Can I Avoid IRMAA Surcharges on Medicare Part B and Part D?

Contributed by: Nick Defenthaler, CFP®, RICP®

In 2023, Medicare Part B premiums for 95% of Americans will be $164.90/mo. However, the other 5% will have to face what’s known as the Income Related Monthly Adjustment Amount or IRMAA and pay higher Part B and D premiums. Each year, the chart below is updated, and in most cases, premiums increase gradually with inflation, as do the income parameters associated with each premium tier.

Source: Medicare.gov

Receiving communication that you’re subject to IRMAA and facing higher Medicare premiums is never a pleasant notification. With proper planning, however, there are strategies to potentially avoid IRMAA both now and in the future.

But first, let’s do a quick refresher on the basics

Medicare bases your premium on your latest tax return filed with the IRS. For example, when your 2023 Part B and D premiums were determined (likely occurred in October/November 2022), Medicare used your 2021 tax return to track income. If you are married and your Modified Adjusted Gross Income (MAGI) was over $194,000 in 2021 ($97,000 for single filers), you’re paying more for Part B and D premiums aka subject to IRMAA. Unlike how our tax brackets function, Medicare income thresholds are a true cliff. You could be $1 over the $194,000 threshold and that’s all it takes to increase your premiums for the year! As mentioned previously, your Part B and D premiums are based off of your Modified Adjusted Gross Income or MAGI. The calculation for MAGI is slightly different and unique from the typical Adjusted Gross Income (AGI) calculation as MAGI includes certain income “add back” items such as tax-free municipal bond interest. Simply put, while muni bond interest might function as tax-free income on your return, it does get factored into the equation when determining whether or not you’re subject to IRMAA.

Navigating IRMAA with Roth IRA conversion and portfolio income 

Given our historically low tax environment, Roth IRA conversions are as popular as ever. Current tax rates are set to expire in 2026, but this could occur sooner, depending on our political landscape. When a Roth conversion occurs, a client moves money from their Traditional IRA to a Roth IRA for future tax-free growth. When the funds are converted to the Roth, a taxable event occurs, and the funds converted are considered taxable in the year the conversion takes place. Because Roth IRA conversions add to your income for the year, it’s common for the conversion to be the root cause of an IRMAA if proper planning does not occur. What makes this even trickier is the two-year lookback period. So, for clients considering Roth conversions, the magic age to begin being cognizant of the Medicare income thresholds is not at age 65 when Medicare begins, but rather age 63 because it’s that year’s tax return that will ultimately determine your Medicare premiums at age 65! 

Now that there are no “do-overs” with Roth conversions (Roth conversion re-characterizations went away in 2018), our preference in most cases is to do Roth conversions in November or December for clients who are age 63 and older. By that time, we will have a clear picture of total income for the year. I can’t tell you how often we’ve seen situations where clients confidently believe their income will be a certain amount but ends up being much higher due to an unexpected income event.

Another way to navigate IRMAA is by being cognizant of income from after-tax investment/brokerage accounts. Things like capital gains, dividends, interest, etc., all factor into the MAGI calculation previously mentioned. Being intentional with the asset location of accounts can potentially help save thousands in Medicare premiums.

Ways to reduce income to potentially lower part B and D premiums

Qualified Charitable Distribution (QCD) 

• If you’re over 70 ½ and subject to Required Minimum Distributions (RMD), gifting funds from your IRA directly to a charity prevents income from hitting your tax return. This reduction in income could help shield you from IRMAA. 

Contributing to a tax-deductible retirement account such as a 401k, 403b, IRA, SEP-IRA, etc.

• Depositing funds into one of these retirement accounts reduces MAGI and could help prevent IRMAA.

Deferring income into another year 

• Whether it means drawing income from an after-tax investment account for cash flow needs or holding off on selling a stock that would create a capital gain towards year-end, being strategic with the timing of income generation could prove to be wise when navigating IRMAA. 

Accelerating business expenses to reduce income 

• Small business owners who could be facing higher Medicare premiums might consider accelerating expenses in certain years, which in turn drives taxable income lower if they’re flirting with IRMAA. 

