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Choosing the Best 529 Plan for Your Child’s College Fund

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

College tuition continues to rise. Over the past 30 years, the average annual increase for college tuition has been 1.9% to 5% above the rate of inflation as measured by CPI according to College Board statistics. This long-term trend shows no signs of being reversed anytime soon. As a result, a pressing concern for many parents is whether they’re saving enough money for their child’s college education. The ever-shifting landscape of tax laws and college education funding rules only compounds this uncertainty.

529 college savings plans can offer attractive tax-advantaged benefits, however, a recent survey by Edward Jones found that 70% of Americans aren’t aware of these investment vehicles. Currently, there are over 50 different 529 college savings plans, with the onus for implementing these on the individual states.

Searching for the Ideal 529 Plan

Not only does money contributed to a 529 plan accumulate tax-deferred, but the earnings withdrawn are not taxed at the federal level as long as it’s being used to pay for qualified expenses. Many states incentivize the transaction by offering tax deductions on 529 contributions on your state income tax return. Five states (Oklahoma, Oregon, Georgia, Mississippi, and South Carolina) even allow you to take the deduction on the previous year’s tax return as long as the contribution was made by April 15th of the following year.

Financial Planning for Doctors

Many states are making this incentive even more attractive by increasing the value of the deduction. For example, in 2013, Arizona increased its deduction of $750 to $2,000 a year for individual tax filers and $1,500 to $4,000 a year for joint filers. Other states are in the process of taking similar action. However, there may be other considerations aside from tax breaks to weigh, which is why families are encouraged to consult with a qualified financial advisor.

Six states (Missouri, Kansas, Maine, Montana, Arizona and Pennsylvania) even allow one to claim a deduction for contributions to a 529 plan from other states. Residents of these states have the opportunity to shop around for plans with minimal administrative and investment fees. Nevada, for example, has an institutionally-managed portfolio of exchange-traded funds which allows them to keep their costs low.

Due Diligence

529 Plans also vary in the investment options they offer. Plans can be customized with a wide variety of investment options that range from conservative to more growth-oriented to match various risk tolerances. Some 529 Plans offer aged-based portfolios that automatically adjust to more conservative holdings as a child approaches college age.

Some 529 college savings plans can be obtained directly while others are advisor-sold, meaning they are purchased through a registered investment advisor. Carefully read the 529 plan issuer’s official offering circular or prospectus before investing.

Gifting from family and friends is made easier by the e-gifting program for 529 plans, available in 11 states. Once an account is opened, relatives can be emailed a link where they would enter their banking information and make a direct contribution to the account. There is usually no fee for this service (unless you’re using a 3rd party gift conduit), and the relative making the contribution is also eligible for a potential tax break.

Have Questions?

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

Information gathered from sources believed to be reliable but is not guaranteed. Any information or opinion contained herein should not be construed as an offer, recommendation or solicitation to invest. Information provided is not to be deemed tax or legal advice. Consult your legal, tax and investment professionals for personalized advice.

Coordinating Group Benefits with Your Overall Financial Plan

Physicians have the responsibility of managing the risks inherent to their profession while protecting their current and future income. Fortunately, most practices and hospitals offer basic insurance and investment options for their employees. Coordinating these employee benefits with the rest of your finances is a crucial component in a sound financial foundation.

Insurance benefits can be a complex issue, but evaluating all the available options can help protect your family in the event of an accident or hardship. Most doctors are dependent on their income or assets to fund their investments and other fiscal endeavors, and seemingly minor setbacks can derail even the most carefully laid plans. However, if set up right initially, insurance plans require little time and effort to maintain.

Physician Disability Insurance Benefits

Prior to enrolling in a disability policy offered by an employer, physicians should take it upon themselves to exhaust all possible options for individual coverage. Holding multiple disability policies is one of the most effective ways to protect future income. Disability benefits provided by an employer are not permanent, and should be considered a supplement to individual coverage.

Disability Insurance for Doctors

A pro-active approach is crucial for protecting insurability down the road because you’ll never be younger and healthier than you are today. The amount of coverage you can obtain will vary depending on your income and specialty. If you are young, healthy and have a good credit score and driving record, insurance can be reasonably affordable if structured correctly.

