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Monthly Archives: September 2015

4 Financially Responsible Habits to Adopt in the New Year

As we close the book on another year, there are certain goals and ideals we’d all like to shoot for in the next twelve months. This could mean taking on something new or phasing out something bad as a way of growing, changing or resolving to make this year better than the last.

For many, this process starts and ends with financial resolutions. Every physician could benefit from adopting just one of these as a New Year’s resolution, and in doing so will set themselves up for a more responsible and balanced financial year.

Emergency Reserve Funds

It’s been said: “Life changes in the blink of an eye.” Emergencies and catastrophes often have a way of developing when we’re least expecting them, and having adequate resources to deal with these unforeseen circumstances is key to a successful financial life. Some people might call this their “Rainy Day Fund.” Regardless of what you call it, it’s crucial to set aside some money for the unexpected expenses that life throws at you.

Forrest Friedow

Financial planners recommend you have a reserve fund equal to six months of your income. However, most physicians keep enough cash to cover about two or three months worth of monthly living expenses in a checking account or money market fund. They unwisely choose to supplement their emergency reserve by relying on a home equity line of credit, four-day access to their investment funds or some other unsecured line of credit. There’s no telling how much you’ll need or how urgently it will be needed, therefore it’s preferable that your emergency fund consists mostly of cash so you’ll be ready when the unexpected comes your way.

Stick to a Budget

Creating a budget is an often overlooked, yet critical way to get your finances in order. Start by dividing your expenses into five different categories:

  • Giving
  • Saving
  • Living
  • Medical School Debt Reduction
  • Taxes

Next, assign each category a percentage that is representative of your total income. In most cases, living expenses will account for at least 50% of your total budget. Besides living expenses, one is encouraged to allocate a percentage of each pay check towards saving money, paying down outstanding debts and charitable giving. As long as the percentages are properly balanced, this simple method can make your life a whole lot easier.

Create a Savings Target

It may sound simple, but spending less than you earn is a key component of the formula for financial success. Setting realistic fiscal goals allows you to determine the degree of sacrifice that is necessary to achieve them. It’s perfectly realistic to save for the future and still enjoy a comfortable lifestyle here and now. Every situation is different, and there is no exact dollar amount that works for everyone so it’s important to consider all the factors and variables at play.

A great deal depends on what type of lifestyle you desire when you reach retirement age. Most financial planners advocate setting aside 10% of your income to provide for retirement. Of course, the earlier you begin saving, the lower the percentage of income that is required to meet your goals. However, physicians by and large have ten less years to reach financial independence, which requires them to save their income at a higher rate.

Legacy of Giving

Financial success is not something to be taken for granted, and giving consistently to those less fortunate is a responsible way to manage your finances. Studies have shown that those who are generous with their time and wealth are happier, less stressed, live longer and feel more spiritually fulfilled.

For those who haven’t yet established their own philosophy for charitable giving, we offer a simple approach. Begin by giving away a set percentage of your after-tax paycheck, and make it a goal to increase that percentage every year if only slightly. Find a cause you are passionate about, but also keep in mind that by donating to certain organizations you could be eligible for a tax deduction in the near future.

Have Questions?

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

This article was provided by Forrest Friedow, Regional Director and Senior Financial Advisor of Larson Financial Group. The opinions stated are strictly those of the author and are not to be considered recommendations or advice of Larson Financial Group or Larson Financial Securities.

Roth Conversions Offer Tax-Friendly Benefits

As the filing deadline for tax returns approaches, many people are taking a step back to analyze their finances and determine whether they’re paying more taxes than necessary. Retirement plans are one area where the decisions you make today can have lasting tax implications further down the road. It might be easy to take a “set it and forget it” approach to saving for retirement, but proactive planning can help you save more efficiently by reducing your tax burden.

Roth IRA plans, which offer tax-exempt savings, have been a popular option since Congress created them in 1998, but there are limitations on eligibility. For example, couples that earn more than $194,000 annually cannot fund a Roth IRA account. However, a few years ago congress enacted a new law allowing more affluent families the opportunity to enjoy the benefits of the Roth IRA.

Conversion Process

Since 2010, anybody can make the conversion from a traditional IRA to a Roth IRA regardless of income. This is called a backdoor Roth IRA, and it’s a completely legal and even standard investing practice for high-income earners. As always, it’s a good idea to consult with a tax professional before taking action.

Physician Retirement Planning

Basically, the process starts by making a regular, non-deductible contribution to a traditional IRA through your IRA custodian. After the contribution posts, you can convert it by buying shares in a Roth IRA and selling shares of your traditional IRA to fund it.