Putting IRMAA into perspective 

Higher Medicare premiums are essentially a form of additional tax, which can help us put things into perspective. For example, if a couple decides to do aggressive Roth IRA conversions to maximize the 22% tax bracket and MAGI ends up being $200,000, their federal tax bill will be approximately $30,000. This translates into an effective/average tax rate of 15% ($30,000 / $200,000). However, if you factor in the IRMAA, it will end up being about $1,700 total for the couple between the higher Part B and D premiums. This additional "tax" ends up only pushing the effective tax rate to 15.85% - less than a 1% increase! I highlight this not to trivialize a $1,700 additional cost for the year, as this is real money we're talking about here. That said, I do feel it's appropriate to zoom out a bit and maintain perspective on the big picture. If we forgo savvy planning opportunities to save a bit on Medicare premiums, we could end up costing ourselves much more down the line. However, not taking IRMAA into consideration is also a miss in our opinion. Like anything in investment and financial planning, a balanced approach is prudent when navigating IRMAA – there is never a "one size fits all" solution. 

Fighting back on IRMAA

If you've received notification that your Medicare Part B and D premiums are increasing due to IRMAA, there could be ways to reverse the decision. The most common situation is when a recent retiree starts Medicare and, in the latest tax return on file with the IRS, shows a much higher income level. Retirement is one example of what Medicare would consider a "life-changing event," in which case form SSA-44 can be completed, submitted with supporting documentation, and could lead to lower premiums. Other "life-changing events" would include:

• Marriage

• Divorce

• Death of a spouse 

• Work stoppage

• Work reduction

• Loss of income producing property 

• Loss of pension income 

• Employer settlement payment 

Medicare would not consider higher income in one given year due to a Roth IRA conversion or realizing a large capital gain a life-changing event that would warrant a reduction in premium. This highlights the importance of planning accordingly with these items.

If you disagree with Medicare's decision in determining your premiums, you have the ability to have a right to appeal by filing a "request for reconsideration" using form SSA-561-U2.

Conclusion

As you can see, the topic of IRMAA is enough to make anyone's head spin. To learn more, visit the Social Security Administration's website dedicated to this topic. Prudent planning around your Medicare premiums is just one example of much of the work we do for clients that extends well beyond managing investments that we believe add real value over time. 

If you or someone you care about is struggling with how to put all of these pieces together to achieve a favorable outcome, we are here to help. Our team of CERTIFIED FINANCIAL PLANNER™ professionals offers a complimentary "second opinion meeting" to address your most pressing financial questions and concerns. In many cases, by the end of this 30-45 minute discussion, it will make sense to continue the conversation of possibly working together. Other times, it will not, but our team can assure you that you will hang up the phone walking away with questions answered and a plan moving forward. We look forward to the conversation!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) I the U.S. which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Q1 2024 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Contributed by: Nicholas Boguth, CFA®, CFP®

As the 4-year anniversary of the Covid stock market correction came and went last month, markets have given historians and economists much to reflect on. Since the consumer is the major driver of the U.S. economy, the aftereffects of the COVID-19 pandemic stay-at-home policies and the economic reopening policies meant it has taken several years for a recession to roll through the economy. This uncorrelation of the sector effects has made this business cycle feel quite different. For example, when staying at home, we shifted our spending to either saving money or spending on goods rather than services, causing a major recession and unemployment in the services industry (remember when we couldn’t travel and instead spent our money on things like a Peloton!). Once herd immunity was achieved, we shifted our spending patterns from goods to services and travel, causing recessionary characteristics to roll through the manufacturing industry. This lack of synchronization has caused the NBER (National Bureau of Economic Research) to not call a recession here in the U.S. even though we met the official definition of one back in 2022 of two negative quarters of GDP growth (Gross Domestic Product).

Recently, the manufacturing numbers, as measured by the ISM index (a leading economic indicator), finally climbed out of recessionary territory (below 50 readings) after a 16-month continuous streak of contractions. This is the longest contractionary steak since 2002! If you couple this with a recovery in new home building permits (another leading indicator), it looks more and more likely that the Federal Reserve has been successful in engineering a soft landing. The Conference Board Leading Economic Index also rose in March for the first time in two years!

