As the person who manages most of the financial decisions in your household, it's natural to want to ensure your spouse is financially secure if you're no longer around. The financial burden on a widow can be overwhelming, especially with the lesser-known tax implications that often follow the death of a spouse. By planning ahead, you can safeguard your spouse from unnecessary financial stress.

Taking a few proactive steps now can help shield your spouse from these challenges and give them peace of mind. This guide will walk you through the financial implications of losing a spouse and what you can do today to ensure you preserve your assets for their well-being.

There are two common tax shocks you want to get ahead of:

Tax shock #1: The “survivor's penalty”

After a spouse dies, the widow is often left facing what’s called the "survivor’s penalty," which refers to higher taxes that result from a change in filing status. While you may currently file taxes jointly as a married couple, your spouse would be required to file as a single taxpayer after your death. This change can increase their tax bill substantially.

Here’s why this matters:

• Higher Marginal Tax Brackets: After your passing, your spouse’s income could fall into a higher tax bracket due to the narrower brackets for single filers compared to married couples.

• Reduced Standard Deduction: In 2024, the standard deduction for married couples filing jointly will be $29,200, but for single filers, it will be just $14,600. This reduction will increase the amount of income subject to taxes.

Looking ahead, it’s important to note that individual tax brackets are set to revert to pre-2018 levels in 2026, further increasing the tax burden on your spouse if you’re no longer here.

Tax shock #2: Hefty taxes on IRA distributions

If your spouse inherits your retirement accounts, such as an IRA, they’ll also face higher taxes due to Required Minimum Distributions (RMDs). These distributions are considered ordinary income, and combined with their new single filing status, could push them into an even higher tax bracket! The larger your IRA, the bigger this tax burden becomes.

What may seem like a well-planned nest egg now could become a source of financial strain later on due to taxes. By understanding this, you can take steps now to lessen the impact on your spouse’s financial future.

Firsthand example from a retired couple

When Spouse #1 and Spouse #2 file jointly, both receive Social Security and must take Required Minimum Distributions (RMDs) from their retirement accounts. Let’s look at their income and tax bill while filing as Married Filing Jointly (MFJ):

Now, if Spouse #1 passes, Spouse #2 becomes the sole taxpayer, facing a shift to the Single filing status. Spouse #2 is still required to take the same RMD amount as the beneficiary of the retirement accounts and claims Spouse #1’s higher Social Security benefit under the survivor benefit rules. However, Spouse #2 cannot receive both Social Security payments, so Spouse 2’s income is reduced. Here’s what their tax situation would look like:

Despite an almost 16% drop in income, Spouse #2's tax bill increases by over 30%, showing the impact of the survivor’s penalty on income and tax liability.

This example highlights why it’s essential to plan ahead to help lessen the financial burden on surviving spouses.

Four strategies to protect your spouse from a heavy tax burden

Fortunately, there are several strategies you can use to reduce the tax burden on your spouse in the future:

1. Complete Tax Projections: To best plan for the future and make calculated decisions, it’s necessary to understand your expected lifetime tax bill. A comprehensive tax projection will identify your current and future tax rates, potential gaps, and overall lifetime tax obligations. This helps you make informed decisions today.

2. Partial Roth IRA Conversions: Converting part of your traditional IRA into a Roth IRA over time can help reduce the tax impact on your spouse later. While you’ll pay taxes on the conversion now, the Roth IRA’s future growth will be tax-free, meaning less taxable income for your spouse when they inherit it.

3. Take Advantage of the Step-Up in Basis: For non-retirement investments, your spouse can benefit from a "step-up in basis." This allows the cost basis of assets to reset to their value at the time of your death, potentially eliminating capital gains taxes if they were to sell those assets. Understanding this advantage can save your spouse from an unexpected tax bill down the road.

4. Naming Non-Spouse Beneficiaries: Another option to reduce taxes is to name non-spouse beneficiaries for some of your retirement accounts, such as your children and grandchildren. While this can lessen the tax burden for your spouse, it’s essential that these non-spouse beneficiaries understand the new withdrawal rules set by the SECURE Act. This law requires that non-spouse beneficiaries fully distribute inherited IRA funds within 10 years, which could trigger substantial tax liabilities for them if not carefully planned. Additionally, consider adding a qualified charity as a beneficiary to your IRA for a tax-free transfer gift.

You can start planning ahead with your spouse now

Planning for your spouse's financial future can be an impactful gift. While it may be uncomfortable to think about what happens if you're no longer here, taking proactive steps now will ease your spouse’s transition during a difficult time. Here are a few key actions to consider:

Have Regular Financial Discussions: Make sure your spouse understands your financial plan, knows how to manage accounts, and is familiar with where to find important documents.

Work with a Fiduciary Financial Advisor: A financial advisor can help you develop a plan tailored to your family’s situation. By understanding your overall financial situation, an advisor can provide guidance now and assist your spouse when you're no longer there. They can also help with tax projections, Roth conversions, beneficiary updates, and staying ahead of tax law changes.