Because the initial contribution was already non-deductible, the taxes on it have essentially been paid. You’ll only need to pay taxes on the difference between the converted value and the amount contributed, which should be minimal if the money was in your account for a short period of time.

One thing to consider before making a conversion is the IRA pro-rata rule. This rule stipulates that when calculating the taxable income from a Roth conversion, you must include all non-Roth IRAs in your name (including SIMPLE and SEP IRAs). To calculate the amount of the conversion that is not taxed, you must divide the total of after-tax contributions by the total balance across all IRAs (excluding Roth IRAs).

To get around this, you can either roll all your traditional IRAs over to a Roth account or an employer-sponsored 401(k). However, it could cost you a lot in taxes and earnings depending on your circumstances. If you own a practice that’s operating at a loss, you can avoid paying the conversion tax by offsetting losses from the business against income from the conversion.

Timing Your Conversion

Whether or not a Roth conversion makes sense for your situation can only be answered on a case-by-case basis. One important guideline is if you cannot afford to pay the taxes owed out of pocket or out of a taxable account, than a conversion would probably not be recommended since the benefits are substantially less. Most people have a tendency to postpone paying taxes as long as possible, but if you can afford to take the hit now it will limit your exposure to taxes on your investment profits down the road.

In general, if you have to use IRA savings to pay taxes triggered by shifting them to a Roth, you might be sacrificing too much principal up front to make the deal worthwhile. It’s definitely not advisable to execute a conversion during your peak earning years. Delaying the conversion until you reach retirement age makes sense if you’ll be in a lower income tax bracket during retirement than you are currently. Other factors to consider are how you plan on paying for the income tax bill due on the conversion, how long the Roth IRA will remain untouched and the size of the IRA in the context of your estate.

At the end of the day, you want to make sure the taxes you pay to convert the account are less than what you would save on subsequent tax-free withdrawals. If you have a large enough net worth, you could also avoid potential estate tax liabilities because the income tax created by the conversion would reduce the value of your gross estate.

If you don’t have other pre-tax IRAs at your disposal, than a backdoor Roth would be an ideal option for high-income individuals looking to gain IRS-approved access to these tax-free accounts. Doing so will allow you to profit handsomely from your investments without having to give Uncle Sam his cut. It might sound too good to be true, and for complex transactions like this it’s best to consult with a tax professional before taking any action, but it’s definitely an option to be explored.

Have Questions?

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

This article should not be construed as tax advice. You should consult with a tax professional that is familiar with your individual circumstances before taking any action.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

Developing a Plan to Save for your Child’s College Education

Provided By Matt Harlow, CFA, Chief Investment Officer at Larson Financial Group

As seen in St. Louis Medical News

For many parents, providing a better future for your children is of the utmost importance. A college education is still an effective way for young adults to pursue their passion and get ahead in life. By funding their college education, you’re helping lay some groundwork for your children to make a successful transition into adulthood by minimizing the need to carry student loan debt.

Currently, the cost of higher education is consistently rising. In fact, College Board statistics show that over the past 30 years the average annual increase for college tuition is 3% to 5% above the rate of inflation. This can make projecting the amount to save for college difficult. This problem may be alleviated by performing some due diligence.

How Much Should Be Funded?

As a physician, there is a chance your family won’t be eligible for any need-based financial aid from the government or a university due to a high net income. It falls on you to decide what savings methods to utilize while weighing factors that can impact education costs. For example, the difference between public and private tuition can be substantial, so you need to plan accordingly.

Medical School Debt

The appropriate amount to save is different for every family depending on your circumstances, values and the needs of your child. Some families target a set dollar amount that they’d like to put aside for their child’s educational needs which allows for flexibility when it comes to controlling cost. If the cost of college ends up being less than the amount saved, the child may be able to apply the excess funds towards graduate school.

Other families take a set-savings approach where they designate a certain amount of their monthly or annual discretionary income towards funding education expenses. Some or all of this money may go into a tax-advantaged account, and whatever accumulates is the financial assistance provided by the parents. You can typically increase or decrease the amount diverted to these accounts as cash flow permits.

In addition to tuition and room and board, students will need about $3,000 to $5,000 throughout the school year. This extra money is needed for books, additional meals, laundry, cell phone, travel home, a computer, a printer and various other expenses. You can proactively develop a college spending plan by listing each category of expense and targeting a total dollar amount they’ll expect to need annually. If you won’t be providing a monthly allowance, make sure your child has a sense of how much money they will need to earn over the summer or in part-time jobs during school.