Insurance is a commodity, but finding the policy that costs the least should not be the primary factor that influences your decision. Instead, your goal should be to find a physicians life insurance company offering the strongest coverage at the best available price. There’s no “one-size-fits-all” answer for determining what kind of coverage is most appropriate for your family. In the end, it comes down to how much income you’ll want to be available in the event that you are no longer able to provide for your family.

Health Insurance Benefits

Unlike disability insurance, there’s no benefit to keeping an individual health insurance policy on top of an employer-sponsored plan. Besides, group health insurance is usually more affordable than anything you can purchase on your own (and as a physician you usually have access to great group healthcare options). Employer health plans have the benefit of offering subsidized group rates by leveraging economies of scale.

Many employers offer flexible spending accounts (FSAs), which are tax-advantaged financial accounts that allow you to automatically deposit a portion of your pretax paycheck. These pretax contributions can be used to offset your out-of-pocket medical expenses. The funds can be used towards qualified medical expenses not covered by insurance such as dental and optometrist visits and certain “FSA-approved” over-the-counter medications and supplies for chronic conditions. Furthermore, you avoid both income and social security taxes on the money contributed.

Dependent-care FSAs allow you to reserve money for the care of dependents. They are often used for child care expenses, but they can also fund the daily care of dependent adults. Most Americans have the option of deducting the cost of childcare off their income for tax purposes. However, physicians are typically excluded from this deduction due to their annual salary being too high. Participating in a dependent care assistance plan would allow a physician to become eligible for tax savings that were previously lost due to high income.

Other Significant Benefits

Retirement plans are another common benefit provided to employees, and there’s hardly any scenario where it would make sense to decline an employer’s contributions into a 401(k) or some other comparable account. On top of this, some employers will match contributions to a retirement plan up to a certain percent. By opting out of this benefit, you are essentially leaving “free” money on the table.

Enrolling in a retirement savings plan can help establish financial security by reducing your tax liability. You can contribute up to $17,500 to a 401(k) or similar plan and that contribution will not be included in your taxable income. If you’re concerned that tax rates will be higher when the time comes to divest your plan down the road, it may be worth checking to see if your employer offers Roth 401(k) plans. Contributions to these plans won’t have any effect on your taxable income when deducted from your paycheck, but you’ll be able to withdraw the money tax free during retirement.

Think of group benefits as added compensation for all the dedicated work you perform on a daily basis. When reviewing your group benefits package, it’s generally advisable to take what is being offered and not leave anything on the table. You can always revisit your decision and determine if there’s any conflict or overlap between your group and individual coverage. The proper coordination of benefits with the fundamental goals of your financial plan will help mitigate risk and provide a solid foundation for your family that can weather the twists and turns of life.

Have Questions?

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

Any information or opinion contained herein should not be construed as an offer, recommendation or solicitation to invest. Consult an investment professional for personalized advice.

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.

Understanding Tax-Loss Harvesting Strategies

Are there investments in your portfolio that have fallen in value since you purchased them? As each tax season approaches, it’s an opportune time to examine strategies that could help lower your tax burden. Tax-loss harvesting is one such method that many investors utilize to help reduce tax obligations.

Whether you want to hold the investment for the long term or realize any losses now, tax-loss harvesting may benefit your situation. Tax-loss harvesting is selling a security at a loss now to offset gains from other investments in the current tax year or possibly carry forward to future years. This strategy can help reduce an investor’s tax bill now and in the future.

Benefits of Tax-Loss Harvesting

Tax-loss harvesting is the practice of selling investments within a taxable account at a loss, thereby generating a capital loss that can be used against current capital gains and possibly against an investor’s future income. The ultimate objective is to limit the impact of capital gains taxes. Short-term capital gains, which are defined as gains on assets held less than one year, are normally taxed at a higher federal income tax rate than long-term capital gains.

Tax Deductions for Doctors

When properly applied, a loss in the long-term capital value of Stock A could be sold to offset the reportable long-term gain in value of Stock B, thus reducing the capital gains tax liability of Stock B. Furthermore, once an investor has offset all of their long-term capital gains, they can offset the loss against other short-term capital gains. Not only can this reduce tax burden for investors, but it can also help diversify a portfolio in ways that may not have been considered. By recognizing a tax loss, investors have various options such as allocating their tax savings in a similar but different investment.