Create a Clear, Organized Estate Plan: Ensure your estate plan is up to date, including wills, trusts, health care directives, power of attorney, and beneficiary designations. This will help prevent unnecessary complications for your spouse during an already challenging time.

Be Proactive About Taxes: By planning for your spouse’s future tax obligations, you can reduce the “survivor’s penalty” and give your spouse more financial security.

You’ve worked hard to provide for your family, and planning for your spouse’s financial future if something happens to you is a vital part of that legacy. While it may seem difficult to know the "right" time to prepare, we can't predict the future. Whether you're already in retirement or facing a serious diagnosis, projecting out scenarios can make all the difference for your spouse’s security.

Don’t wait until it’s too late—start planning now to protect your loved one from unnecessary financial strain.

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There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, there are many notable changes that will allow investors to save more money.

One important update for 2025 is that under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in eligible retirement plans.

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2025!

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Social Security remains a cornerstone of American retirement planning, yet it’s often shrouded with concern and misinformation. As the dialogue about its future grows increasingly pessimistic, many people question its reliability and role in their retirement income plans. Understanding the current state of Social Security is crucial for making informed decisions about your financial future.

Perception vs. Reality:  The Role of the Trust Fund

Much of the anxiety around Social Security comes from media reports highlighting the shrinking trust fund. This often leads to the mistaken belief that the program is on the verge of collapse. But the real issue isn’t mismanagement—it's demographics. As baby boomers retire and people live longer, benefits are outpacing payroll tax revenues.

Historically, Social Security operated on a pay-as-you-go basis. Since 2010, however, benefits have exceeded payroll tax collections. To bridge the gap, the Social Security Administration (SSA) has been tapping into the trust fund, a practice that will continue until the fund is expected to run out by 2033[i]. While this sounds alarming, it doesn't mean Social Security will vanish.

Misunderstandings About Insolvency

A common misconception is that the depletion of the trust fund means Social Security will go bankrupt and cease to exist. In reality, even after the fund is exhausted, payroll tax revenues will still cover approximately 79% of retirement benefits[ii]. This isn’t a doomsday scenario; it’s a call for strategic policy adjustments.

Fixing the Funding Gap – Potential Reforms

The SSA has proposed several solutions to address Social Security’s funding gap. Here are some of the most viable strategies:

1. Increase Social Payroll Tax – Projections show Social Security's long-run deficit is 3.5% of covered payroll earnings[iii]. Raising payroll taxes by this amount—1.75 percentage points each for employees and employers—could secure full benefits through 2098, with a one-year reserve at the end.

2. Increase the Social Security Wage Base—In 2024, the first $168,000 of earned income is taxed at 6.2% each for employees and employers; self-employed individuals will pay 12.4%.[iv] Increasing the Social Security wage base can help address the shortfall.

3. Increase Full Retirement Age (FRA): Currently set at age 67 for individuals born in 1960 and beyond, the FRA dictates when retirees can claim full retirement benefits without reduction. Each one-year increase in the FRA equates to roughly a 7% cut in monthly benefits for affected retirees. Raising the FRA to 70 would reduce benefits by nearly 20% at any given claiming age.[v] This change aligns with historical precedent, as the FRA was originally 65 for most of Social Security’s history.  

4. Invest in Equities: The SSA could explore investment strategies to enhance returns, following successful models utilized by other countries like Canada or systems such as the US Railroad Retirement System.                    

These measures would require political compromise but could ensure the program’s sustainability and continued support for retirees.

Planning for a Reduced Benefit Scenario

Amid ongoing discussions about Social Security reforms, it’s essential to hope for the best but prepare for the worst—acknowledging the potential for reduced benefits if corrective actions fail to shore up funding. The looming risks of benefit cuts necessitate careful consideration alongside other retirement planning factors, including life expectancy, additional income streams, risk tolerance, inflation, and potential spousal benefits.

Consider your Options in an Ever-evolving Social Security Landscape

Despite the challenges and negative perceptions, Social Security is not on the brink of collapse. With informed decisions and potential policy adjustments, the program can continue to support retirees for many years. It's crucial to stay informed and consider the evolving landscape of Social Security in your retirement planning. We’re here to support you. Contact us to meet with an advisor and learn more about your options.

Sources

[i] Social Security Administration. (2024). The 2024 OASDI Trustees Report. https://www.ssa.gov/oact/tr/2024/

[ii] Munnell, Alicia H. 2024. "Social Security's Financial Outlook: The 2024 Update in Perspective" Issue in Brief 24-11. Chestnut Hill, MA: Center for Retirement Research at Boston College.

[iii] SSA, The 2024 OASDI trustees report. p.17.