Investment Philosophy

Once you’ve determined how much of their education you want to cover, the next step is to decide which investment methods are the best fit for your situation. Conventional wisdom may suggest that you take an “age-based” approach to saving for college. However, our experience has shown that age-based portfolios many times offer less opportunity to meet the goals you’ve set for your children’s education fund. For many situations, simply using a conservative portfolio during the entire funding and accumulation period prior to your child attending college often outperforms the conventional wisdom.

It may be an option to spend any savings you have accumulated in non-retirement accounts. For example, if you are planning to sell stock to fund you child’s education expenses, you may consider gifting that stock to the student because they’ll typically pay a lower capital gains tax when they sell it. As a result, appreciated assets transferred to students often yield more than the same amount of appreciated assets sold by a parent. Also, consider cashing in any savings bonds you and your child may own. They usually have low interest rates, and savings bonds purchased after 1989 are tax-advantaged if used to pay for education expenses.

Unlike retirement accounts, which usually have more time to recover in the event of a bumpy stretch in the market, education funds are typically exhausted within a few years once distributions begin. Meaning, you’re taking a comparable amount of risk without as much opportunity for reward. This is why we prefer analyzing your retirement portfolio separately from your education portfolio, and often have separate investment strategies for each.

You’re encouraged to speak with a financial advisor familiar with the factors that are unique to your family’s situation before taking action. The important thing to remember is that education planning should be reconciled with your own financial independence needs. Generally, you should avoid taking a loan from your 401(k) plan for your child’s education. These loans typically need to be paid off when changing jobs, and unpaid 401(k) loan balances are treated as taxable withdrawals.

Have Questions?

The information presented is for informational purposes only, and is not to be construed as legal, tax advice, or otherwise. The material is based on information believed to be reliable but is not guaranteed. Before making any important financial, legal or tax decision, it is always recommended to seek advice of a qualified representative who can address how this relates to your own personal and specific situation.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC. Tax services offered through MedTax, an affiliated company.

Determining the Value of Financial Advice

Have you ever speculated about how much better off your portfolio would be under the careful stewardship of a financial advisor? It’s difficult to quantify, but a recent study by the world’s largest mutual fund company attempted to put a numerical value on expert financial advice. What they found is that you can potentially add up to 3% in net returns over time when working with an advisor that adheres closely to best practices.

Financial Planning for Physicians

 

While there are many different philosophies and schools of thought when it comes to portfolio management, certain methods are universally recognized as the foundation of a sound investment strategy. For example, diversification is an effective way of spreading your risk across a wide range of asset classes such as local and global bonds, domestic and developed market equities and emerging markets. However, these standard practices can only take a portfolio so far. Strategic investors differentiate themselves by following these seven wealth management principals:

  • Maintaining a long-term, disciplined approach: Investing is a marathon, not a sprint. Advisors can help their clients see the big picture by essentially coaching them to evaluate their portfolio in a long-term context instead of seeking instant gratification. Investing is an inherently emotional experience, so advisors have to maintain a disciplined approach that avoids the temptation of chasing returns.
  • Applying an Asset Location Strategy: The coordination of assets between taxable and tax-advantaged accounts can add value to your portfolio every year that builds up quickly. A properly structured portfolio will hold broad-market equity investments in taxable accounts while holding taxable bonds within tax-advantaged accounts. Doing this generates higher and more certain returns by spreading the yield between taxable and municipal bonds.
  • Asset Allocation: Most firms request that their clients fill out an investment policy statement that outlines the financial objectives of the portfolio. Having this blueprint in place provides a solid foundation for the advisor/client relationship. Not only does it allow them to adopt an investment philosophy and embrace it with confidence, but it also makes enduring the inevitable ups and downs of the market a little more tolerable.
  • Employing Cost-Effective Investments: Advisors constantly seek ways to control costs so they can efficiently deliver higher-than-expected returns. Every dollar spent on management fees, trading costs and taxes is a dollar less for your potential net return. By paying less you are essentially keeping more, regardless of how the market is performing in general.
  • Maintaining Proper Allocation Through Rebalancing: Risk tolerance is different for every investor. It’s up to the advisor to reconcile the risk/return characteristics of a portfolio with the client’s appetite for taking risks. The objective of a properly implemented rebalancing strategy is to minimize risk, rather than maximizing return.
  • Implementing a Spending Strategy: When the time comes to divest your portfolio, it’s important to consider this income in the context of your estate so that tax liabilities are minimized. The acceleration of income taxes and the resulting loss of tax-deferred growth can negatively affect a portfolio. An informed withdrawal order strategy will minimize the total taxes paid when a client reaches retirement which ultimately increases the wealth and longevity of their portfolio.
  • Investing Income Vs. Total Returns: Ideally, an investor could live off the returns generated from their holdings, but that often sacrifices the tax efficiency of the portfolio in the process. Ultimately, this increases the portfolio’s risk by becoming too concentrated in certain sectors which could potentially reduce the lifespan of the portfolio. For retirees to avoid the risk of falling short of their long-term financial goals, experts advocate an approach that considers both income and capital appreciation.