The stock market agrees as the year has started out very strongly, with U.S. stocks up over 10.5% as measured by the S&P 500, U.S. small company stocks up 5.2% as measured by the Russell 2000, and International stocks up 5.78% as measured by the MSCI EAFE. Bonds were off to a slower start, down .78%, as the market reset expectations of the number of interest rate hikes that are likely to occur this year.

As the S&P 500 hits new highs, it is natural that you might be wondering if the market is too expensive. Investing at all-time highs seems like the wrong time to add to your investments. Check out my recent blog for some interesting statistics on forward returns when investing on days the market is making a new high. The moral of the story, though, is that while valuations are expensive, they do NOT necessarily mean the market will crash tomorrow, next quarter, or even next year. Current valuations are usually a poor indicator of how markets will perform in the short run. It is important to set reasonable expectations of future market returns. This is not the same market we have seen over the past couple of years driven by a few concentrated names. Returns have broadened across the benchmark, and political headlines may start to creep into market performance in the short term.

Investing by Political Party: A Long-Term Perspective

What if you ONLY invest in the stock market when your president is in office? Over the past 80 years, the political party-agnostic investor beats the democrat and republican by ~3,000% and ~17,500%!

OK, this may fall under the “lying with statistics” category, but I think it still illustrates two very important points. Stocks don’t grow because of political parties, and time in the market is the single most important factor in growing your investment. 

Let’s consider three hypothetical investment strategies starting with $10,000 in 1945:

1. Republican Only Investor: puts 100% of their money into the S&P 500 when the president is a Republican, otherwise hides their money under their mattress.

2. Democrat Only Investor: puts 100% of their money into the S&P 500 when the president is a Democrat, otherwise hides their money under their mattress. 

3. Agnostic Investor: puts 100% of their money into the S&P 500 the entire time.

The results may shock you. The “Republican Only” investor ends up with ~$309k, the “Democrat Only” investor ends up with ~$1.75M, and the “Party-Agnostic” investor ends up with a whopping ~$54.5M.

Obviously, this hypothetical is a bit outlandish for a few reasons. It has an 80-year time horizon, which is much longer than most people are seriously investing. It is an all-or-nothing strategy that puts all its eggs in one basket or the other. One of those baskets earns 0% (which isn’t realistic if you compare it to money markets or short-term treasuries over time). And lastly, it might lead one to confuse correlation and causation when looking at the Democratic/Republican gap.

It would be easy to point to this as confirmation that the Democratic party is better for stocks, but digging a little deeper makes it less clear. The lead changes throughout history – if we wrote this in the 1990s, someone could point to it as confirmation for the Republican party and stock performance. Aside from that, the gap comes from two very distinct decades: the 2000s that gave investors one of the worst decades of stock returns in history, and the 2010s that gave investors one of the best. Lively debates are still happening today over what caused the Tech Bubble, the Great Financial Crisis, and subsequent recovery – but there were certainly more factors than one. In the long run, stocks grow because earnings grow, and earnings have much more to do with innovation and economic growth than those sitting in the Oval Office.

The second and even more important point is that the best way to partake in those growing stock earnings is, unsurprisingly, to invest in stocks! The chart below uses the same data as the previous chart but only shows the time each investor invested in stocks. Each party held office for almost exactly half of the time, so missing out on the other half was a HUGE detriment to results for both investors.

The Fed, Interest Rates, and Bond Returns

The Fed ended the fastest rate hike cycle in history last summer when they made the final hike to 5.25-5.5%. Since then, the bond market has been trying to pinpoint exactly when the first interest rate CUT would come. March? June? Later? Expectations have been shifting later than initially predicted. You can see that in the rising interest rates the past few months – the 1-year treasury rate was around 4.7% in January but back to 5% by the end of the quarter. What does all this ACTUALLY mean for bond investors, though?

