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:

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:

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:

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:

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.

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:

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:

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®, CPAFinancial 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: 

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: 

For those filing married and joint: 

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

This is a question we are asked frequently by clients. How much life insurance is enough will vary greatly depending upon your situation. We will discuss some of the factors that you should consider in making this decision. 

What Financial Obligations Do You Need to Cover? 

The first thing to keep in mind is that the main purpose of life insurance is to replace income or build assets in the event of your death. 

The best way to estimate how much life insurance you need is to take an inventory of the financial obligations that you would like to be able to cover in the event of your death. These will vary based on your unique situation, but here are some common examples we see in working with our clients: 

These are just some examples of the types of obligations you may want to cover via a life insurance death benefit for your beneficiaries. 

Consider All of Your Assets 

Part of the calculation of how much life insurance you may need is taking your other assets that could be passed on to your heirs upon your death into consideration. Everyone’s situation is a bit different, but some examples could include: 

These and other assets can be used to fund the needs of your family or other heirs. These assets should be taken into account in your estate planning process and in deciding how much is needed in terms of a life insurance death benefit to meet their needs. 

Other Factors to Consider 

Whether you need life insurance and how much coverage will depend on a number of other factors.  Among these are: 

Age. We find that younger clients generally need a larger death benefit, especially if they are married and have children. They typically have not accumulated enough assets elsewhere to provide for their family in the event of their untimely death. 

On the other side of the coin, clients in their 60s or older may not need any life insurance or may need a lower death benefit. Their kids are generally grown and they have accumulated other assets to pass on to their heirs and beneficiaries. 

A key question is do you have beneficiaries who will need financial support upon your death? If you are single with no dependents the answer may be no. Likewise, if you are financially independent and have sufficient assets to leave to your spouse and other heirs. 

One nice benefit of life insurance is that the death benefit passes to your beneficiaries tax-free. The tax-free nature of the death benefit will be appreciated by your beneficiaries.

Depending upon the nature of your other assets, a life insurance death benefit can be a good addition to your estate. 

What Type of Life Insurance Policy is Best? 

While there is no single right answer here, we generally recommend that our clients strongly consider term life insurance. We like term insurance as the premiums are generally cheaper and there are generally no hidden costs as is sometimes the case with permanent life policies. You are only paying for a death benefit and not some underlying investment option that may or may not be a good deal for you.  

The other reason we typically recommend term life is that we find that many clients don’t need the death benefit as part of their estate planning as they move into retirement. Most have built up enough assets including investments, real estate, and in some cases their interest in a business where they are now considered "self-insured" and can live off of their accumulated assets instead of needing a large payout from life insurance.

For help in deciding on the amount of life insurance coverage that you need please feel free to reach out. We can help you incorporate life insurance into your financial and estate planning. 

Bill Canty, CFP®, CPA

Ed Canty, CFP®, Investment Advisor

Joe Canty, Investment Advisor

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor

The period leading up to your retirement is a critical time to ensure that you have your financial plan in place as you enter retirement. Financial planning doesn’t stop once you retire, things change and your need to stay on top of things and adjust as needed. This is the focus of much of our work with clients approaching and in retirement. 

Here is a checklist of items to review during the 12 months leading up to retirement. 

Your Retirement Budget 

One of the most important things to do during this period is to formulate a retirement spending budget. This will drive almost everything else that you do financially in retirement. This budget should take into account your normal monthly costs plus money to cover things like travel or other activities that you plan to do in retirement. 

Sources of Retirement Income 

During this period it's important to identify all sources of retirement income that you can tap. This might include many of the following: 

Depending upon your situation there may be additional sources of income to consider as well. It's important to be sure that you have your arms around all potential sources of retirement income, and how much income you might generate from each of these sources. Additionally, you will want to be sure that you understand the tax implications of tapping each of these income sources. 

Retirement Withdrawal Strategy 

Putting a retirement withdrawal strategy in place is critical. Which accounts will you withdraw funds from and in what order? This will be driven by a number of factors including your age at retirement. When you claim your Social Security will certainly be a factor in this strategy. 