 

Active fund managers haven’t been able to consistently outperform benchmarks despite having a wealth of experience and resources at their disposal. The value of every advisor varies based on each client’s unique circumstances and the way the assets are actually managed. Ideally, you want a responsive advisor that you can trust with your financial future.

Transparency is critical, but you also want to make sure that you’re receiving truly independent advice. This means avoiding the recommendations of someone who is receiving a financial incentive from the provider of the product they are promoting. You don’t want to contract with advisors that are sales representatives for a particular company. The ideal advisor is independent and committed to a fiduciary relationship with their clients.

A fiduciary relationship is defined as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.” Although this standard is not required by law, an advisor pledging to make recommendations solely with the client’s best interests in mind will be able to manage your portfolio as objectively as possible. This standard of conduct includes controlling excess costs such as transaction fees, taxes and efficiency in implementation.

Markets are uncertain and cyclical, but a disciplined approach to investing will yield better results over the long run. An advisor that will work tirelessly on your behalf day-in and day-out to provide the highest level of service possible will allow you to have peace of mind and confidence that the foundation for a secure financial future is in place.

Have Questions?

The projections or other information included in the linked report prepared by Vanguard regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Although we believe the information contained in the linked report to be accurate, we can’t guarantee its accuracy.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services. Please consult the appropriate professional regarding your legal or tax planning needs.

4 Key Steps for Planning Your Digital Estate

When a close family member of mine passed away back in the spring, no one was surprised that this meticulous planner had left his financial affairs in good shape. The family’s longtime financial advisor coached his wife about how to open an inherited IRA to stretch out the tax-saving benefits of the vehicle, and the family attorney got to work on tying up all of the other loose ends, both financial and legal.

But not every aspect of his estate has been attended to, almost six months later. His LinkedIn profile is still up, as is his old Facebook page. In the scheme of things, the fact that those accounts are still live may not seem like a big deal. But that may not have been what he had wanted, either. Because he never specified his wishes for those accounts, his family doesn’t really know.

Financial Advice for Doctors

My relative’s situation illustrates that even people who think they’ve ticked off all the usual boxes on their estate-planning to-do lists may have overlooked an increasingly important component of the process: ensuring the proper management and orderly transfer of their digital assets after they die or become disabled. Just as traditional estate planning relates to the management and transfer of financial accounts and hard assets, digital estate planning encompasses your digital possessions, including the tangible digital devices (computers and smartphones), stored data (either on your devices or in the cloud), and online user accounts such as Facebook and LinkedIn.

The basic idea is to knit these digital assets in with the rest of your estate plan. “We need to do the next step in planning,” says James Lamm, an attorney who coaches other attorneys on the importance and specifics of digital estate planning. “Who should get the data? And more importantly, are there things we don’t want others to have?”

‘The new reality’

As we’re all spending more and more time pecking at our phone screens and transacting online, digital assets are taking up an increasingly important role in all of our lives. “The new reality is that our lives are largely digital, and the artifacts of our digital lives have value, from both sentimental and financial standpoints,” notes Evan Carroll, cofounder of TheDigitalBeyond.com and coauthor of Your Digital Afterlife, a book about digital estate planning.

At first blush, making plans to allow your loved ones to gain access to your digital property may not seem like a pressing concern—certainly not on par with issues like who should inherit your financial accounts or look after your minor children. Lamm concedes that many digital assets have little or no financial value. But he also notes that “there can be significant value if you know what to look for.”

An obvious example of a valuable digital asset would be a manuscript on the PC of a best-selling author. But domain names and advertising from webpages and blogs may also have financial value. Downloaded assets such as digital music and book libraries may be worth something too.

And even if they don’t have monetary value, digital assets may have sentimental worth. If you don’t specifically outline what should happen to such assets when you craft the rest of your estate plan, Carroll notes, “The implications could be that your wishes are unknown to your heirs and they won’t have access to precious family mementos or important documents.”