Well, the Fed doesn’t control the entire yield curve – they only have a direct impact on the shortest durations of bonds at the front end of the curve. If you are invested in those short duration bonds, you will probably see the yields fall as the Fed cuts, but the prices of short duration bonds do not move nearly as much as longer duration bonds. Money market funds, for example, have become very popular over the past two years as rates have increased. Roughly speaking, if the Fed cuts rates from 5.5% to 4.5% over the next year, a money market investor would likely see their yield fall a similar 1% but wouldn’t see any price appreciation (they also wouldn’t likely see any price DEPRECIATION if yields were to rise).

Intermediate and long-term bond investors have more factors to consider because those durations are much more volatile and move with longer term economic growth expectations as well as inflation expectations. Just because the Fed cuts rates does not necessarily mean that the 10-year rate would also decrease. BUT if it did, that investor would see significant price appreciation. The flip side to that, as we all saw in 2022, is that those investors saw significant price depreciation as rates rose.

So, What May Be Coming This Quarter?

• Presidential Primary races will continue throughout this quarter, concluding in early June, but with all opponents dropping out of the race, it looks like we will repeat the 2020 election of Donald Trump and Joe Biden. Market driving election headlines are likely to be minimal for now but may start to play into market performance in the short term. Holding the cash you may need in the next year, lengthening the duration of our bonds – to potentially offset equity market volatility, and rebalancing are all tools we are deploying to take advantage of or insulate against short-term market volatility.

• Next month, the SEC will shorten the standard trade settlement cycle from two business days to one business day after the trade date. This reduces the time between when a sale of a security occurs and when the proceeds are cleared for withdrawal.  

• Portfolio spring cleaning? Much like moving through the rooms in your house with a critical eye, the investment committee is focused on reviewing asset classes within the portfolio. We are focused on extending the duration of our bond portfolio with a partial change having already occurred. We will also be doing a deep dive into our international investments. 

We are grateful for the opportunity to guide you throughout your investment journey. If you ever have any questions, don’t hesitate to contact us!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The Composite Index of Leading Indicators, otherwise known as the Leading Economic Index (LEI), is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy.

Any opinions are those of the Angela Palacios, CFP®, AIF® and Nicholas Boguth, CFA®, CFP® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Are Fair and Equal the Same When It Comes to Gifting Children?

Contributed by: Sandra Adams, CFP®

I have had several client conversations in recent months about gifting to children. Parents are always concerned about making sure that they are being fair to all their children as they gift. As these discussions evolve, the definition of “fair” in the minds of parents often means “equal.” But do gifts to our children always need to be—and should they always be—equal?

Think back to when your children were younger. For some reason, many of us drive ourselves crazy making sure each of our children had the same number of pictures taken, received the same number of holiday gifts each year, got offered the same number of extra-curricular activities, got the same amount for each tooth from the Tooth Fairy...the list goes on and on. Why do we do this?

Our children are individuals, and their situations and needs are different. As our children reach adulthood and we are ready to gift them from our accumulated wealth (or plan to give to them in the future through inheritance), we should consider each of their situations and needs when gifting. For instance, providing more to a child who struggles to support their family on a modest income than one who is financially successful and has no children. Or to offer more to a child who has decided to give more of their time and career to help with a parent’s care versus one who is more focused on their career. There are families with special needs children that must devote more time and resources to that child than the others. Or simply taking into consideration the types of gifts given based on need, such as helping to pay off student loans for one versus contributing to the purchase of a home for another.

Getting out of the mindset that gifts to our children must be monetarily “equal” to be “fair” is one we should all consider. It allows us to give better thought and intent to the gifts we give to our children based on their actual needs, and it takes the stress off us to ensure that every cent is accounted for to monetarily make things equal. When the gifts are meaningful, there are few of your children that will be counting!

If you or someone you know are working on your gifting or legacy plan and have questions, please reach out. We are always happy to help Sandy.Adams@centerfinplan.com

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

How to Use a 529 Plan to Fund a Roth IRA

Contributed by: Josh Bitel, CFP®

Before the passing of SECURE ACT 2.0 in late 2022, folks with unused funds sitting in a 529 account had a few options for using leftover 529 funds. Generally speaking, the most common options were: 

1. Save the funds for future educational use (either for the current or future beneficiary) or

2. Withdraw the money and pay federal income taxes and a 10% penalty on any gains within the account.

While these options may be feasible for some folks, others are left scratching their heads when they see leftover funds in a 529 plan when their child finishes college. This can also be a concern if a student wins a scholarship, attends a military academy, or receives unexpected gifts to help pay for school. 

