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Tax Planning

Don’t Let These Tax Traps Ruin Your Retirement

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Retirement planning requires a lot of different elements. Investments, tax planning, income planning, and more. Many people dedicate their focus towards managing their investment returns, and while that’s important other factors that can have an even bigger impact on their nest egg get overlooked. One huge factor is taxes.

Taxes could be your largest expense in retirement. Developing strategies around them is key to best positioning your retirement future. To mitigate the negative impact that taxes might have on your retirement savings, be aware of these common tax traps before you start planning that retirement party.

Retirement Tax Trap #1: Claiming Social Security Could Increase Your Tax Bill

Claiming your Social Security benefits could be one of the most important financial decisions of your life. How and when you claim Social Security could impact far more than just the amount of your benefits check. It could also trigger paying taxes on as much as 85% of your benefits.

Don’t make your decision solely based on maximizing your benefits. Instead, consider how it could impact your taxes, Medicare premiums and spousal benefits.

Retirement Tax Trap #2: Withdrawals from Your IRA and 401(k) Are Taxable

Contributing money to your IRA and 401K is easy. But withdrawing this money in retirement is complicated and confusing.

Remember, you must pay taxes when you withdraw this money in retirement. And Required Minimum Distributions will further complicate matters. When you turn 73, “RMD’s” force you to start withdrawing money from these accounts, whether you want to or not. And this could result in paying more and more taxes every year.

The solution? Start planning for RMDs in your 60s to minimize their impact on your tax bill.

Retirement Tax Trap #3: Failing to Diversify for Taxes

Most people understand investment diversification, but few think about diversifying their tax exposure. Many individuals have too much of their retirement savings in tax-deferred accounts, which can lead to big tax headaches down the road.

To minimize your tax burden, aim to have a balance of accounts in three categories: taxed always, taxed later and taxed rarely. If you have too many eggs in one basket, it could spell serious financial trouble in retirement.

Retirement Tax Trap #4: Missing the ROTH IRA or 401(k) Conversion Window

A Traditional IRA or 401K allow tax-free contributions. But you must pay taxes when you withdraw this money in retirement unless you convert some, or all your traditional IRA or 401K to a ROTH.

A ROTH IRA or 401K doesn’t allow tax-free contributions (that’s the catch), but you pay zero taxes when you withdraw money in retirement. ROTH accounts are not subject to RMDs either. That means you get tax-free growth, which could add up to tens of thousands of dollars in retirement (possibly more).

A financial advisor can help you determine whether a ROTH conversion is right for you.

Take Control of Your Retirement Taxes

The good news? You have more control over how much you pay in taxes during retirement than at any other point in your life. But lowering your tax bill doesn’t happen automatically—it requires proactive planning. By addressing these tax traps early, you can set yourself up for a more tax-efficient, stress-free retirement. To set yourself up, give us a call: 952-460-3290.

4 Big Tax Mistakes That Could Cost You an Arm and a Leg When You Retire

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Most people ignore the significant impact taxes could have on their IRA and 401K because they think they don’t have a choice in the matter. This is simply not the case.

You have more control over your taxes than you realize, including your IRA and 401K, Social Security benefits, and investment income. Come along as we discuss how to avoid four big tax mistakes as you plan for retirement.

Mistake #1: Not Having a Strategy for Your Tax-Deferred Accounts

Taxes on Your IRA and 401K: One of the biggest retirement tax traps is withdrawing money from your 401K, IRA, or other retirement accounts. These accounts are very popular for saving money because of employer matching and tax-free contributions. However, withdrawing this money can lead to unexpected taxes, as the IRS will want its share.

Required Minimum Distributions (RMDs): When you turn 73, RMDs kick in, requiring you to withdraw a certain amount from your IRA or 401K each year. Failure to comply with RMD rules can result in severe taxes, penalties, and fees. These accounts have been called “sleeping tax bears” that wake up and growl loudly in your 70s. Creating a withdrawal strategy in your late 50s or early 60s can help you avoid paying thousands in unnecessary taxes and penalties.

