate investments to liquidate are also essential for minimizing tax liabilities. At Canty Financial, we emphasize tax-efficient withdrawal planning as a vital part of our retirement planning services, aiming to enhance your financial outcome in retirement.

Investing in Tax-Advantaged Accounts and Portfolio Structures

Considering tax implications prior to making investments can lead to substantial tax savings and provide increased after-tax returns. The choice between investing in traditional IRAs versus Roth IRAs, for example, should be influenced by your current and expected future tax situations.

Contributions to Health Savings Accounts (HSAs), if eligible, also offer tax benefits and can act as a substitute for your IRA or other tax-deferred accounts. Contributions to HSAs are tax deductible and if used for qualified medical expenses distributions are tax-free. Any distributions from HSAs after age 65 are considered ordinary income, but not subject to a 10% penalty.

Exchange traded funds are more tax efficient and have less capital gain distributions compared to similar mutual funds, allowing you to keep your money invested rather than having to pay large tax bills each year. We construct portfolios of ETFs at Canty Financial, giving our clients more tax-advantageous portfolio structures.

Harvesting Losses and Gains

Tax-loss harvesting is a strategy to offset capital gains with losses reducing your net tax burden. At Canty Financial, we leverage our portfolio rebalancing software, 55IP, to automate this process. Tax loss harvesting opportunities are consistently analyzed every 30 days, allowing our clients to take advantage of fluctuations in the market. If a fund can be sold at a loss, we will realize the loss by selling that ETF and then purchasing a very similar fund. This allows our clients to take advantage of the loss while remaining fully invested at all times. This approach is particularly beneficial for managing large, unrealized gains and for transitioning accounts to a new portfolio with minimal tax impact.

Charitable Contributions

Charitable giving, including Qualified Charitable Distributions (QCDs) from IRAs, can reduce taxable income and is highly effective if you are subject to RMDs or if you take the standard deduction. Donating appreciated assets directly to charity can also circumvent capital gains taxes, offering a tax-efficient way to support charitable causes.

Estate Planning and Gifting

We assist clients in developing estate planning strategies that minimize transfer taxes and facilitate the efficient transfer of wealth to heirs. This may involve the use of trusts, beneficiary designations, transfer on death titling, and strategic gifting. Understanding the rules and benefits of annual gifting can further reduce tax bills.

State Tax Considerations

State taxes can also affect retirement income. For instance, New York State does not tax Social Security or public pensions and offers a $20,000 exclusion for retirement account withdrawals.

Certain income such as interest from U.S. government bonds are also tax-exempt in many States.

Planning for State taxes, especially if considering a move in retirement, is crucial for minimizing overall tax burdens.

Consult with a Professional

Tailoring tax planning strategies to individual circumstances requires professional insight. The landscape of tax laws and personal situations is ever-changing, highlighting the need for ongoing tax planning.

At Canty Financial, we prioritize the integration of tax considerations into your comprehensive financial plan, covering areas such as retirement, estate planning, and investment management. Our approach ensures that our clients experience no gap between their tax strategy and their broader financial decisions, a common issue when advisors lack sufficient tax knowledge.

Engaging with a financial planner or tax professional goes beyond mere tax compliance, it's about maximizing your financial potential in retirement. By understanding and applying these strategies, retirees can significantly reduce their tax burdens, securing a more prosperous and worry-free retirement.

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

As a financial planning firm, we understand the importance of preparing for all life's stages, especially the later years. One critical aspect that often goes overlooked is long-term care financial planning. It's about more than just saving; it's about strategically preparing for the financial demands that come with aging. In this post, we'll explain why long-term care planning is essential and how you can effectively prepare for it.

Understanding Long-Term Care

Long-term care refers to a range of services and support needed by people who are unable to perform everyday activities on their own due to chronic illness, disability, or the aging process. It includes assistance with activities like bathing, dressing, and eating, and it can be provided at home, in a community setting, or in a facility.

The Cost of Long-Term Care

One of the most eye-opening aspects of long-term care is its cost. According to recent studies, the average cost of a private room in a nursing home can exceed $100,000 per year, and even home healthcare services can run thousands of dollars monthly. These costs can quickly deplete savings, leaving families financially vulnerable.

Medicare and Medicaid: What Do They Cover?

It's crucial to understand the role of Medicare and Medicaid in long-term care. Medicare, the federal health insurance program for people over 65, does not typically cover long-term care costs. On the other hand, Medicaid, a state and federal program that offers health coverage to eligible low-income individuals, can cover long-term care costs but requires meeting specific financial criteria.