In addition to offsetting taxable gains, the IRS allows investors to take up to $3,000 of losses per year if married filing jointly ($1,500 if single) to reduce their ordinary taxable income. It’s important to note that tax-loss harvesting only applies to investment losses held within taxable accounts. Investments held within tax-advantaged accounts such as 401(k)s and Roth IRAs do not receive the same benefits. However, high-income earners that have maxed out their tax-advantaged accounts should be aware of tax-loss harvesting opportunities when managing their portfolios.

Rules and Regulations

In order to take a physician tax deduction on the loss, an investor must sell the investment and not purchase the same or substantially similar investment for at least 30 days before or after the sale date. The purchase of that asset or a substantially similar asset in that 60-day window will cause the loss to be disallowed by the IRS under the wash-sale rule, but may be able to be carried over and added to the cost basis of the new purchase. However, an investor does not need to wait to reinvest the same dollar amount in an asset that is not substantially similar.

If an investment has fallen in value but the long-term outlook is promising, there’s the option of claiming the loss and re-investing in the same security after 30 days. One possible risk is if the security appreciates in value during the 30 day period that funds are not invested. This consideration, among others, should be weighed against the perceived gains from realizing the loss.

Harvesting a loss every time there is a fluctuation in the market can be a burdensome task from a tax-preparation standpoint. Therefore, the transaction costs of buying and selling should be compared to the amount saved in taxes when harvesting a loss. The general idea is to realize the loss if the tax benefits outweigh the administrative costs and investment risk.

Tax-loss harvesting is an active portfolio management strategy that may allow investors to improve their after-tax returns in some cases. It won’t restore actual investing losses, but it can save money by helping to reduce the tax burden. Markets can be volatile and unpredictable, but tax-loss harvesting may aid investors in making a tactical exit from an under-performing security. Prior to taking action, make sure to consult with your tax professional about your specific situation to make an informed decision.

Have Questions?

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Tax loss harvesting is a complicated issue and cannot be fully covered within the context of this article. This article should not be construed as tax advice. Please contact a qualified tax professional with knowledge about your specific needs.

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.

Living With Volatility Again

October 28, 2014 | By Jim Parker, Vice President DFA Australia Limited

Volatility is back. Just as many people were starting to think markets only ever move in one direction, the pendulum has swung the other way. Anxiety is a completely natural response to these events. Acting on those emotions, though, can end up doing us more harm than good.

There are a number of tidy-sounding theories about why markets have become more volatile. Among the issues frequently splashed across newspaper front pages: global growth fears, policy uncertainty, geopolitical risk, and even the Ebola virus.

In many cases, these issues are not new. The US Federal Reserve gave notice last year it was contemplating its exit from quantitative easing (an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective). Much of Europe has been struggling with sluggish growth or recession for years, and there are always geopolitical tensions somewhere.

In some ways, the increase in volatility in recent weeks could be just as much a reflection of the fact that volatility has been very low for some time. Investors in aggregate were satisfied earlier this year with a low price on risk, but now they are applying a higher discount rate to risky assets.

So the increase in market volatility is an expression of uncertainty. Markets do not move in one direction. If they did, there would be no return from investing in stocks and bonds. And if volatility remained low forever, there would probably be more reason to worry.

As to what happens next, no one knows for sure. That is the nature of risk. In the meantime, investors can help manage their risk by diversifying broadly across and within asset classes. We have seen the benefit of that in recent weeks as bonds have rallied strongly.

For those still anxious, here are seven simple truths to help you live with volatility:

#1 Don’t make presumptions:Have you noticed how people become experts after the fact? But if “everyone” could see a correction coming, why wasn’t “everyone” profiting from it? You don’t need forecasts.

#2 Someone is buying: People often gravitate to the familiar and to shares they see as solid. But a company’s profile and whether or not it is a good investment are not necessarily correlated. Better to diversify.

#3 Market timing is hard: The emotions triggered by volatility are understandable, but acting on those emotions can be counterproductive. Uncertainty goes with investing. Historically, long-term discipline has been rewarded.