Mistake #2: Not Having Tax Diversification

Tax diversification involves spreading your investments across accounts with different tax treatments to better manage your tax liability in retirement. There are three basic tax categories to diversify in:

  1. Taxable accounts: Brokerage accounts, checking, and savings accounts. You pay tax on dividends, interest, or capital gains.
  2. Tax-deferred accounts: 401(k), Traditional IRA, 403(b), real estate, or hard assets.
  3. Tax-free accounts: Roth IRA, interest from municipal bonds, and certain types of life insurance.

By putting investments in accounts across the categories, you’ll likely significantly impact your retirement tax bill. But it’s important to do so proactively – BEFORE the tax bill comes.

Mistake #3: Not Converting Some of Your Money to a Roth

An IRA or 401K allows tax-free contributions. But when you withdraw that money in retirement, you have to pay taxes on that money. However converting some, or all of your traditional IRA or 401K to a Roth can lower your tax bill since Roth distributions aren’t taxed.

How a Roth IRA Works: Unlike traditional IRAs or 401Ks, Roth IRAs don’t offer tax-free contributions, but you pay zero tax when you withdraw money in retirement. And you don’t have to deal with RMDs either. That means you get tax–free growth – which could add up to tens of thousands of dollars in retirement, if not more. Another benefit is the lack of early withdrawal penalties, which makes Roth IRAs a flexible option for retirement planning.

A Few Watch-Outs: All of this said – Roth conversions can be tricky. Knowing the exact tax impact can be challenging until the year is over, and you’re not able to reverse your conversion decision. It’s important to seek financial advice to navigate the complexities of Roth conversions effectively.

Mistake #4: Forgetting About Taxes on Your Social Security Benefits

Taxation of Social Security Benefits: Many people are unaware they could pay taxes on as much as 85% of their Social Security benefits. This tax bill can be a shock if not anticipated and planned for in advance. Here’s how your benefits are taxed:

  • If your income is over $25,000 (or $32,000 for couples), you will face taxes on up to 50% of your Social Security benefits.
  • If your income exceeds $34,000 (or $44,000 for couples), you could be taxed on up to 85% of your benefits.

Planning for these taxes can help you avoid unexpected reductions in your Social Security benefits.

Tax laws are subject to change, and staying informed about new legislation is crucial. Working with a tax professional can help you adapt your retirement strategy to any changes in the tax code, so you know you have the latest information and strategies to maximize your retirement savings and minimize your tax liability.

For your complimentary review meeting – step one of our Taxsmart Retirement Program™– to get your taxes on track for retirement, call us today: 952-460-3290.

5 Considerations To Help You Land the Right Financial Advisor

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With more and more financial products hitting the market and a growing number of so-called gurus shilling financial advice from every nook and cranny of the internet, it’s more important than ever to have a trusted financial advisor in your corner. But with so many opinions floating around, how can you determine who to actually trust? Navigating through the maze of investment options, retirement plans, and financial strategies demands tried-and-true expertise and insight. We’ve put together a list of five things to consider as you sift through the noise and find a professional who’s worthy of your trust.