The Role of Estate Planning

Estate planning can play a significant role in long-term care financial planning, particularly through the use of irrevocable trusts. These legal instruments can be pivotal in protecting your assets while addressing the potential need for Medicaid support in the future.

An irrevocable trust, once established and funded, removes the assets from your ownership. This is crucial for Medicaid planning, as Medicaid eligibility is based on the assets you own. There is a five-year look-back period, during which assets transferred out of your name can still impact your eligibility. Therefore, early planning is key.

By transferring assets into an irrevocable trust well before this look-back period, you can protect your estate from being depleted by long-term care costs. This strategic move ensures that your assets are not counted towards Medicaid's asset limit, potentially qualifying you for Medicaid assistance with nursing home costs without exhausting your life savings. It's important to note that these trusts must be properly structured and managed to comply with Medicaid rules and regulations.

Insurance Options for Long-Term Care

Long-term care insurance is a topic that cannot be overlooked, despite its evolving landscape. Long-term care insurance, once a more common component of retirement planning, has become increasingly expensive and less prevalent due to rising care costs. These policies are designed to cover services that aren't typically included in regular health insurance, Medicare, or Medicaid.

When considering long-term care insurance, it's essential to be aware of these dynamics. The cost of premiums has risen significantly, reflecting the increased expenses associated with long-term care. As a result, these policies may not be as accessible as they once were, prompting a need for careful evaluation and strategic planning.

Key factors to consider include your age and health status, as they significantly impact the cost and availability of coverage. Generally, the younger and healthier you are when you apply, the more favorable your premiums will be. However, with the current market trends, even early applicants need to be prepared for potentially high costs.

It's also crucial to scrutinize the benefits each policy offers. With the changing landscape of long-term care insurance, once standard benefits may now be limited or cost extra. Policies vary widely in terms of daily benefits, length of coverage, and what types of care are covered, so a thorough comparison is necessary to find the best fit for your needs.

Given these challenges, long-term care insurance is not a one-size-fits-all solution. It's important to balance the potential benefits of a policy against its costs, keeping in mind the rising expenses in the long-term care sector. In some cases, alternative strategies such as protecting assets using irrevocable trusts, or self-funding through savings and investments might be more viable.

Saving and Investment Strategies

A robust savings and investment plan can provide an additional layer of security. It's important to effectively utilize various investment tools such as retirement accounts, brokerage accounts, pensions, and other financial instruments, with an eye towards long-term care needs. Some retirement accounts may offer a degree of protection in the context of Medicaid eligibility, which can be an important consideration in your overall financial planning for long-term care.

Tax Planning and Long-Term Care

Effective tax planning is a vital component of long-term care financial planning. Here are some tax considerations associated with long-term care planning.

• Deductibility of Long-Term Care Expenses: Qualified long-term care expenses, such as nursing home costs, may be deductible as medical expenses if they exceed a certain percentage of your adjusted gross income.
• Deduction of Long-Term Care Insurance Premiums: Premiums paid for qualified long-term care insurance policies can be tax-deductible, subject to age-based limits and IRS guidelines.
• Estate Tax Considerations: Utilizing trusts in estate planning can reduce the taxable estate, potentially lowering estate taxes and affecting long-term care funding.
• Tax Implications of Gifts & Asset Transfers: Transferring assets to qualify for Medicaid can have gift tax consequences, especially considering the five-year look-back period for Medicaid eligibility.
• Income Tax on Trust Assets: Investment accounts within trusts will generate income via dividends, interest, and potential capital gains. Proper coordination of tax planning and investment decisions can reduce the amount of taxes paid at the trust level.
• State-Specific Tax Considerations: Some states offer tax credits or deductions for long-term care insurance premiums or have specific rules regarding the taxation of long-term care benefits. For example, New York State has a 6% assessment on nursing home facilities, typically passed on to the residents. This is an eligible deduction when filing a NYS income tax return.

Having Family Discussions

It's vital to have open and honest conversations with family members about long-term care preferences and financial planning. These discussions can help ensure that your care wishes are understood and respected, and they can also provide an opportunity to discuss financial contributions and support from family members.

Legal Documents and Healthcare Directives

Preparing legal documents, such as a durable power of attorney and healthcare directives, is a crucial step. These documents ensure that your preferences for care and financial decisions are followed, even if you're unable to communicate them yourself.