#4 Never forget the power of diversification: People often assume that success in investment requires a specialist’s knowledge of a sector. But that information is usually already in the price. Trust the market instead.

#5 Markets and economies are different things: Isn’t that the point? You can rationalize a stock-specific bet as much as you like, but events or external influences can conspire against you. Spread your risk instead.

#6 Nothing lasts forever: If an economy performs strongly, that will no doubt be reflected in stock prices. What moves prices is news. And news relates to the unexpected. So work with the market.

#7 Discipline is rewarded: We can put too much faith in individual stocks, and holding onto a losing bet can mean missing opportunities elsewhere. Portfolio structure affects performance.

Have Questions?

‘‘Outside the Flags’’ began as a weekly web column on Dimensional Fund Advisors’ website in 2006. The articles are designed to help fee-only advisors communicate with their clients about the principles of good investment—working with markets, understanding risk and return, broadly diversifying and focusing on elements within the investor’s control—including portfolio structure, fees, taxes, and discipline. Jim’s flags metaphor has been taken up and recognized by Australia’s corporate regulator in its own investor education program.

Diversification does not eliminate the risk of market loss. Past performance is no guarantee of future results. There is no guarantee that strategies will be successful.

The S&P 500 Index is not available for direct investment and does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

Dimensional Fund Advisors LP (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Copyright © 2014 by Dimensional Fund Advisors LP. All Rights Reserved

Maximizing Protection of Assets

Practicing medicine is a highly litigious profession. In fact, a study published by the New England Journal of Medicine found that a staggering 99% of physicians in high-risk specialties will be sued by the age of 65. Fortunately, you can defend many of your assets from potential lawsuits by following a risk management model that will systematically title your property in an advantageous way.

Carefully constructed asset protection strategies that are fully implemented before any hint of trouble are more likely to be effective in warding off potential lawsuits or reducing the settlement amount. That is where Larson Financial Group Lawsuit Protection comes in. Having your end goal in mind is extremely helpful when developing a solid plan of protection. The first step is to assess where you’re at today from a risk standpoint and how that falls short from your preferred state of protection.

Asset Protection for Physicians

Asset protection plays a critical role in many different aspects of your financial plan. If you’re starting a practice, you’ll need to recognize the implications your business plan will have on your estate. Or if you’re developing an estate plan, you need to assess what ramifications those strategies will have on your practice. Ideally, these methods will also be set up in a way that reduces your estate’s tax obligations after your death and allows your heirs to avoid the process of probate.

Larson Financial Lawsuit Protection

A carefully drafted risk management plan that protects your assets and business from liability claims will make you a less viable target for a lawsuit. However, assets that are legally exempt from creditors can vary widely from state-to-state on a case-by-case basis. Because every state has different laws to consider, it’s recommended that you partner with an attorney who is familiar with your state’s asset protection laws and case history.

Timing is everything when it comes to risk management. Asset protection strategies are only truly effective if done proactively. A reactive approach to risk management likely won’t be able to keep your assets safe.

Titles Matter

When purchasing the facility where you want your medical practice to be located, many of these same issues apply. You have to decide whether you want to put that property in your name, or in the form of an LLC that you co-own with others. If you have a partner, you should have an agreement in place that stipulates what would happen to the practice and its real estate in the event of a death or disability.

For planning purposes, you’ll want to look at your complete list of assets and classify them as:

  • Practice-operating assets
  • Practice-capital assets
  • Individual investments
  • Personal assets

Once your assets are classified, the next step is to build separation between your investment and personal assets so that everything is not on the table in the event of a liability. Incorporating your practice normally protects your personal assets from non-malpractice claims against the practice.

Oversight is Critical

When implementing an asset protection plan, the involvement of several different professionals from a variety of different disciplines is required. The services of an attorney, accountant, insurance agent and mortgage professional may all be necessary at some point, and coordinating their efforts is not always an easy task. It’s critical to work with professionals that have a fiduciary responsibility and are personally familiar with your values and objectives.

Asset protection is an area of wealth management that affluent physicians can’t afford to ignore. A risk exposure analysis will allow you to determine which personal and practice assets could be vulnerable and implement proactive strategies to protect them.

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

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.