[iv]Social Security Administration. (2024). Contribution and benefit base. https://www.ssa.gov/oact/cola/cbb.html

[v] Springstead, G. R. (2011). Distributional effects of accelerating and extending the increase in the full retirement age (Policy Brief No. 2011-01). Social Security Administration. https://www.ssa.gov/policy/docs/policybriefs/pb2011-01.html) 

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As the golden years approach, retirement promises relaxation and newfound freedom. However, during this period of life, there's an often misjudged financial responsibility - Required Minimum Distributions (RMD). Despite an investor saving diligently to tax-deferred accounts like pre-tax 401(k)s or traditional IRAs for retirement tax advantages, higher tax rates often blindside retirees due to these distributions.

Failure to prepare for RMDs can lead to a substantial increase in your retirement tax bill.

Fortunately, strategic retirement planning and foresight offer avenues to mitigate the impact of an inflated tax bill. By reducing your taxes, you gain the flexibility to allocate your funds where they matter most – be it for personal expenses, supporting loved ones, or giving back to charitable causes.

Understanding RMDs

RMDs are mandatory withdrawals from tax-deferred retirement accounts starting at age 73 (or 75 for those born in 1960 or later). These withdrawals aim to ensure you pay taxes on the money you've saved.

Each year, individuals can calculate their RMD by dividing the total amount in their eligible retirement accounts at year-end by a factor determined by the IRS, derived from their life expectancy which is listed in the Uniform Lifetime Table.

Let’s use an individual who is age 73 and had a $1,000,000 IRA balance as of December 31 of the previous year as an example. Their IRS life expectancy factor is 26.5, which means that their RMD for this year will be $37,735.85.

$1,000,000 ÷ 26.5 = $37,735.85

It's crucial to take RMDs on time to avoid penalties. Failure to do so can result in a 25% excise tax on the amount not withdrawn as required.

Don’t Leave your RMDs Unchecked

As each year passes, the life expectancy factor used to calculate Required Minimum Distributions (RMDs) decreases. This results in a larger portion of the investment portfolio needed for mandated withdrawals. Put simply, the older you are, the higher the required withdrawal amount, which in turn increases the associated tax bill.

To illustrate this increase in RMDs over time, let’s consider that someone with a $1,000,000 IRA balance must take approximately $37,736 at age 73, or about 4% of their pretax eligible portfolio. Seventeen years later, at age 90, the required withdrawal amount grows to over $118,000, or about 8% of their qualified portfolio.

This is where the danger of RMDs becomes evident. Left unchecked, RMDs can snowball, leading to an increasingly burdensome annual and lifetime tax bill. Additionally, as your income rises due to RMDs, you may inadvertently trigger additional tax traps such as:

• Taxes on Social Security Benefits: An increase in income can subject a higher percentage of your Social Security benefit to taxes. Whether or not your Social Security benefits are taxed is based on your combined income level and marital status.

• Medicare IRMAA surcharges: These surcharges present another potential financial concern. This can increase monthly Medicare premiums due to the Income Related Monthly Adjustment Amount (IRMAA). If you're enrolled in Medicare or plan to enroll within the next two years, exceeding the income threshold by as little as $1 could result in hundreds of dollars in additional premiums for Medicare Part B and Part D.

Strategies to Mitigate Tax Impacts of RMDs

Although failure to plan for RMDs can cause tax traps, thoughtful strategizing can help. Here are a few ways to mitigate tax impacts of RMDs, so they support your retirement lifestyle rather than cause a headache:

Withdraw more funds than you need

The most straight-forward strategy is to withdraw more funds than you need after age 59½. This age typically marks the earliest point at which you can start withdrawing from a tax-deferred account without facing a 10% early withdrawal penalty. By deliberately withdrawing funds, you can reduce your account balance and, as a result, your future RMDs. This strategy can be advantageous when current tax rates are lower than anticipated future rates.

Utilize Roth Conversions

A Roth conversion involves transferring a portion of funds from a traditional IRA or other tax-deferred retirement account into a Roth IRA. During this process, taxes are paid on the transferred amount at ordinary income tax rates for the year of conversion. The remaining funds are then reinvested in the Roth account.

This strategy appeals to many, especially those aiming to strategically reduce future Required Minimum Distributions (RMDs). Withdrawals from Roth IRAs in retirement are tax-free, and there are no RMD requirements, making this option attractive for minimizing tax obligations.

The rationale behind opting for a partial Roth conversion revolves around managing when and at what rate taxes are paid. By strategically choosing to pay taxes on tax-deferred dollars in a year when you are in a lower tax bracket than when you anticipate withdrawing the funds, you can maximize tax benefits. Additionally, reinvesting dollars into a Roth IRA allows them to continue benefiting from compound growth, with all future growth being tax-free.

Effective Roth conversions should be based on a thorough analysis of both current and future tax brackets, considering potential changes in tax rates and various sources of retirement income. It's crucial to convert just enough to utilize the lower tax brackets, maximizing the advantages of Roth Conversion.