Fortunately, among the legislative changes brought forth by SECURE ACT 2.0 is a solution to help ease some of these concerns. Starting in 2024, 529 account holders are permitted to roll excess college savings plan funds into a beneficiary’s Roth IRA without incurring taxes or penalties. Sounds great, right? Well, as with most new laws, there is some important fine print to understand before going forward with such a transfer:

• The 529 plan must have been open for at least 15 years before you can execute a rollover to a Roth IRA.

• Rollovers are subject to the annual Roth IRA contribution limit. For 2024, this limit is $7,000. Additionally, if the beneficiary makes any IRA contributions in a given year, the eligible 529 to Roth IRA rollover amount is reduced by the size of that contribution. For instance, if the beneficiary contributes $3,000 to an IRA in 2024, the eligible rollover amount decreases to $4,000, based on the 2024 total IRA contribution limit set by the IRS.

• 529-to-Roth rollovers are subject to a lifetime limit of $35,000 per beneficiary. So, if you wanted to roll over the entire $35,000, you would have to do it over five years under the current 2024 contribution limits. (Although IRA contributions limits tend to rise in most years with inflation).

• 529 plan contributions made in the last five years cannot be transferred to a Roth IRA (including any earnings accrued on those contributions).

• The beneficiary of the 529 plan must match the owner of the Roth IRA. For example, if you have a 529 for your grandson Teddy, you can only roll over any excess funds to a Roth IRA in Teddy’s name. 

• Just as when making a normal contribution to a Roth IRA, the owner must have earned income at least equal to the amount of the rollover. For example, if Teddy has a part-time job earning $4,000 in 2024, you may only roll over $4,000 in 529 funds to the Roth for that year.

• There are no income limits restricting a 529-to-Roth rollover for either the beneficiary or 529 owner. For someone contributing directly to a Roth IRA (not using 529 funds) they are not permitted to do so if they earned $161,000 or more in taxable income as a single person in 2024. This rule does not apply to 529-to-Roth rollovers, so it is an excellent way for high earners to get money into a Roth.

As you can see, there is a lot to know before performing one of these rollovers, but for the right person, this can be a great retirement savings option. A more concise flowchart can be found here to help determine if you or your beneficiary is eligible for this transfer.

Overall, this new provision is a great way for savers to utilize excess 529 funds penalty and tax-free. However, there are still many questions that remain unanswered as it pertains to SECURE ACT 2.0. We are continuing to monitor and research as more details emerge. We will provide additional information as it is available, but if you have any questions about how this could affect you, please contact your Financial Planner. We are always happy to help!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Keep in mind that, unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Any opinions are those of Josh Bitel and Center for Financial Planning, Inc., and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or protect against a loss This material is general in nature and provided for informational purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds and protection from creditors. The tax implications can vary significantly from state to state.

Required Minimum Distributions (“RMDs”) – Everything You Need to Know

Contributed by: Nicholas Boguth, CFA®, CFP®

“What is a required minimum distribution?”

RMDs are the amount you are required to withdraw from your retirement accounts once you reach your required beginning date. Remember all those years you added money to your IRA and 401k and didn’t have to pay tax on those contributions? Well, the IRS wants those taxes EVENTUALLY – which is why we have RMDs. These required distributions ensure that you will spend down the assets in your lifetime, and the IRS will receive tax revenue on that income. 

“When do I have to take RMDs?”

When you turn 73. This age has changed multiple times in the past few years from 70.5 to 72 and is intended to change further to 75 in 2033, but for now, anyone turning 73 in the next nine years will have to begin taking RMDs. You must withdraw the RMD amount by December 31st of each year (one minor exception is being allowed to delay until April in your first RMD year). 

“What accounts do I have to take an RMD from?”

Most retirement accounts such as IRAs, SIMPLE IRAs, SEP IRAs, Inherited IRAs/RIRAs, and workplace plans such as 401k’s and 403b’s require RMDs. RMDs are NOT required from Roth IRAs during the account owner’s lifetime. 

