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It Takes a Family to Plan Retirement

Let clients know financial planning is not a solo project for retirees—annual family meetings can ease the transition into senior status.

It is no secret that we have an aging population: Each day 10,000 baby boomers turn 65 and start collecting Social Security and Medicare benefits. This trend is expected to continue for the next 19 years.

Physician Retirement Planning

However, what’s less well known is that the vast majority of retirees are underfunded for retirement. The reasons for being underfunded are many: lack of savings, poor investment choices, excessive spending, or unforeseen expenses.

No matter what the cause, it is becoming clear that neither they nor we can rely on the federal government to take ample care of our senior citizens.

In fact, it truly does take a family to care for their elders, and we are seeing more and more situations where children are pitching in to help out parents with both care and financial support.

To facilitate this, having annual family financial meetings is a critical yet simple step that can help a family find the best available solutions for their finances. Every situation is slightly different, of course, but we see two specific areas that seem common to most situations where it pays to be proactive in getting all members of the family on board, before a crisis hits.

The key areas to discuss are long-term care and real estate, because they are two areas that often cause the most significant pressure on the next generation of a family.

One of the biggest financial burdens of a retiree is long-term care, which can run around $100,000 a year with an average stay of three years. Who is going to foot the bill? Who is going to manage the parents’ transition into a nursing home? With the right planning, the next generation can provide the care needed without a slew of sudden emergency expenses.

As a part of the family planning process, options for long-term care insurance should be investigated. Traditional long-term care insurance is a use-it-or-lose-it type of insurance policy with premiums that are inexpensive relative to the benefit amount. Another option is a life insurance policy with long-term care benefits, in which case you will use the long-term care insurance for elderly needs or a loved one will receive a death benefit upon your passing.

Thinking about long-term care needs today can save you both dollars and heartbreak and/or financial discomfort in the long run.

Next is real estate: Who is going to be responsible for the care and disposition of the family home? What is the plan for the succession of the family vacation home? Who will take care of the maintenance, upkeep, and taxes from year to year? Who will take the tax deductions and/or rental income, if any?

Real estate can be part of a family’s financial solutions since it can be leveraged to help out the underfunded retiree. This could take several forms, but one is by having a working child move in and do a buyout of the home, and another is a reverse mortgage.

Of course, these are idealized solutions. In real life, there are usually more complications, especially when more children and grandchildren are involved.

Often the party that does not want his or her parent to give up the family home is not the party that is dealing with the day-to-day care issues. Similarly with vacation homes, it’s sometimes the side that frames the issue in terms of memories, nostalgia, and emotion that is the least able to step up and take on the responsibilities in terms of finances and time commitment.

All of these issues can be dealt with in advance of an emergency, a time that forces the issue and heightens the emotions.

When trying to set up an advance meeting, communicate that the goal is to get to a win-win solution for everyone: to provide financial relief and liquidity to the retiree and give all adult children an opportunity to weigh the pros and cons of various solutions.

Too often we see people think only in terms of potential inheritance, forgetting about the potential expenses for their parents or conflict within the family that can arise. For all of these reasons and more, it is important for families to sit down and develop a plan while everyone can be at the table in a relatively calm and unstressed condition, before it is too late.

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Get Into the Spirit of Giving (and Reap the Tax Benefits)

December is a popular time of year for reflection. Another year has run its course, and the holidays allow us to the opportunity to spend time with loved ones while remembering those who are less fortunate. It’s no surprise that donations to charitable organizations tend to spike at the end of the year.

Tax Deductions for Doctors

There’s still time, advocates of non-profit organizations say, to make a year-end donation that’s eligible for a tax deduction. In addition to being altruistic, seasonal generosity can be a favorable strategy when you’re preparing your tax return. Fortunately, once you’ve found a cause dear to your heart there are numerous resources online where you can do your due diligence in verifying the charity’s fiscal health and transparent governance.

Founded in 2002, charitynavigator.org helps donors evaluate where and how to spend their money. Charitable organizations are rated, allowing you to make sure your hard earned dollars are going to a good cause by avoiding charities that might misuse donations. Once a donation is made, there’s not much recourse for the donor if the organization turns out to be unethical or generally unwise with its decisions. Guidestar.org is another useful resource for researching and evaluating charities.

Methods of Donating

In addition to a standard cash donation, real estate and precious items such as jewelry, art and antiques can be deducted when donated to an eligible organization. However, steps must be taken to properly appraise and asses their fair market value. When estimating the value of donated property, it’s best to err on the conservative side since the IRS will penalize taxpayers for overstating the value of donated property. If you’re claiming a deduction of more than $5,000, the IRS mandates completing Form 8283, Section B.

Another donation strategy that we advocate is to donate investments to a charity instead of cash. If you donate stocks and/or bonds that have appreciated to a qualified charity, you can take a deduction on the appreciated value of those assets rather than their basis. Use the price on the date of the sale, averaging the high and low price to get the fair market value.

Charities are allowed to sell investments tax-free, even if there’s a substantial gain. Furthermore, you can repurchase the exact same investments with cash. Not only do you receive a deduction for the full amount of the investments that you gifted to the charity, but you also pay less taxes when you ultimately withdraw your cash that has been reinvested, so it’s pretty much a win-win.

Eligibility Requirements

Before donating, it’s imperative to make sure that an organization is a qualified charity under IRS rules. These include corporations, trusts, community organizations, funds or foundations organized and operated in the United States for religious, charitable, scientific, literary, or educational purposes. Other qualified charities include cemetery companies, veterans’ organizations, fraternal organizations and organizations designed to prevent cruelty toward children or animals.

Certain charities in Canada, Mexico and Israel may also qualify. You can search for qualified charities using the IRS’s online search tool. The IRS prohibits charitable contribution donations for money or property given to political candidates for public office and groups that lobby for legal changes. Labor unions, chambers of commerce, Homeowner’s associations and for-profit organizations are also not eligible.

Finally, remember to save all receipts and document when possible. No deduction is allowed for a separate contribution of $250 or more unless you have written confirmation from the charity. When donating paintings, antiques or objects of art worth $20,000 or more, a signed appraisal must be attached to your tax return, and the IRS may request an 8” X 10” color photo of the donated item. Just to be safe, you should keep records of your donations in the form of a cancelled check, credit card statement or a written acknowledgement from the charity. When in doubt, check with your financial advisor for rules specific to your situation.

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The above article is for general informational purposes only and should not be construed as tax advice. You should consult with a professional advisor familiar with your particular factual situation for advice concerning specific tax matters before making any decisions.

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.