  1. Communication Style: Clear and effective communication is crucial to the advisor-client relationship. In this industry, things can get complex and confusing quickly. You want an advisor who can spell it all out for you in a way you understand. Beyond that, you’ll want to work with someone who responds promptly and is willing to provide you with regular updates. Transparent and open communication fosters trust and ensures that you remain in the know and empowered throughout your financial journey.
  2. Credentials and Beyond: Formal credentials can be a valuable indicator of expertise, but they don’t provide a complete picture of competency. In the world of financial consulting and retirement planning, there is a whole spectrum of designations ranging from rigorous to just plain formalities. Take into account a prospective financial advisor’s track record, integrity, and compatibility with your financial goals, rather than simply relying on the acronyms trailing their name.
  3. Specialization: Just like you’d consult a cardiologist for heart-related concerns rather than your family doctor, you should seek out a financial advisor whose expertise aligns with your specific financial needs. At Secured Retirement, our specialization revolves around income and tax planning for retirement. Having a specialty indicates the presence of proven strategies. Whether you’re interested in retirement planning, estate management, or investment strategies, and depending on where you are in your financial journey, working with a specialist ensures guidance and comprehensive insights tailored to your goals.
  4. Life-Long Learning: Even the most decorated financial professionals should seek out ongoing education and training. This is a field that is constantly changing. You want to work with advisors who keep up with this change. What’s more, you want to know that the training they’re doing isn’t on sales techniques, but in areas of financial substance. Ensure your financial partner values honing their knowledge and skills in their area of expertise so that they consistently stay on top of their game.
  5. A Range of Approaches: Every family’s financial situation has its strengths and weaknesses. Within their specialty, your financial advisor should be able to tailor their approach to your unique situation in order to achieve your personal financial goals. You need a partner who takes the time to listen to your vision and can craft a strategy around it. There is no one-size-fits-all approach in this industry, and if anyone claims there is. . . Beware!

In the complex world of financial planning, working with competent financial professionals you can trust makes all the difference. At Secured Retirement, we’ve built our business with these very considerations in mind. We’re a partner you can rely on and thrive with. 

Connect with us today: 952-460-3290

Tax Prep Vs Planning – Two Strategies For Tax Savings

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As the new year unfolds, it brings not just resolutions and fresh beginnings but also the commencement of a new tax season. The tax season is upon us and tax professionals across the country are spending their wee hours crunching numbers to save you money where they can. While the best tax preparers can sometimes find savings for you, tax planning offers a more comprehensive way to secure longer-term savings, rather than just once-every-couple-years savings. And that’s the difference between tax preparation and tax planning. Blog over. Case closed. Just kidding! Let’s dive into the distinction between these practices and why there’s a place for both of them in your financial routine.

Tax Prep Vs. Tax Planning

Tax prep and tax planning have two central differences: Their purpose and their timing. Tax prep is primarily focused on completing and filing the correct tax forms in order to be federally compliant. This process happens between January 1 and the April due date – the 15th this year. If you’re lucky, a skilled tax preparer will find some ways to minimize the amount you owe Uncle Sam yearly. This reactive strategy does work out some years!

On the other hand, tax planning is an ongoing effort that happens year-round. These tax-saving strategies take into account your long-term financial goals and make more substantial money-moving adjustments to minimize your tax liability to the tune of a small fortune. Its purpose is to create a proactive strategy for savings accomplished in advance of your retirement. 

Tax Planning’s Growing Importance

In today’s financial world, taxes primarily have a significant effect on retirement earnings. The current generations of retirees are the first to fund their retirements from 401Ks and IRAs, as opposed to the pensions of previous generations. Therefore, it’s more important than ever to prioritize tax planning as part of your retirement savings arsenal. Planning before you retire will help you reap the most rewards.

Additionally, federal taxes are currently at a 40-year low. In order to pay off our record-breaking national debt, it’s likely the federal government will raise taxes. So make your adjustments and maximize your savings while the gettin’s good.

Strategies To Maximize Savings and Minimize Tax-Liability

When it comes to actually implementing tax savings strategies, there are a host of factors that contribute to your tax-optimized equation. Things like managing when and how you withdraw from IRAs, 401Ks, and take your social security benefits all have tax consequences. In retirement, as you transition your income, you’ll be taxed on all of those things. A robust retirement withdrawal strategy often relies on diversifying your money across different types of accounts. This applies to things like reserve funds, taxable accounts (traditional brokerage accounts), tax-deferred accounts (401K or Roth IRA), and tax-free accounts (Roth 401K or Roth IRA). Tax planning may involve

consciously paying taxes now in an effort to save on taxes later, such as converting traditional IRAs into Roth IRAs.