Logistical hurdles abound

Digital estate planning is, in many respects, more complicated than traditional estate planning. Whereas finding and managing financial and hard assets after a loved one has died or become incapacitated isn’t always straightforward, identifying and gaining access to the digital assets of a loved one is apt to be an even more cumbersome process.

Lamm says that unless the owner of those assets has left specific guidance about the existence and whereabouts of the digital assets, the deceased or disabled individual’s fiduciaries may not even be aware of their existence. Additionally, those digital assets may not only be password-protected or encrypted, but they may also be covered by data-privacy laws or criminal laws regarding unauthorized access to computer systems and private data. Fiduciaries may be able to unearth passwords and gain access to their loved ones’ online accounts, but they may not be doing so legally.

The field of digital estate planning is also evolving rapidly, as are digital providers’ policies on what should happen to digital assets that are left behind. For example, Google has created an Inactive Account Manager, which allows you to name a trusted person who can gain access to your data once your accounts have been inactive for a certain period of time. Facebook, meanwhile, does not currently allow others to gain access to data stored on the social media firm’s site. Digital assets are also governed by a complex web of rapidly evolving laws, both at the state and federal levels.

The fact that state and federal laws and digital providers’ rules are so piecemeal, notes Carroll, should serve as an impetus for individuals to “take a few minutes and get their plans in order.” Here are several key steps to take.

1. Conduct a digital “fire drill”

Lamm thinks a good first step in the digital estate-planning process is to conduct a digital fire drill, which tends to jog clients’ memories about what digital assets they deem important. He urges his clients to consider the following questions:

  • What valuable items would you lose if your computer were lost or stolen today?
  • If you were in an accident, would your loved ones be able to gain access to your valuable or significant digital information while you were incapacitated?
  • If you were to die today, to what valuable or significant digital property would you like your loved ones to have access?

2. Take an inventory of your assets

The next must-do is to create an inventory of the digital assets you named during the fire drill. Document the item/account name as well as user names and passwords associated with that item.

Among the items to document in your digital inventory are:

  • Digital devices such as computers and smartphones
  • Data-storage devices or media
  • Electronically stored data, including online financial records, whether stored in the cloud or on your device
  • User accounts (Facebook and LinkedIn accounts, for example)
  • Domain names
  • Intellectual property in electronic format (a book you’re working on, for example)

As with the “master directory” I’ve discussed in the past, this document is chock-full of sensitive information, so keeping it safe is crucial. A printed document will tend to be the most vulnerable, unless you store it in a safe or safe deposit box. A password-protected electronic list of your digital assets and instructions on how to gain access to them is a step in the right direction, but it, too, will need to be updated on a regular basis as passwords change.

Lamm is a fan of software programs such as LastPass and Dashlane, which securely store your online account information and passwords on your computer and smartphone. Web-based services such as LegacyLocker and AssetLock aim to take the extra step of making this information available to your fiduciaries, after a verification procedure.

Lamm recommends a hybrid approach for most individuals. Maintain an electronic list of digital property and passwords, protected with strong encryption and a strong password and backed up in the cloud (as opposed to on your computer and smartphone alone). From there, he advises creating a master password for the electronic list, storing the password in a safe deposit box or home safe, and providing fiduciaries and family members with instructions about how to gain access to it.

3. Back it up

We’ve all been schooled on the importance of regularly backing up digital assets, and Lamm points out that estate-planning considerations make it doubly important to do so. Even if a specific device malfunctions, storing digital assets on another storage device or in the cloud helps ensure the longevity of those assets. Moreover, online account service providers may voluntarily disclose the contents of electronic communications, but they’re not compelled to do so. If you want to help ensure that your loved ones have access to the information in your online accounts, backing it up on your own device is a best practice.

4. Put your plan in writing

Experts also recommend formalizing your digital estate plan. That means naming a digital executor—someone who can ensure that your digital assets are managed or disposed of in accordance with your wishes after you’re gone.

If your primary executor is savvy with technology, there’s probably no need to name a separate digital executor. But if not, or if you have particularly valuable or special digital property, such as intellectual property, Lamm advises a separate fiduciary/executor for digital assets.

Depending on the type of property, the fiduciary may also need special powers and authorizations to deal with specific assets. “Because of the complexities of criminal laws and data-privacy laws,” Lamm says, “you need the right kinds of authorizations in place.”

He also advises individuals to mention specific digital assets in their wills. “If you don’t want to pass it on, that’s fine. But if I had something valuable I wanted to pass on, I’d put it in my will.”

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