Start Planning Today

Long-term care financial planning is an integral part of a comprehensive financial strategy. It requires thoughtful consideration and proactive planning. As financial planners, we are here to guide you through this process, ensuring that you and your loved ones are well-prepared for the future. Remember, the best time to plan for long-term care is before you need it.

If you haven't started planning for long-term care, now is the time to begin. Contact us to schedule a consultation. Together, we can develop a long-term care financial plan that meets your unique needs and provides peace of mind for the future.

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

We are excited to begin 2024, marking the 37th year of our firm's history. As we continue our journey, here are some important updates and enhancements to our services that we're thrilled to share with you.

Firm Updates and Our Services:

• Canty Financial Management is proud to serve over 400 families, managing over $165 million in Assets Under Management (AUM). Our expertise as Fiduciary advisors encompasses investment management, financial planning, and income tax preparation & planning.
• Celebrating professional growth, Joe Canty has recently earned his CFP certification, furthering our commitment to excellence in financial planning services.
• Welcoming Tina Alteri, CPA full-time to our team. Tina has worked for CFM seasonally for over 20 years, she brings her expertise in tax planning and preparation, and superb client service to further strengthen our firm’s capabilities.

Market Overview:

Read our latest market insights and our recent rebalance strategy in our CFM Investment Commentary. We invite your questions and look forward to discussing these topics with you.

Enhanced Portfolio Management:

We're excited to continue our collaboration with institutional portfolio managers such as J.P. Morgan, BlackRock, Clough Capital, and State Street. This partnership aims to optimize our model portfolios, leveraging their extensive market experience and advanced analytical tools. This strategy enhances our ability to offer you diversified, robust investment options tailored to meet your individual financial goals.

Technology Resources & Updates:

• 55IP: Coming in 2024, this innovative technology will revolutionize tax-smart investing, including automated tax loss harvesting every 30 days, tax-smart withdrawals, and tax-efficient rebalancing, adding significant value to our client’s investment portfolios.
• RightCapital / CFM Roadmap: Our financial planning software enables us to assist clients with comprehensive retirement planning, estate planning, investment & net worth overview, and provides access to a handful of other financial planning tools. RightCapital serves as a central hub for our client’s finances, allowing us to provide clear actionable financial insights to our clients. Start your planning journey here: CFM Roadmap.
• Charles Schwab: Secure and efficient custody of investment accounts is facilitated through the Schwab platform, ensuring a superior client experience. CFM remains an independent entity and does not have any direct affiliation with Charles Schwab. This independence allows us to focus solely on the best interests of our clients.
• Morningstar: Morningstar plays a crucial role in our client performance reporting and portfolio research. Its comprehensive suite of tools enables us to deliver detailed analyses and insights, ensuring that our clients have a clear understanding of their investment performance. The depth and breadth of Morningstar's research capabilities also support our strategic decision-making process when building model portfolios.
• OpenAI: We have optimized our services by incorporating OpenAI into our processes. This technology helps us conduct in-depth analyses of tax law changes and IRS publications. Additionally, OpenAI aids in investment benchmarking and portfolio optimization, ensuring our strategies are data-driven and aligned with our current views on the market.
• ProSeries: ProSeries is our go-to resource for high-level tax preparation and planning. Its robust capabilities allow us to navigate complex tax scenarios with precision and efficiency. This tool is essential in our efforts to optimize tax strategies for our clients.

Stay Informed:

Stay up to date on the latest financial planning news by subscribing to our monthly newsletter here.

Looking Forward to 2024:

We encourage you to explore the new features of our software and connect with a CFM advisor for personalized and tailored guidance. We look forward to helping you navigate your financial journey into the new year.

Best regards, The Canty Financial Management Team

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

Retirement marks a significant transition in life, offering the promise of relaxation, exploration, and pursuing passions long put on hold. However, achieving the retirement of your dreams requires careful financial planning. One of the critical steps in this journey is estimating the amount of money needed to generate sufficient income during retirement while also optimizing for tax planning.

Estimating Your Retirement Income

As you embark on retirement planning, diversifying your income sources becomes pivotal. Consider the following key income streams:

Investment Accounts

Your investment accounts, including IRAs, 401(k)s, TSPs, deferred compensation, and brokerage accounts, can form the foundation of your retirement income. A popular guideline is the 4% rule, which suggests withdrawing 4% of your total retirement savings annually. For example, if your savings amount to $1 million, this rule indicates an annual withdrawal of $40,000.