Another often-implemented strategy involves reducing your taxes when the time comes to actually make withdrawals from your tax-deferred accounts, like your 401K. Sometimes taking too large of a withdrawal from your account can push you into a higher tax bracket. By planning carefully, you can limit your 401K withdrawals to prevent that push, and then take the remainder of your cash needs from after-tax investments, cash savings, or Roth savings. When you fund big-ticket purchases from a mix of accounts, you can best minimize your tax expenses.

Bottom Line

Both tax preparation and tax planning can save you money at the end of the day. At Secured Retirement, we believe one of the most effective ways to plan for retirement is to implement tax planning. Most folks don’t want to pay the government one dime more in taxes than they have to. They want to enjoy their retirement and their earnings. If that sounds like you, the single, most important key is to take advantage of every tax-saving opportunity available to you.

Let’s find the best strategies for you — and see how much money you could save!

Email us to schedule your free tax analysis today.

Weekly Insights 8/14/23 – 8/18/23

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In the Mood

A 2019 Gallup investor sentiment survey indicated that 52% of those surveyed said the performance of their investments affected their daily disposition, or mood. When broken down by demographics, an even greater number of retirees (63%) stated their moods were affected by the performance of their investments. Since this survey was conducted, we have experienced the Covid-induced market volatility of 2020 as well as the 2022 drawdowns in the stock and bond markets so it is likely if this survey was taken again today the results might be different, and not necessarily for the better.  From time-to-time analysts and the media will describe the stock market as having a mood, either positive or negative, which we have seen swing over the past couple of weeks. 

The first came on the heels of the credit downgrade by Fitch Ratings on debt issued by the United States from AAA to AA+ on August 1st.  Markets moved lower the following day, with the Nasdaq having its worst day since February, but paling in comparison to the market rout that occurred in 2011 immediately following a similar (and even more surprising) move by Standard & Poor’s.  Fitch’s decision was based upon political dysfunction following contentious debt ceiling standoffs.  It remains extremely unlikely the U.S. will default on its debt and there is little doubt U.S. Treasuries will retain their status among the safest investments in the world.  However, this added layer of risk could push rates higher resulting in higher borrowing rates, such as mortgages and credit cards.  And now that two out of the three major credit ratings agencies no longer classify U.S. debt as AAA rated, perhaps it will get the attention of politicians to make some difficult (and politically unpopular) decisions towards better fiscal responsibility.  One of which very well could be in the form of higher taxes in the future. 

A week later the credit ratings downgrades of 10 regional banks, this time (ironically) from Moody’s Ratings, roiled the markets. They also placed the ratings of six banks under review and shifted the outlook of 11 banks from stable to negative.  In their report, the credit rating agency highlighted some of the issues that caused the banking crisis earlier this year have not disappeared, citing strains from a fast rise in interest rates eroding profitability.  Despite concerns about the stability of some of these institutions, deposits should remain safe from the regulatory backstops of FDIC insurance and the steps regulators took in the aftermath of bank collapses earlier this year. 

Mood Swings

Stock markets enjoyed a good month in July, with all major indices posting positive returns.  Value and growth performed in-line with each other, following through on a trend that began in June.  Prior to that point, growth stocks had largely outperformed value stocks in 2023, driven primarily by mega-cap tech stocks.  It seems the excitement and hype around A.I. is beginning to wear off as those stocks have become relatively expensive on a historical valuation basis.  The performance dispersion between sectors generally narrowed with almost all sectors performing well.  In a similar manner, small caps had an especially strong July, echoing decent performance in June after having a difficult first few months of the year. 

August is off to a more difficult start, especially in light of the aforementioned downgrades, with both the S&P 500 and Russell 1000 indices being lower by over 2%.  Value is generally outperforming growth as the technology sector has come under some pressure.  Investors have benefited from rather surprising positive returns so far this year so having the markets cool off a bit does not come as a surprise and is part of the normal market cycle. However, market sentiment is perhaps changing. Whether this becomes a longer-term structural change reflecting a slowing economy or is simply a short-term sector rotation remains to be seen.   