“How much will my RMD be?”

The IRS provides tables that determine RMD amounts based on life expectancy. For anyone taking their first RMD this year at age 73, the current factor is 27.4. So, for example, if you have $500k in your IRA, then you will have to distribute $500k / 27.4 = $18,248. That number may be lower if your spouse is listed as the beneficiary and is more than ten years younger than you. 

“What if I don’t take my RMD?”

There is a 25% penalty on the RMD amount. 

“Can I withdraw more than the RMD amount?”

Yes.

“What if I’m still working?”

For most accounts, such as IRAs, you must still take your RMDs. If you have a 401k with your employer, you may be able to delay RMDs in that account until you retire. 

“Will my beneficiaries have to take RMDs after I am deceased?”

Yes. These rules have also changed recently, and like most things in the IRS, there are plenty of caveats and asterisks, but generally speaking, your beneficiary will have to deplete the account within ten years. Certain beneficiaries, such as your spouse, have more options for determining required distributions. 

Tax-deferred accounts like IRAs and 401ks are a significant part of most retirees’ financial plans, so many of us will have to navigate this topic. We’re proud to say that we’ve been helping clients navigate the maze of retirement accounts, RMDs, and beneficiaries for over thirty years, so we are here to help if you have any questions. 

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Navigating Your Financial Journey

Contributed by: Kelsey Arvai, MBA, CFP®

In a world where financial decisions can often feel overwhelming and complex, the role of a financial planner stands out as a guiding beacon, offering expertise and tailored strategies to help individuals achieve their financial goals. Whether you're aiming to buy a home, save for retirement, or planning for your children's education, a financial planner can be an invaluable asset in navigating the intricacies of personal finance. In this blog, we'll explore who financial planners are and what they do.

Who are Financial Planners?

Financial planners are professionals who specialize in helping individuals and families manage their finances, make informed decisions, and plan for their financial future. We possess expertise in various areas of finance, including investment management, retirement planning, tax strategies, estate planning, insurance, and more. Our primary objective is to understand clients' financial situations, goals, and risk tolerances and develop comprehensive plans to help them achieve their objectives.

What Do Financial Planners Do?

1. Goal Identification & Determining Net Worth: Financial planners begin by assessing clients' current financial status, including income, expenses, assets, and liabilities. We then work with clients to establish short-term and long-term financial goals, such as buying a home, saving for retirement, or funding a college education.

2. Financial Planning: Based on the client's goals and financial situation, planners develop personalized financial plans that outline strategies to achieve those objectives. This may involve budgeting, investment management, tax planning, risk management, estate planning, financial independence review or retirement income analysis, charitable planning, college planning, preparing future generations for wealth management, and coordinating with multiple advisors (i.e., CPA, attorney, etc.).

3. Investment Management: Financial planners help clients ensure their investments reflect their objectives, risk tolerance, and time horizon. We may recommend specific investment vehicles, asset allocations, and diversification strategies to help clients maximize returns while managing risk.

4. Retirement Planning: Planning for retirement is a significant aspect of financial planning. Planners help clients estimate retirement expenses, determine retirement savings goals, and develop strategies to accumulate retirement assets through vehicles such as employer-sponsored retirement accounts (e.g., 401(k), IRA), pensions, and other investments.

5. Risk Management and Insurance: Financial planners assess clients' insurance needs, including life insurance, health insurance, disability insurance, and long-term care insurance. We help clients select appropriate coverage to protect against unforeseen events and mitigate financial risks.

6. Estate Planning: Financial planners assist clients in ensuring their beneficiary designations are properly set up on accounts, including retirement, checking & savings, brokerage accounts, and life insurance policies. Estate planning documents (wills, durable power of attorney, health care power of attorney, and trusts) are drafted by an Estate Planning Attorney. Your Financial Planner will help to ensure that you work with an attorney when appropriate and that your estate plan is reviewed at least every 3-5 years.

7. Regular Reviews and Adjustments: Financial planning is not a one-time event; it's an ongoing process. Planners regularly review clients' financial plans and adjust as needed based on changes to your financial situation, goals, and market conditions.