Consider this scenario: you possess a $1,000,000 IRA and have recently consulted with your financial planner for a retirement tax analysis. The analysis suggests that executing a $50,000 Roth Conversion to fill up the 12% tax bracket would be prudent. This strategic move takes advantage of the current lower tax rate, shielding you from potential future tax increases when Required Minimum Distributions (RMDs) come into play. Given the expectation that RMDs will push you into the 25% federal tax bracket in the future, this decision protects you from paying an additional 13% in taxes.

During this conversion process, the $50,000 seamlessly transitions from your traditional IRA to a Roth IRA. Although this amount is subject to ordinary income tax, you have flexibility in managing the tax liability, whether through tax withholding on the Roth Conversion or by utilizing estimated taxes from alternative sources.

It's important to note that any subsequent growth on the converted amount within the Roth IRA remains entirely tax-free for you or your beneficiaries, providing lasting financial benefits.

Make an Impact through Charitable Donations

Another strategy to decrease your tax burden involves donating some of your IRA distributions directly to a qualified charity. Once you reach age 70½, you become eligible to make a Qualified Charitable Distribution (QCD), which is a tax-free transfer of funds from your IRA to an IRS-recognized charity. While these distributions are not subject to taxation, they do count towards fulfilling your required minimum distributions for the year.

Retirees who do not immediately require their RMDs and wish to support their chosen charity or religious institution tax-efficiently should evaluate whether making donations directly from their IRA aligns with their financial goals.

Viewing QCDs as part of a broader tax and charitable strategy is essential. Donating directly from an IRA offers a more significant financial benefit than donating cash or appreciated securities because it reduces your Adjusted Gross Income (AGI). This is particularly advantageous for retirees who no longer itemize deductions and instead choose the standard deduction, maximizing the tax benefits of charitable giving.

Have an RMD Strategy in Place

Grasping the nuances of RMDs is pivotal for retirement preparedness. Neglecting to address RMDs can result in significant tax liabilities, jeopardizing your financial stability during retirement.

By integrating proactive strategies into your retirement planning, you can mitigate the effects of RMDs, maintain control over your tax situation, and align your retirement savings with your lifestyle and legacy goals. Seeking advice from financial experts can offer personalized support in navigating RMDs effectively, empowering you to pursue your retirement aspirations confidently.

For more on retirement strategies, download our 36-page guide here.

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There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, there are many notable changes that will allow investors to save more money. One important update for 2024 is that 401(k) elective deferrals increased from $22,500 to $23,000. That’s not all! Please see below for the applicable updates for the coming year:

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2024!

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Corporate retirement plans (401(k), 403(b), 401(a), 457(b), etc.) made up a total of $9.3 Trillion as of December 31, 2022. It goes without saying that these types of accounts make up a significant portion of how Americans save for retirement. In this series we want to help equip and educate investors on how to successfully navigate selecting their investments, sticking to a game plan, and ultimately growing their account in the most efficient way possible.

What matters the most

Asset Allocation

Luckily, studies have been done and papers have been written about the number one determinant of portfolio success. As the pie chart below shows, allocating funds appropriately across asset classes is BY FAR the number one factor that determines portfolio success.

Put differently, ensuring that an investor selects a fund (or funds) that diversifies their investments will outperform the investor who spends time on trying to time the market or ensure that the security they selected is superior to other investments in the same peer group. This can be accomplished using a Target Date Fund, Target Risk Fund, Model Portfolio, or by creating a custom asset allocation.

Expense Ratio (or Fund Cost)

The next variable that we would say matters most is ensuring that the fund or funds you select has a low expense ratio. What’s low? In 2022, the average expense ratio for a index fund was 0.05%. In our opinion, if the index fund you select has an expense ratio of less than 0.15% we think you are checking the box on selecting a low-cost option.

What matters less

Historical Performance

Talking about historical performance is no easy task. The point here is that when you are on your retirement plan website and looking to learn about the investment options, the majority of the information is about the performance of the funds. And while that information might stand out the most, it’s actually not the most helpful. We think about fund performance track records in this framework:

1. Asset class performance is more important than actual fund performance. More specifically, owning the Large Cap asset class is more important than trying to select a specific large cap manager.

2. So much can go into why a specific fund performed well or did not perform well over the last 1 year, 3 year, 5 year, or 10 year performance period. Only looking at these variables has not been a good indicator of if a fund is going to perform well on a go forward basis. A majority of the top-half performing funds fall out of the top half after 5 years.

3. Our recommendation, if you are going to look at funds in a more in depth way look at variables like risk-adjusted return or the specific track record of the management team. Another option is to simply select a low-cost index fund. 

A visual guide on what to look for

We created this table to help provide a road map for selecting investments. This sample fund menu contains; investment options, historical performance, cost, and if the fund should be used on a stand-alone basis (provides ample asset allocation) or should be held alongside other investment options.