Even though the Fed is ostensibly winding down this cycle of interest rate hikes and inflation has become more benign, rates will remain higher for longer than previously anticipated, causing borrowing rates to remain at their highest levels in over two decades and continuing to put strain on consumers.  Employment remains strong, but the number of jobs created in July was less than expected so cracks may be appearing in the labor market.  And while one could argue about the validity of credit ratings downgrades, especially in light of the spotty track record of the ratings agencies during the 2007/2008 Great Financial Crisis, there is no reason to believe that the balance sheets of many institutions have improved, and we are not yet in the clear when it comes to the banking sector.  Oil prices have also moved higher, further putting a strain on budgets for families and companies. And even though the most recent inflation reports showed inflation continuing to slow this could reverse over the next couple of months if oil prices continue to move higher or remain where they are now. 

Looking Ahead

After raising rates a quarter point at their most recent meeting in late July, the Fed is now widely expected to pause for the foreseeable future.  Odds for an additional rate hike later this year slightly dropped after last week’s softer than expected inflation reports but this could change quickly if future data shows inflation remaining elevated or not continuing on its downward trajectory.  However, this most likely will not be a concern or affect markets over the next couple of months since it seems there is little that will impact the Fed’s rate decision at their next meeting in late September, absent an unanticipated event.

Speaking of the Fed, the annual Jackson Hole Economic Symposium will be held next week, August 24-26.  While this is not an official FOMC meeting and no action will come of it, Fed Chair Powell’s remarks last year did spook markets, sending them lower over the ensuing couple of months.  We would be very surprised to see a repeat this year, but the potential exists for comments from Fed officials to impact markets. 

Markets tend to be calm during the waning days of summer.    Earnings season is pretty much wrapped up, with the exception of reports from major retailers this week, and there are very few major economic releases prior to month-end so we do not have any reason to think this year will be different.  Often it is during the autumn months where we experience greater volatility in the markets.  This is a good opportunity to ensure your portfolio is positioned appropriately.  During retirement if you no longer can rely on a steady paycheck, investing money becomes an emotional commitment along with a financial one.  Be sure you have a solid income plan in place so you need not worry about what happens in the market;  do not let the performance of your portfolio alter your mood. 

Have a wonderful week!

Nathan Zeller, CFA, CFP®

Chief Investment Strategist
Secured Retirement
nzeller@securedretirements.com

Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.   

info@securedretirements.com
Office phone # 952-460-3260

Weekly Insights 7/24/23 – 7/28/23

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Train Kept a Rollin’

The song “Train Kept A-Rollin,” which was first performed by jazz and blues artist Tiny Bradshaw in 1951 and further popularized by the rock group Aerosmith during the 1970s, is about a guy who is stunned by an attractive woman on a train but must act cool to not scare her away.  The stock market continues to keep rolling higher but can the participants remain cool, or will something happen to scare it?

Last week the S&P 500 posted its fourth weekly gain in the past five and the Dow Jones Industrial Average capped off its 10th straight daily gain on Friday; its longest winning streak since August of 2017.  The small cap Russell 2000 outperformed the S&P 500 for the second straight week but the Nasdaq, whose improbable run may be cooling, was slightly lower as the shift from mega-cap tech stocks that began about a month ago continues with other sectors now showing strength.  Second quarter earnings kicked into full gear with strong results from the banking and financial sector.  Disappointing reports from Tesla and Netflix weighed on the sentiment of big tech, adding to scrutiny around valuations and higher expectations following outsized year-to-date gains.