Financial planners play a vital role in helping individuals and families navigate the complexities of personal finance, achieve their financial goals, and build a secure future. Financial planners empower clients to make informed decisions and take control of their financial well-being by providing expertise, personalized advice, and ongoing support. When choosing a financial planner, it's essential to consider their qualifications, expertise, and alignment with your financial goals and values. With the right planner by your side, you may embark on your financial journey with confidence and clarity.

Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

Should I Invest When Markets Are Making New Highs?

Contributed by: Angela Palacios, CFP®, AIF®

While it may seem counterintuitive, the answer can be yes! The chart below shows forward returns for the S&P500 when investing on days when the market is making new highs. The green bar shows the average forward returns when investing on a day the market makes a new high, and the gray bar shows the forward returns on average when investing on any day. You might be surprised to learn that the outcome is usually better when investing when markets are making new highs!

Think about timing the market less and focusing more on your short- and long-term financial goals. Deciding when and how to invest is more nuanced and needs to be tailored to your situation rather than focusing on short-term market fluctuations. If you are uncertain about the best course of action, ask your financial planner!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Trend Towards Later Retirement

Contributed by: Sandra Adams, CFP®

According to The Pew Research Center, over the next decade, workers over age 55 will grow 4 percent per year — 4 times faster than the entire workforce. Older workers are not only a larger percentage of the overall workforce but also an important part of the workforce with their knowledge and experience base.

So, what are the reasons why people are working later in life?

• Some may need additional income after “first” retirement.

• Some indicated they thought they needed to supplement what they had already saved to keep up with inflation.

• Some may want something of value and purpose to do with their time and to feel that they are contributing to something meaningful.

• Some (especially women) are returning to work and starting their careers later in life after raising their families, and their children are out on their own.

• Some return to work after serving for some time as a caregiver to a spouse or parent and feel like they need to make up for lost time in their career and save for future financial security.

No matter what the reason(s), adults remaining longer in the workforce benefit from:

• Continuing to challenge themselves cognitively.

• Continuing to learn new things on the job.

• Continuing to socialize with coworkers and others in a work environment regularly.

With life expectancies anticipated to continue to grow in the coming decades, living to one hundred and beyond will be the norm in the not-too-distant future. And when it is, most of us will be working longer, either out of necessity to support ourselves financially and/or to keep ourselves cognitively challenged for the years we are living. So, if a longer life is in your future, a longer working life may also be in your future. It may not be only your first career that you retire from, but a second or third career. There is a lot to look forward to in a 100-year life!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Any opinions are those of Sandra D. Adams, and not necessarily those of Raymond James.

Five Reasons Supporting the Case for Discretionary Investing

Contributed by: Mallory Hunt

We all lead busy lives. Whether you are getting down to business (in the throes of the grind??) or enjoying your retirement to the fullest, who wants to worry about missing a call from their advisor because something in their portfolio needs to be changed? Perhaps cash needs to be raised to meet that monthly withdrawal to your checking account so you can keep paying your traveling expenses. Or maybe you are still in the saving phase, and money has to be deposited into your investment account to keep pace with your retirement goals. Regardless of your situation, many investors find it challenging to make time to manage their investment portfolios. We would argue that this is far too important to be left for a moment when you happen to have some “spare time” (is that a thing?!). In the dynamic world of finance, making the right investment decisions can be a complex and intimidating task. Discretionary investing emerges as a powerful solution for clients seeking an investment strategy that places the decision-making responsibilities in the hands of seasoned professionals, offering a myriad of benefits that cater to the diverse needs of investors.

What is Discretionary Management?

Discretionary management is the process of delegating day-to-day investment decisions to your financial planner. Establishing an Investment Policy Statement that identifies the guidelines you need your portfolio managed within is the first and arguably the most important step of the process. Investment decisions can then be made on your behalf within the scope of your unique criteria laid out in this statement. Think of it as utilizing a target date strategy in your employer’s 401(k): you tell it how old you are and when you will retire, and Voilà! All of the asset allocation, rebalancing, and buy/sell decisions are made for you.