What to talk about your company’s retirement plan?

Schedule time to meet with an advisor below or e-mail Andrew at andrew@humaninvesting.com.

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A newly passed bill known as Secure Act 2.0 will change how retirees withdraw from their retirement nest eggs. This fundamental change increases the age at which investors must take money from their retirement accounts, bringing about some impactful financial planning opportunities.

What is an RMD?

Once an investor reaches a specific age, they must withdraw a required minimum distribution (RMD) from their retirement account, such as an IRA or 401(k). The RMD amount is determined by the account holder's age and account balance at the end of the previous year. The Internal Revenue Service (IRS) requires RMDs to ensure account holders pay taxes on their retirement savings. RMDs, therefore, can be taxed on both federal and state taxes.

After reaching their RMD age, account holders must begin taking withdrawals from retirement accounts by April 1. Each subsequent year, RMDs must be taken by December 31st of that same year. The IRS may levy a sizable penalty for failure to take the mandatory distribution.

Good news, RMDs will be delayed by a year

A notable update from Secure Act 2.0 is the delay of RMDs. RMDs will start at age 73 instead of 72 for those born in 1951-1959. For those born in 1960 or later, RMDs will be delayed even further to age 75.

For those who turn 72 in 2023, you will not need to start your RMDs this year. Your first RMD can either be taken by December 31, 2024 or delayed until April 1, 2025.

There is no impact on a retiree if they have already started taking their RMDs or need their IRA to cover their cost of living. For others, who only take RMDs because they are required to, this significant modification to the RMD age provides additional retirement planning opportunities.

Retirement Planning opportunities

There will be more time for growth.

The new RMD regulation will give retirees a simple yet powerful benefit, more time for compounding growth. As the billionaire investor Charlie Munger states, “The first rule of compounding is to never interrupt it unnecessarily.”

This benefit must be highlighted, especially after a year of market losses.

An 8% return on a million-dollar IRA is $80,000. Additional returns undisturbed by an unnecessary RMD can have a snowball effect, providing an exponential lifetime benefit.

A longer window before RMDs can allow for additional planning and time, the essential ingredients in building wealth.  

QCDs can still be maximized.

Amidst the RMD age adjustment, the age at which account holders can use their IRAs to make Qualified Charitable Contributions (QCDs) was untouched. Thus, preserving one of the most powerful tax-saving strategies available to charitably inclined retirees 70.5 and older.

A QCD is a tax-free transfer of funds from an individual's IRA directly to an IRS-recognized charity. This charitable distribution allows taxpayers to avoid paying taxes on the withdrawn funds.

Retiree “Gap Years” are extended.

"Gap Years" are the years that occur between a person's retirement and the beginning of their RMDs. These Gap Years are often the years with the lowest taxable incomes in a person's adult life. As a result, they frequently serve as ideal years for accelerating income that would otherwise be taxable in a subsequent, higher-income year. The Secure Act 2.0's changes will give additional time for Tax Bracket optimization strategies such as Roth Conversions and Capital Gain Realization to reduce an investor's lifetime tax bill.

You may be pushed into a higher tax bracket in your later years.

Like all financial planning strategies, there is no one-size fits. The unanticipated pitfall of postponing RMDs can lead to more significant withdrawals in subsequent years when RMDs do start. An unexpected boost in income from RMDs might push you into a much higher tax bracket, phase you out of a tax credit, or trigger a surtax. Taking the time to understand the applicable tax implications are crucial when building a tax-sensitive retirement income plan.

This is a great time to reevaluate your retirement plan

The retirement system has undergone numerous changes due to Secure Act 2.0's policy reforms, adding to the difficulty of retirement planning. Recognizing the planning opportunities and risks that relate to you and your financial plan is essential.

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We help our clients organize and implement tax bracket optimization. In your early years of retirement, even if you do not have earned income, there are important tax considerations. I will illustrate two recurring tax planning strategies: Roth Conversions and Capital Gain Realization.

Consider a retired married couple (both age 65) living in Oregon this year.

In this example, this couple has $36,700 of taxable income. This places them in the 12% federal tax bracket and provides $52,750 more room inside the 12% bracket before moving into the 22% bracket.

Considering the wiggle room before the increased tax rate, this client could decide between the following options:

OPTION 1: Realize Capital Gains

Realize (sell and reinvest) up to $52,750 of long-term (held longer than 12 months) capital gains to take advantage of the 0% Federal Capital Gains rate within the 12% bracket. This couple living in Oregon would still pay 9% State. Ideally, they pay less taxes today to avoid realizing those gains at 15% Federal and 9% State later, likely during the required distribution timeframe starting at age 73. They would keep 15% more of the growth on their investments.