Optimism remains in the market around the broadening of the rally and increased hopes of a soft landing.  Overall earnings reports have been generally positive and exceeded previously lowered expectations.  Signs of resilience in consumer spending and lower inflation have helped provide optimism to investors.  The headline CPI and PPI inflation reports from June showed inflation at the lowest levels in over two years, however it should be cautioned this was compared to June of a year ago when inflation reached its peak when CPI was over 9% on an annual basis.  With inflation moderating in the ensuing months of 2022, future inflation reports could become interesting since they will be compared to a year prior.  Core inflation, which does not include food and energy, remains elevated, hovering near 5% compare to a year ago.  Energy prices have been moving steadily higher this month and therefore are likely to put upward pressure on non-core, or “headline,” inflation readings over the next few months.    

Derailment?

What could derail the recent market rally or cause it to slow?  Likely culprits include higher interest rates and disappointing earnings.  Most market analysts and economists are predicting we are near the top of the current interest rate cycle.  If that is the case, then this might be an opportune time to lock in the highest interest rates we have seen since before the Great Financial Crisis over 15 years ago.  There is also a chance interest rates continue to move higher. We would suggest looking beyond some of the traditional fixed income strategies for ways to earn higher amounts of interest and protect against loss in stocks and bonds. Despite inflation falling, it remains elevated and continues to eat away at purchasing power, especially over longer time periods, making it especially important to ensure your savings are able to keep up.  This could prove more challenging in coming years as prospects of lower interest rates and more subdued stock market returns are seemingly rising.

With earnings season fully underway, the S&P 500 is reporting an earnings decline of 9% for the quarter compared to a year ago; the largest drop since the second quarter of 2020, in the midst of the COVID pandemic.  So far this has not been enough to throw the market rally off course since expectations going into earnings season were already lowered.  However, this remains an important lesson in the markets – performance is based upon expectations with future events often “baked in” to current prices. Major price movement, either negative or positive, tends to primarily be caused by surprises. 

Looking Ahead

The Fed is widely expected to raise interest rates by a quarter point at the conclusion of their meeting on Wednesday. Looking back, the trajectory of interest rates from Fed action this year has surprised to the upside but it has not been enough to thwart the stock market rally as investors have mostly shrugged it off and instead focused on the likelihood that the end of the rate hike cycle may be near.  Future Fed action will be become very dependent upon inflation data in following months so it is too early to make predictions, but current odds are the Fed will pause at the next meeting in September with about a 50/50 chance of another quarter point hike in early November. 

Earnings season continues in earnest with tech heavyweights Microsoft, Alphabet (Google) and Meta (Facebook) set to report.  Preliminary GDP from the second quarter will be reported on Thursday and is expected to show positive growth of around 2%, indicating a recession has thus far been averted but does not mean we are completely out of the woods. 

It has been hard to ignore the strong performance of the mega-cap tech stocks this year but with the broadening rally better opportunities may lie in other market segments such as small and mid-cap stocks, as well as other sectors which previously have lagged.  Given the surprising bull run, this would be a good time to review your investment strategy and rebalance your portfolio appropriately. When markets rally, many investors tend to get greedy and take on excess risk; the opposite of what should be done.  Be sure to protect yourself in the event of a market downturn, but not so much that you miss out on future opportunities.  We remain cautious in the short term but bullish in the long term.  You should remain focused on the long term and what can lead to your secure retirement and do not let it get derailed by short-term events. 

Have a wonderful week!

Nathan Zeller, CFA, CFP®

Chief Investment Strategist
Secured Retirement
nzeller@securedretirements.com

Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.   

info@securedretirements.com
Office phone # 952-460-3260

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Danielle Christensen

Paraplanner

Danielle is dedicated to serving clients to achieve their retirement goals. As a Paraplanner, Danielle helps the advisors with the administrative side of preparing and documenting meetings. She is a graduate of the College of St. Benedict, with a degree in Business Administration and began working with Secured Retirement in May of 2023.

Danielle is a lifelong Minnesotan and currently resides in Farmington with her boyfriend and their senior rescue pittie/American Bulldog mix, Tukka.  In her free time, Danielle enjoys attending concerts and traveling. She is also an avid fan of the Minnesota Wild and loves to be at as many games as possible during the season!