This goes hand-in-hand with your retirement budget and also encompasses tax planning in terms of whether to tap taxable or tax-deferred retirement accounts first. 

Regularly reviewing and adjusting your retirement withdrawal strategy is vital for effective financial planning during retirement. Our team specializes in assisting clients with this essential aspect of retirement planning.

401(k) & Employer Retirement Plans

When our clients retire or leave their employer, they often ask about what to do with their 401(k) or similar retirement plan. We assist them with rolling over their plan to an IRA, developing a retirement withdrawal strategy, and ensuring their investments are aligned with their goals and time horizon.

For many individuals, the 401(k) or employer retirement plan represents their largest retirement savings, so it's crucial to develop a well-defined strategy for managing and investing these funds throughout retirement.

Transferring a 401(k), 403(b), TSP, or Deferred Comp to an IRA account offers several advantages for portfolio management. It provides a wider range of investment options, such as individual stocks, bonds, ETFs, and a more extensive selection of mutual funds compared to employer-sponsored plans. Rolling over the employer plan allows for better integration into an overall investment strategy and alignment with other managed assets. Moreover, IRAs often offer lower-cost investment options when compared to employer retirement plans.

When taking required minimum distributions (RMDs) or taking distributions from tax-deferred accounts, it's important to consider the associated tax implications and engage in tax planning. Additionally, careful consideration should be given to selling the appropriate investments to facilitate distributions.

Healthcare Costs 

A key budget item is the cost of healthcare. Depending upon the circumstances surrounding your retirement, how you cover the cost of healthcare may vary over the course of your retirement. 

In the case of a married couple, if one spouse is still working while the other spouse retires the working spouse may be able to add their spouse to their employer’s policy. If you are retiring as part of an early retirement package from an employer, check to see if they offer any extended health insurance benefits.

Medicare is the main vehicle to cover healthcare costs in retirement and it's important to learn as much as you can about the basic coverage offered by Parts A and B as well as other options such as drug coverage and Medicare Advantage plans. You can learn more about the basics of Medicare in our article here

Social Security 

Prior to retiring, you should obtain a copy of your Social Security statement and review it for accuracy. It’s important to be sure that all of your earnings are properly credited to your record as this is the basis of how your Social Security benefits are calculated. If you find omissions it's important to contact the Social Security Administration immediately to get this corrected. 

During this time period, you should also review your benefit levels based on claiming at various points in time. This will help you determine when is the best age at which to claim your benefit as part of your overall retirement financial picture. 

Pension 

If you are covered by a defined benefit pension plan from your employer, this is the time to be sure you understand how to claim your benefit and any options available to you as to how to receive your benefit and the benefit level based on when you claim it. 

Most defined benefit plans offer the benefit as a monthly annuity payment. The payment amount may differ based on the age at which you commence your benefit. Some companies may also offer the option to receive a lump-sum payment versus the stream of annuity payments. 

You will also want to ensure that your beneficiary information is up-to-date. If you are married, the beneficiary is generally your spouse, but you should verify to be sure. 

You may also be entitled to a pension benefit from a former employer if they offered a pension plan and you were vested in a benefit prior to leaving that employer. Vesting typically occurs after five years. You should contact that former employer to be sure you are on top of what needs to be done to initiate your benefit. 

Stock Compensation

If you have received any type of stock-based compensation from your employer, you want to be sure that you understand what needs to be done to take full advantage of this prior to leaving the company. 

This might include stock options, restricted stock units (RSUs), or other vehicles. Be sure that you understand when and how to convert these vehicles to shares and also any restrictions on selling the shares if desired. 

Taxes 

Many might think that once you retire worrying about taxes is a thing of the past. In fact, taxes are among the top issues that retirees need to focus on. During the year leading up to your retirement, you will need to do some tax planning in conjunction with formulating your withdrawal strategy. You will also want to look at the tax impact of pension payments and other streams of retirement income. Assisting clients with tax planning is a regular part of our services, both as they approach retirement and throughout their retirement years.