Pensions

For those fortunate enough to have pensions, they provide a reliable income stream. Pensions are typically determined by your years of service and average salary.

Interest and Dividends

Interest from bonds and dividends from stocks contribute to a steady income. Creating a balanced portfolio with growth-oriented and income-generating assets is essential for consistent returns.

Social Security Benefits

Social Security will also play a role in retirement income. Timing is crucial – delaying claiming benefits until full retirement age or beyond can yield higher monthly payments.

Part-Time Opportunities

Many retirees explore part-time work or side gigs to bolster income and keep engaged. These activities can offer both financial benefits and personal fulfillment.

Understand Your Spending: The First Step

Before assessing your retirement income needs, it's crucial to understand your spending habits. Tracking your current expenses forms the foundation of creating a realistic retirement budget. Account for all monthly and yearly expenditures, including housing, utilities, healthcare, transportation, leisure activities, and potential travel.

Creating a Retirement Budget

Your newfound insight into spending lays the groundwork for crafting a comprehensive retirement budget. This budget should align with your envisioned lifestyle. Consider these factors:

Essential vs. Discretionary Expenses

Distinguish between essential expenses (housing, healthcare) and discretionary spending (travel, entertainment) to allocate funds effectively.

Accounting for Inflation

Incorporate an inflation rate into your budget to ensure future income covers rising costs over time.

Contingency Planning

Building a contingency fund within your budget prepares you for unforeseen expenses that may arise during retirement.

A Living, Breathing Plan

Remember, life is fluid, and so should be your budget. Regularly review and adapt your budget as circumstances evolve.

Calculating Your Retirement Nest Egg

To approximate the funds you'll need for retirement while optimizing for tax planning, follow these guidelines:

Estimate Annual Retirement Expenses: Using your budget, calculate the annual funds needed to maintain your desired lifestyle.

Assess Income Sources: Calculate expected income from investments, Social Security, pensions, and potential part-time work.

Determine Shortfall: Deduct expected annual income from projected expenses to identify your financial gap.

Incorporate Tax Planning: Strategically withdraw funds from your retirement accounts to minimize your tax impact. We regularly help our clients optimize for tax-efficient distribution strategies out of tax-deferred, taxable, and tax-free investment accounts.

Try Applying the 4% Rule: Divide your financial gap by 0.04 (4%) to get a rough estimate of the total retirement savings required.

Plan for Longevity: With rising life expectancies, ensure your savings support you through extended retirement years and the potential need for long-term care.

Tax Optimization: A Crucial Component

Optimizing your retirement income includes strategic tax planning. Minimizing your tax liability when tapping your retirement nest egg is a key factor in helping to ensure that you don’t outlive your money in retirement. Planning around withdrawals, required minimum distributions, pension income or income from employment can help determine which accounts to tap in which order. Here are key strategies to consider:

Tax-Efficient Withdrawals/ Distributions

Strategically withdrawing funds from different types of retirement accounts can minimize your tax liability. This is one of the most common areas where we help our clients who are in retirement. By carefully balancing withdrawals from taxable, tax-deferred, and tax-free (Roth) accounts, you can minimize your taxable income in retirement and reduce your overall tax burden.

Consider Tax-Optimized Investments

Invest in assets that have historically generated tax-efficient returns. For example, index funds and ETFs tend to generate fewer capital gains distributions compared to actively managed funds, potentially resulting in lower tax liabilities.

RMD Planning

Understand the rules around Required Minimum Distributions (RMDs) from retirement accounts like IRAs, 401(k)s, TSP, and Deferred Comp. Failing to take RMDs on time can result in substantial tax penalties. Strategically planning your withdrawals can help minimize the impact of RMDs on your taxable income.

Healthcare Savings Strategies

Exploring tax-advantaged healthcare funding options like Health Savings Accounts (HSAs) can help you manage healthcare costs in retirement while providing potential tax benefits. HSAs offer triple tax advantages: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Tax-Loss Harvesting

Implement tax-loss harvesting to offset capital gains with capital losses in your investment portfolio. This strategy can help minimize your tax liability on investment gains.

Tax-Efficient Charitable Giving

Explore ways to optimize your charitable giving to maximize tax benefits. Donating appreciated securities, using donor-advised funds, and considering Qualified Charitable Distributions (QCDs) are strategies to explore.

Timing of Social Security

Deciding when to begin claiming Social Security benefits can have a substantial impact on your taxable income during retirement. Consult with us to determine the most tax-efficient timing for claiming your benefits.