Option 2: Conduct Roth Conversions

If a client does not have any taxable accounts or unrealized capital gains, they could use the room in the 12% bracket to conduct Roth conversions. This would consist of transferring funds from a traditional IRA, paying the taxes now (12% Federal and 9% State), and putting the net amount into the Roth IRA to grow tax-free overtime. This strategy is helpful to maximize the 12% bracket, since the 12% bracket will revert to the 15% bracket in 2026, when the Tax Cuts and Jobs Act (TCJA) ends. Additionally, when a client turns 73 and is required to take distributions from IRAs, this required distribution amount cannot be converted to a Roth IRA but must be distributed.

Required distributions could also push income from IRAs into the 22% bracket. Another benefit of Roth conversion is that Roth IRAs are not subject to required distribution rules and therefore can continue to grow tax-free for the life of the married couple.

Option 3: Combination of realizing Capital Gains and Roth Conversions

This requires year-by-year income and deductions tracking from all sources to ensure the right amount of money is being realized or converted.

Tax bracket optimization is not an after-thought, but a pivotal component of holistic financial planning offered at Human Investing. If this kind of planning would be helpful to you, please schedule a time to review your situation.

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Are you fearful a recession might be around the corner?

There’s been a lot of chatter about the state of the economy and whether we’re in a recession, or if one’s already passed. Whatever the situation, we wanted to help put things into perspective and remind you of the things you can (and cannot) control if uncertainty is on the horizon.

The widespread definition of a recession is two consecutive quarters of a decline in real GDP (Gross Domestic Product). However, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months." No matter which yardstick we use to measure a recession, here is what you need to know:

• Recessions are a natural part of the business cycle. There have been 34 recessions since 1857, ranging from more than five years to the pandemic-driven contraction of 2020 that lasted two months.

• Recessions do not necessarily coincide with a decrease in the stock markets.

• No two recessions are alike in cause, length, or intensity.

• Recessions are marked as a time of heavy uncertainty and an increase in job insecurity.

Planning for a recession is difficult.

Using the general definition, we won't know we are in a recession until six months after it starts. Rather than worrying about a recession (which is out of our control), investors should focus on things that they can control. When future economic uncertainties arise, here is a list of things that you can do to prepare yourself better:

1. Re-evaluate the size of your emergency fund.

The amount someone should keep on hand should correspond with their living expenses, income instability, stage of life, risk tolerance, etc. This amount is typically 3 to 12 months of living expenses. An unforeseen medical bill or a temporary lapse in employment can happen anytime. Arming yourself with a cash safety net is your first defense against debt or selling your investments during a market downturn. For more information, read our blog about understanding the role of cash in a financial plan.

2. Analyze your spending.

Watching how much you spend builds awareness of your current spending habits. Understanding essential vs. nonessential expenses will make it easier to navigate your budget if your income disappears. Bonus: a better understanding of your spending can help you spend less and thus help you save more.

3. Bolster your professional network and skills.

Prioritize efforts to develop strong long-term relationships with essential connections. You may also invest in yourself with job-related skills and by polishing your résumé to ensure you are prepared for an unanticipated lapse in your employment.

4. Assess your investment portfolio.

Recessions don't always coincide with a stock market selloff. However, ensuring your investments are aligned with your goals is essential. Before a downturn in the market is the best time to position your portfolio based on your risk tolerance, time horizon, and financial goals. If you are unsure of your investment strategy, get in touch with a financial advisor to ensure you have the formula for successful investing.

5. Review your insurance coverage.

Start with the basics. Review what you have vs. what you need.

• What kind do you have? Is your protection tied to your job?

• Do you have enough dollar-amount coverage?

• Do you need to adjust, more or less?

Remember the things you can and cannot control. Take your time to examine what you want to prioritize. While we can't predict precisely when a recession will occur, we can plan, prepare, and adjust appropriately to survive any economic storm. If you want to talk with one of our advisors, please call Jill at 503-905-3100.

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Many small businesses are behind.

There are several retirement solutions that can help you secure your future and that of your employees, but the decision-making process can be challenging.

A survey of nearly 2,000 small business owners in 2017 found that over a third (34%) don't have a retirement plan. The main reason for this cited (by 37% of those respondents) was that they could not generate enough revenue to save. Another 18% of the business owners without retirement savings are looking at selling the businesses as a retirement plan.

Many small business owners avoid or are unaware of the crucial elements of planning for their futures. Here are a few questions to ask yourself before deciding on a retirement plan:

Do you have employees or expect to in the future?

Is it important that employees can contribute to a retirement plan?

Is your priority higher contributions or ease of administration?

Would you like plan contributions to be deductible as a business expense?

What retirement plan options do you have?

With help from Vanguard, we put together a one-sheeter that gives details and considerations on several small business retirement plans, including Small Plan 401(k), Individual 401(k), SEP IRA, Simple IRA, Traditional IRA, and Roth IRA.

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Source: Vanguard

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Keep in mind that the state requires all employers in Oregon to facilitate OregonSaves if they don't offer a retirement plan for their employees. The deadline for employers with four or fewer employees is March 1st, 2023. The rules are identical to a Roth IRA, where employees contribute post-tax dollars to the plan and distribute savings tax-free.

If your business already sponsors or wants to sponsor a 401(k) or another qualified retirement plan, you are not required to participate in OregonSaves but must certify the exemption online. Exemption certificates are valid for three years from the filing date.

Employers who don’t sponsor a retirement plan or participate in OregonSaves by the appointed deadline may be penalized $100 per affected employee. The maximum fine per year is $5,000. More details can be found here: OregonSaves

Which plan is best for you?

401(k): Best retirement plan for large and established small businesses.

Safe Harbor 401(k): Best retirement plan for small businesses with less than 100 workers to avoid expensive annual compliance testing.

Solo 401(k): Best retirement plan for maximizing contributions.

SEP IRA: Best retirement plan for a sole proprietor who wants easy administration.

Simple IRA: Best retirement plan for employee participation in funding the retirement account.

Profit Sharing Plan: Best retirement plan for business owners who want more 401(k) contributions and tax benefits.

The responsibilities of owning and operating a small business can be overwhelming, but having the right retirement plan and advocates on your side can make all the difference. If you would like assistance making the best decision for your business, we invite you to schedule an appointment on the calendar below.

Source: Best Retirement Plans for Small Business

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Taking a distribution from a tax-qualified retirement plan, like a 401(k) before age 59.5, is generally subject to a 10% penalty for early withdrawal. The exceptions to paying this 10% penalty are:

• Hardship distributions

• Rule of 55

Are you familiar with how the Rule of 55 works? If you want to retire early, this blog post is significant for you.

What is the Rule of 55?

The Rule of 55 is an IRS provision that allows employees who leave their job on or after age 55 to take penalty-free distributions from their retirement accounts. It’s a life hack! Typically, individuals would face a 10% early-withdrawal penalty if they access their retirement account before age 59.5. The 10% penalty and account accessibility are two of the reasons why people plan to work until at least age 59.5. 

If you are someone who is thinking about retiring early, the following Rule of 55 requirements are necessary:

1. You leave your job (voluntarily or involuntarily) in or after the year you turn 55 years old.

2. Your plan must allow for withdrawals before age 59.5.

3. Your dollars must be kept in your employer’s retirement plan. If you roll them over to an IRA, you lose the Rule of 55 protection.

4. You will likely want your plan to allow partial distributions when you are terminated.

Access to your retirement account at age 55 is available for all employees with an employer-sponsored retirement account. However, if you are considering retiring after age 55 and using funds from this retirement account, you must check whether your plan allows partial distributions. This feature is an opt-in feature for employers to select. We recommend that you work closely with your recordkeeper to ensure you can take advantage of the Rule of 55 in a way that benefits you.

3 Examples of the Rule of 55

Look at a few examples of employees with partial distributions compared to employees without partial distributions allowed in their plan.

Example 1: Partial Distributions Allowed

Danielle can take any amount from her PDX 401(k) account. For example, in October 2022, she can request $30,000. She doesn’t have to take anything out in 2023. She could take another $65,000 out in January 2024.

EXAMPLE 2: Partial Distributions Disallowed

Martin’s employer-sponsored retirement plan does not permit partial distributions. If he wants to access his retirement account at age 57 without incurring a 10% early-withdrawal penalty, he would have to withdraw the entire $450,000. This would result in reporting $450,000 of taxable income for the year of his distribution. Given the tax bracket optimization strategies that exist during retirement years, this may not be Martin’s best solution for accessing dollars before age 59.5.

A couple of alternative solutions for Martin are:

1. Ideally, Martin would have a cash-flow plan to support his expenses until he reaches age 59.5.

2. Initiate a direct rollover of his $450,000 retirement account into a IRA account. Then take distributions as needed but expect to pay a 10% penalty on these dollars. Before paying a 10% penalty on an early-distribution from a IRA, we would recommend that Martin review other cashflow options he may have.

Example 3: Partial Distributions Disallowed

Rebecca, age 56, has $67,000 saved in her most recent 401(k) account with ABC Company. She also has $700,000 saved in her previous 401(k) account with XYZ Company. Neither of these retirement plans allow for partial distributions.

Rebecca retired at age 56 from ABC Company, so she can take the entire $67,000 balance out in one lump sum distribution. She will not owe a 10% penalty on these dollars due to the Rule of 55.

If she were to access any of her $700,000 saved in her previous 401(k) account with XYZ Company before age 59.5, then she would incur a 10% penalty. Not to mention the $700,000 is sitting in a plan that disallows partial distributions so that would be significant taxable income to report in the same tax year. Similar to the example above, Rebecca may consider initiating a direct rollover of her $700,000 into a IRA account for more flexible distribution choices.

What About Other 401(k) Accounts from Previous Jobs?

To qualify for the Rule of 55, you must be terminated as an employee on or after age 55. Therefore, if you have multiple retirement accounts, the only ones that will qualify for a penalty-free distribution between ages 55 and 59.5 are accounts with your termination date reflecting that age range.

One consideration is to roll over a previous retirement account into your current account before you retire. We recommend speaking with your recordkeeper to confirm that your retirement plan features are designed so rollover sources can be accessible by partial distributions.

For example, if Danielle from above had another 401(k) account, she could have rolled that into her PDX 401(k) account before retiring. All the dollars in the account would be eligible for Rule of 55 distributions.

What if I Decide to go Back to Work but have Taken Distributions Already?

Going back to work after you have taken a Rule of 55 distribution should not result in a 10% penalty. If you go back to work for the same company, then you may lose the ability to access funds as an active employee. However, your distributions will not be impacted if you go back to work at another organization.

How are Rule of 55 Distributions Tracked for Tax Reasons?

Custodians and recordkeepers are responsible for providing a Form 1099-R. This tax form reports any distributions from a retirement account. If you take a distribution under the Rule of 55, you would expect to see code 2 in box 7 of your 1099-R form. Code 2 specifies the following:

2 - Early distribution, exception applies (under age 59.5)

If your 1099-R form includes Code 2 in box 7, you will not owe a 10% penalty. Before you initiate a withdrawal between ages 55-59.5, we recommend confirming your record keeper will issue the 1099 in this format.

What Other Resources do you Have?

Retirement is a transition that only happens once in life. You probably haven’t retired before, and you likely won’t retire again. Retirement transitions involve several financial planning considerations and we wanted to conclude this article with additional resources that may be helpful to you:

Your Pre-Retirement Checklist

The 3 Questions to Ask to Build a Solid Retirement Income Plan

Why an IRA Makes More Sense in Retirement than your 401(k)

While the articles are supplemental information, we believe the best way to prepare for your upcoming retirement is to collaborate with our team at Human Investing. Please use this scheduling link to meet with our team to review your unique financial landscape before you start planning your retirement celebration(s): Schedule here.

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Medicare is an important part of your retirement plan. We hope this overview is a helpful resource to know when to apply and how much it may cost.

Before you turn 65…

Most people turning age 65 should sign up for Medicare during their Initial Enrollment Period (IEP). During your IEP, which starts 3 months prior to the month you turn 65 and lasts until 3 months after, you can enroll in Medicare Part A (Hospital coverage), and Medicare Part B (Doctor visits). Medicare Part B pays 80% of most medically necessary healthcare services and the beneficiary pays the remaining 20%. You may also join a Medicare Part D plan (Prescription Drugs) within 3 months of when Medicare coverage begins to avoid any late enrollment penalties.

What if I’m still working past age 65?

If you are still working and have employer-based health insurance at a company with 20 employees or more, you can delay enrollment in Medicare until retirement. If, however, you work for a company with less than 20 employees, you will likely need to sign up for Medicare at age 65.

When your employment health plan coverage ends, you will need to add Part B within eight months of either a) the end of your employment or b) then end of your group health coverage. COBRA can help bridge the gap between employment coverage and Medicare. COBRA will end once Medicare begins.

If you are still working past age 65 and want to continue contributing to a Health Savings Account (HSA) with a high deductible plan, you will need to delay your Medicare Part A coverage.

What does Medicare cost?

Most beneficiaries will only pay the standard premium amount for Part B ($158.50 in 2022). They may be required to pay a premium based on their income represented in the chart below. Medicare uses the modified adjusted income from the beneficiary’s IRS tax return two years prior.

Typical cost for Part B is shown below with income ranges that increase Medicare premiums:

If you do not enroll in Medicare Part B when you are first eligible:

• Your Part B monthly premium will increase 10% for each 12-month period that you are not enrolled.

• You will pay a higher premium for the remainder of your life.

What if I need additional coverage?

Your IEP is also when you can buy Medicare Supplemental Insurance (also known as Medigap) from insurance companies. This is an additional policy that Medicare beneficiaries can purchase to cover the gaps in their Part A and Part B Medicare coverage. You are guaranteed the right to purchase this insurance without going through medical underwriting (i. e. you can’t be denied). This is critical if you have one or more chronic health conditions. Cost for Supplemental Insurance can typically range from $200 to $300 per month.

How do I sign up?

• Online (at Social Security) — It’s the easiest and fastest way to sign up and get any financial help you may need. (You’ll need to create your secure my Social Security account to sign up for Medicare or apply for benefits).

• Call Social Security at 1-800-772-1213. TTY users can call 1-800-325-0778.

• Contact your local Social Security Office.

Sources: medicare.gov

Medicare can be a complicated concept, but the help of a professional can make all the difference. Please reach out to our team if you could use some guidance as you approach retirement.

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