Summary 

In the year leading up to retirement, or prior to that time, there are a number of planning issues to resolve and things to verify. The items listed above are a good starting point, your list may differ a bit depending upon your own unique situation. The more prepared you are, the more likely you are to enjoy a financially successful retirement. 

If you are looking for guidance about your retirement plan or any other financial issues, please contact us to discuss. We are here to help.

Bill Canty, CFP®, CPA

Ed Canty, CFP®, Investment Advisor

Joe Canty, Investment Advisor

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor

The terms financial advisor and broker may seem interchangeable to some investors. Both financial advisors and brokers are financial professionals. The main differences lie in the types of services offered and in the way they are compensated by their clients. 

What is a Broker? 

A broker is an individual or firm that acts as an intermediary between their clients and one or more security exchanges. The broker buys and sells stocks and other securities on behalf of their clients on these exchanges. 

Brokers and brokerage firms are typically affiliated with a broker-dealer. Brokers are typically compensated through transaction fees such as commissions earned for facilitating trades for clients. 

While the term broker typically conjures an image of a person, brokers can also take the form of online brokers. Investors can submit their trades and the online broker will execute them within their account. Some of these online brokers may be discount brokers who offer low or in some cases no transaction fees. 

The more traditional full-service broker often works at a full-service brokerage firm. These brokers were often referred to as stockbrokers in the past. 

If you have a 401(k) or employer retirement plan, it's highly likely that you are using a broker to facilitate your investments.

What is a Financial Advisor? 

A financial advisor provides their clients with financial advice in a variety of financial areas including investments, retirement, estate planning, and other aspects of the financial planning process. Financial advisors or advisory firms will generally be registered Federally with the SEC (Securities and Exchange Commission) or at the State level. Registered advisors are required to pass the Series 65 exam administered by the NASAA (North American Security Administrators Association) or one or more of several other exams. 

Many financial advisors operate on a fee-only basis, meaning that they are compensated for the services and advice they provide and not for selling financial products. 

Most Financial Advisors offer a wider offering of services when compared to traditional brokers. Some of these services include:

Many financial advisors have also earned the Certified Financial Planner (CFP) designation. The CFP has a number of requirements, including:

The CFP is considered to be the gold standard of professional designations for financial advisors. 

Compensation 

This aspect can be very confusing for investors looking for the right type of financial professional for their needs. 

Brokers are generally compensated by sales commissions or sales charges, called loads, from the sale of various financial products. This might include stocks, bonds, mutual funds, ETFs, and other types of securities. Additionally, they will also receive compensation from the sale of annuities and life insurance if applicable. 

Many financial advisors adhere to a fee-only model. This means that the client pays the advisor for the advice they provide. There are a number of variations of this model, including: 

When discussing compensation with a financial professional you are considering working with, or one with whom you have an existing relationship, ask questions about ALL ways in which they are compensated for working with you. Be sure to fully understand the broker or advisor’s compensation structure and any potential conflicts of interest this can lead to. 

Are they a Fiduciary? 

Financial advisors who are registered with the Securities and Exchange Commission, in many States, and those who are CFPs are held to a fiduciary standard. This means that they must put the interests of their clients first. 

Brokers and others who work through broker-dealers are generally held to lower standards in terms of their duty to their clients. The suitability standard states that advice and product recommendations must be suitable for someone in the client’s approximate situation, but not necessarily for the client’s specific, exact situation. 

The regulatory situation is evolving in terms of the duty of care that both financial advisors and brokers must adhere to. Again, be sure to ask any advisor or financial professional that you are considering working with if they are a fiduciary and if they will put this in writing. If they refuse, this again is a red flag. 

Canty Financial is a fee-only registered advisor who works with clients as a fiduciary. We are transparent about fees and all aspects of our dealing with clients. We encourage client questions and will always provide full disclosure as to our fees, our compensation, and why we are recommending a particular investment or course of action.

Please feel free to reach out to us if you have any questions about your investment accounts, taxes, or financial planning. We are here to help.

Bill Canty, CFP®, CPA

Ed Canty, CFP®, Investment Advisor

Joe Canty, Investment Advisor

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor

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