5 Reasons This Can Be a Suitable Option for Investors:

1. Adaptability to Market Changes: Financial markets are inherently unpredictable, and staying ahead of the curve requires constant vigilance. Discretionary management allows for swift responses to market changes, adjusting and rebalancing portfolios in real-time to capitalize on emerging opportunities or shielding against potential downturns. In the face of evolving market conditions, this adaptability ensures that your investments remain aligned with your financial goals, whether you can be reached or not.

2. Time Efficiency: For many clients, the demands of daily life leave little time for in-depth market research and portfolio management. Discretionary investing provides a welcome solution by freeing clients from the burden of day-to-day decision-making. This frees up your time and allows your focus to be redirected to what’s important to you: your family, your career, and personal pursuits. After all, time is the resource we all struggle to get our hands on. Need I say more?

3. Tailored Approach to Unique Goals: Discretionary investing is NOT a one-size-fits-all strategy. Seasoned investment managers take the time to understand each client’s unique financial goals, risk tolerance, and time horizon. This personalized approach ensures that investment strategies are aligned with the needs outlined in the Investment Policy Statement. Think of this as your customized roadmap to financial success. While this is similar to non-discretionary investing, discretion will allow investment managers the ability to keep your portfolio at this set target in a timely manner through strategic and tactical rebalancing when the markets are changing.

4. Diversification & Risk Management: Successful investing is not solely about maximizing returns but also about minimizing risks. Discretionary management employs strategies to diversify portfolios and manage risk effectively. By expanding investments across various asset classes and geographical regions, we can create a resilient portfolio that can weather market fluctuations and aims to deliver more consistent returns over the long term. Again, while this can also be applicable to non-discretionary management, it comes down to the time efficiency offered by discretionary management to continuously monitor your diversification and risk management with no bother to you.

5. Expert Guidance: Discretionary investing allows clients to tap into the expertise of financial professionals; it’s what we are here for! Financial planners and investment managers bring a wealth of knowledge and experience to the table, navigating the intricacies of the market to make informed decisions on your behalf, with your best interest in mind always. In turn, leaving the decision-making to the professionals may reduce the potential for poor investor behavior. Let those not emotionally charged by fluctuations in the market make decisions on your behalf.

In the fast-paced world of finance, where information overload and market volatility can overwhelm even the most seasoned investors, discretionary investing presents itself as a compelling choice. By entrusting investment decisions to experienced professionals, clients may enjoy soundness, time efficiency, and a tailored approach that empowers their financial future. If you have questions on whether discretionary management suits you and your portfolio, don’t hesitate to contact us. We’d be happy to help you weigh out your options!

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

Keep in mind that discretion may not be appropriate for clients who prefer to participate in investment decisions or maintain concentrated positions. Additionally, discretionary authority may not be possible with certain investing strategies or accounts, such as options or annuities. Another consideration is whether an advisory account is the best option for client or if a brokerage account would be more suitable. Its important to consider all options and speak with a financial advisor about your specific situation.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

DTE Announces Buyout Offer

Contributed by: Michael Brocavich, CFP®, MBA

DTE has recently offered buyouts to 3,000 employees’, which is about 30% of its total workforce.  Employees that are eligible will receive an offer and be under a deadline to determine if they will accept the offer.

If you, friends, family members, or colleagues have recently received a buy-out offer from DTE or any other company and would like to discuss the details with one of our team’s Certified Financial Planners, please feel free to reach out, and we’d be happy to arrange a time to chat. Our team has nearly four decades of experience helping clients navigate significant life transitions such as this – we’d be honored to serve as a resource for you. 

Also, if you would like to attend a live seminar about this buyout and what you should consider when making this decision, please look out for an invitation to a live event at the end of February. 

Office Line: 248-948-7900

Website Contact Inquiry: https://www.centerfinplan.com/contact 

If you’d like to receive a copy of our “Should I roll over my 401k to an IRA?” checklist, please click HERE! 

Source: https://www.freep.com/story/money/business/michigan/2024/01/10/dte-energy-buyout-offer-voluntary-separation-incentive-employees/72173895007/

CENTER FOR FINANCIAL PLANNING, INC is not affiliated with DTE Energy.

Michael Brocavich, CFP®, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.