Estate Planning Considerations

As part of your overall tax strategy, consider how your estate will be passed on to heirs. Estate tax laws can impact the transfer of wealth, and careful estate planning can help minimize tax burdens for your beneficiaries.

Conclusion

Preparing for retirement is a journey that requires meticulous planning and careful consideration. By estimating your retirement income needs, crafting a realistic budget, and optimizing for tax planning, you can create a secure financial foundation for your life in retirement. Please feel free to reach out to us to develop a retirement income plan, we regularly help clients develop a retirement plan that is optimized for tax efficiency.

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, Financial Planner

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor

A question we are often asked is whether or not you can claim Social Security while working. The answer to this question is yes you can. However, it’s not that simple. The question to ask is should you claim Social Security while working? In answering this question it's important to understand the rules regarding earned income, taxes, and your Social Security benefits. 

Key ages for claiming Social Security benefits 

There are some key ages to keep in mind in connection with claiming Social Security benefits: 

• Age 62 is the earliest most people can claim their benefits. It is also the age that will yield the lowest benefit level for you.
• FRA or full retirement age is the age at which you are eligible to receive your full retirement benefit. FRA is 66 for those born between 1943 and 1954. After that it increases by two months for every year until it currently caps out at age 67 for those born in 1960 or later.
• Age 70 is the point at which your benefit maxes out, claiming later than this will not increase your benefit level. 

Social Security and working 

For those who are working, drawing Social Security benefits and who have not reached their FRA, there is a benefit reduction if your earned income exceeds $21,240 for 2023. In these cases, there will be a $1 benefit reduction for every $2 that your earned income exceeds these limits. Earned income is defined as income from employment or self-employment. This does not include income from sources like interest or investment gains. 

For those working in the year in which they attain their FRA, the earnings limits increase to $56,520 for 2023. In this case, there is a $1 benefit reduction for every $3 in earned income above these limits. 

There are no limits on your level of earned income, and no benefit reductions once you have reached your FRA. Note that any withheld benefits are returned to you in the form of a higher monthly payment once you reach your FRA. Even with this, it probably doesn’t make sense to claim your benefit prior to your FRA if you know that all or most of the benefit will be lost due to your level of earned income. 

One issue that may confuse some people is the Social Security COLA or cost of living adjustment. The COLA for 2023 is 8.7%. If you defer claiming your benefit you do not lose out on this COLA, it simply will be factored into your benefit when you do claim in the future.

A one-time do over

There is a once per lifetime do-over option once you have claimed your Social Security benefits. Let’s say you decided to totally retire at age 62. Since you had no plans to ever work again you decided to claim your Social Security benefits. 

Nine months later, you realized that you were bored and decided to work with a consulting firm that serves companies in your former industry. Your compensation will be $75,000 which is well above the Social Security earnings limit. 

You have the option to withdraw your application. This is a once per lifetime opportunity and must be done within a year after you initially claimed your benefits. Withdrawing the application allows you to reapply later when you are no longer working or you reach the age at which your benefit will no longer be impacted by the level of your earned income. 

When doing this, all benefits received by you plus anyone else who received benefits based on your retirement application must be repaid. Additionally, these benefit recipients who are impacted must consent to this application withdrawal in writing. 

Social Security and taxes 

Social Security benefits can be subject to federal income taxes based on your combined income, which the Social Security Administration defines as: 

Adjusted gross income (AGI) plus nontaxable interest income plus ½ of your Social Security benefits. 

For those filing as single: 

• If your combined income is between $25,000 and $34,000 up to 50% of your benefit may be taxable.
• If your combined income is more than $34,000 up to 85% of your benefit may be taxable. 

For those filing married and joint: 

• If your combined income is between $32,000 and $44,000 up to 50% of your benefit may be taxable.
• If your combined income is more than $44,000 up to 85% of your benefit may be taxable. 

Additionally, 12 states currently tax Social Security benefits in some fashion at the state level. 

If you are working your benefits will almost certainly be subject to income taxes. It's important to increase your withholding to cover these added taxes.

We help our clients determine the best time to claim their Social Security benefits based on their overall situation. If you are still working this is certainly a factor in this decision. For help in deciding when to claim Social Security and in all aspects of financial and retirement planning please feel free to reach out to us. As both financial and tax advisors we help our clients design tax-efficient retirement income strategies.

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, Financial Planner

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor