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.

---

---

Related Articles

Bonds are a fundamental piece of most investment portfolios, and the basics of bonds can confound even seasoned investors. When testing financial literacy through 5 core questions, bonds are frequently the topic that most commonly trips people up (try the quiz here). We want to make it easier for you to grasp the basics of bonds, whether you're new to investing or just want a quick review.

lend money to companies or the government

At its core, a bond is a type of loan. It's usually issued by governments or companies that need to borrow money. When you buy a bond, you're essentially lending money to the issuer. As the bondholder, you receive interest payments from the borrower.

Bonds are generally considered less risky than stocks, because if the borrower faces bankruptcy bondholders get paid before stockholders. However, the return on bonds is typically lower than stocks, and there's a risk that the borrower might not be able to pay back the debt.

key terms related to getting paid back

The principal value is the amount being borrowed by the issuer. Typically bonds trade in $1,000 increments.

The maturity date is the date the bond will return the principal value (aka face value) to bondholders.

You also receive interest when you lend money. The interest received is usually based on the Coupon rate, which is the interest payments paid to bondholders. Typically as a percentage of face value paid annually. For example, if you have $1,000 of a bond with a coupon rate of 5%, you will receive $50 in interest payments every year until the bond matures. Upon maturity, you will get the $1,000 principal back.

Credit rating is like a credit score for a government or company, indicating how likely they are to make payments. A higher credit rating indicates a higher chance of the issuer making payments.

Imagine if Disney needed to raise money via bonds

When a bond is first issued, the issuer sets the terms like the coupon rate and maturity date. The reality is that interest rates and credit risk (how likely the issuer is to payoff the bond) change after the bond is issued, which causes the bond price to fluctuate.

Imagine if Disney issues bonds paying 5% interest, the current market rate.

You purchase a bond for $1,000, and you get a $50 coupon payment from Mickey Mouse every year until the bond matures.

If interest rates go up, this isn’t good for your bondS

If interest rates rise next year to say 8%, and Disney issues new bonds, they will probably issue them at the new interest rate.

Your neighbor Laura decides to buy $1,000 of the new bonds, and she gets an $80 coupon from Mickey Mouse every year.

Because interest rates rose, the value of your bond paying $50/year goes down in value, less than the $1,000 you purchased it for because the $1,000 could buy Laura’s bond paying $80/month.

The reverse if also true. If rates had fallen to 3%, Laura’s bond would only pay her $30, and your $50/month bond would be worth more than $1,000. This is why when interest rates rise, bond prices fall.

Think of a teeter-totter: When one side’s down (interest rates), the other side must go up (bond prices).

When your bond is trading below $1,000, it is trading at a discount, typically with a coupon rate lower than current interest rates. If your bond is trading above $1,000 it is trading at a premium, typically with a coupon rate higher than current interest rates.

Timing bond returns

Remember that the bond market is full of smart people looking to try and make money. As a result, all similar bonds are priced so they provide similar returns. For example, if you see a 2 year bond with a 5% coupon, and a 2 year bond with a 3% coupon, the price of the 3% coupon bond will be so much lower than the 5% coupon bond and you will end up making just as much money either way. This is called the yield, or coupon + price return on a bond. Keep in mind if there are differences in bonds (i.e. higher or lower credit risk, time to maturity, other terms of the loan), that can cause differences in yield too.

When should I own bonds?

Long term equities tend to produce higher returns than bonds. However, these equity returns involve higher risk, and some people can’t afford to wait to make their money back. Bonds are an important ballast to ensure you can sleep at night, keeping a portion of your portfolio safe. Bonds can also provide a reliable source of cash flow that can be more reliable than stock dividends.

Finding the right bond for you

Like stocks, there are different bonds. Sovereign bonds (issued by governments) tend to be less risky, providing lower returns because of the lower credit risk. On the other hand, corporate bonds (issued by companies) provide higher returns, with an increased danger of losses due to companies going bankrupt.

At Human Investing, we provide individual treasury ladders for clients. US Treasuries are broadly considered one of the safest investments in the world. By owning individual bonds, you know you will get your principal returned upon maturity. The liquidity of treasuries also allows for flexibility if funds are needed sooner than anticipated.

Alternatively bond funds can be an excellent solution for clients, particularly those seeking growth. By investing in a bond fund, you gain exposure to a diversified range of bonds, enabling you to take on credit risk more effectively than as an individual investor. Much like owning a stock index fund, owning so many different companies debt means even if a few go bankrupt, they are such a small piece of your portfolio you will be okay.

Still have questions, or want to talk to an advisor? Reach out to us at hi@humaninvesting.com, or 503-905-3100.

---

---

Related Articles

All too often generations of students stumble through the college planning process. With college costs on the perpetual rise, it is critical to start the planning process early.

Whether you are a beginner to the college planning journey or refining an existing strategy, here’s a visual guide of some critical to-dos for students and impactful strategies for parents depending on your unique situation.

The FAFSA is a financial unlock for college students

The FAFSA is an application for federal student aid such as federal grants, work-study funds, and loans. It’s the largest source of aid to help you pay for college or career school. To qualify, the FAFSA considers the impact of income and assets from January 1 of your sophomore year of high school until December 31 of your junior year of college (assuming a student goes straight from high school to college). For a high school senior filling out the FAFSA in 2023 and graduating in the spring of 2024, you are looking at your prior-prior year’s tax return in 2021.

The FAFSA application window opens as early as October 1st and closes by June 30th of the year you receive aid (depending on the institution’s deadline). However, in 2023, FAFSA will not be available until sometime in December due to the FAFSA Simplification Act, reshaping the entire system. Details about this significant reform can be found in this article.

Follow our yearly timeline to make things a little less stressful

For high school students planning ahead for college, we’ve summarized the major considerations and to-do items. Download the PDF here to print and hang on your fridge.

We can help with education planning

College involves time, money, and emotions. By dedicating effort, you will spare yourself unnecessary stress later. Amidst all the school visits, tests, test planning, be deliberate and have a plan. If you have any questions or would like to speak with one of our advisors, please reach out to me here.

---

---

Related Articles

In today's challenging real estate market, prospective homebuyers face stiff competition and rising costs. However, there are creative ways to navigate these hurdles and secure your dream home, second home, or investment property. Here are nine strategies to consider, that can make a significant difference in your home-buying journey:

1. Seller Concessions

Don't hesitate to ask sellers for concessions to help cover your closing costs and escrow reserves. This can ease your financial burden during the transaction.

2. Borrow From Equity

If you own a home, consider tapping into its equity to fund your down payment and closing costs. Options like refinancing or taking out a home equity loan can provide the necessary funds.

3. Escalation Clauses

Work closely with your realtor to include an escalation clause in your offer. This can help your bid stand out in multiple offer situations by automatically increasing your offer amount to surpass competing offers.

4. Buying Points

Discuss the possibility of buying points with your lender. This upfront investment can reduce your interest rate and lower your monthly principal and interest payments over the life of your mortgage.

5. Rent-Back Options

Negotiate a rent-back option with the seller. This arrangement allows you to stay in your current residence for a period after closing, giving you more time to move.

6. 401k Loans

Consider taking out a loan against your 401k for your down payment and closing costs. Be sure to understand the terms and implications before proceeding.

7. Low-Down Payment Programs

First-time homebuyers should explore no-down payment and low-down payment programs. Many government-backed loans and assistance programs can help reduce your upfront costs.

8. Credit Union Referrals

Reach out to your credit union for real estate broker referrals. Working with an experienced and trustworthy real estate agent can be invaluable in navigating a competitive market.

9. Gift Funds or Equity

Explore the possibility of using gift funds or gift equity from family members to cover your down payment. Ensure you meet the lender's requirements for documenting these funds.

Be creative and resourceful

In conclusion, purchasing a home in a challenging market requires creativity and strategic thinking. By leveraging these approaches, you can enhance your chances of securing your purchase while managing the financial aspects of the transaction. Stay informed, work with experienced professionals, and be bold while exploring these options to make your home-buying journey successful.

---

---

Related Articles

A much needed update for families

The Free Application for Federal Student Aid (FAFSA) Simplification Act of 2021 was passed by Congress for many reasons. For starters, the calculation was originally defined over four decades ago in 1972 and is in some need of updating. According to the National College Attainment Network (NCAN), only 61% of seniors applied for aid in 2017 and 54% in 2021.

Some consider COVID to be the main culprit for this sudden drop, but the complexity of the form is the other main issue. Currently, students are required to answer 100+ questions depending on their family's income level. As of now the new FAFSA form changes are set to be released in December 2023 and students and parents alike need to be aware of the specific aspects that will apply in the 2024-2025 academic year that may impact aid eligibility depending on their family situation.

What’s changing and why it matters

1. EFC (Expected Family Contribution) replaced with Student Aid Index (SAI)

Short answer: Fairer access to funds for lower-income households.

One of the more obvious changes was renaming the EFC to the SAI. The goal was to not only reduce the confusion around the actual costs of college and what families are responsible for paying but also ensure access to Federal Student Aid programs including Direct Student Loans, Parent PLUS Loans, Work-Study programs, and even Pell Grants for low-income households. This number can be negative with maximum Pell Grants awards giving a student up to -$1,500 in money back. Time will tell but the largest impact will fall on middle to upper income families who will no longer be able to divide the number of college students in the household that are currently in college. For example, a family that could pay $40k/year could split the aid evenly between the number of students in college at the time. They no longer have this luxury and will see a reduction in aid.

2. Custodial parent status changes

Short answer: For non-married couples, the parent who ultimately claims the child as their dependent on their tax return will submit the FAFSA.

Currently, the FAFSA only collects income and asset data from the parent a student lives with. In cases of divorced, separated, or non-married couples who reside together starting in 2024-2025 school year, the SAI calculation factors in the parent who provides the greatest financial support. In cases of divorce and separation starting in 2023 the SAI calculation will only require the parent who provides the majority of “support” to fill out the FAFSA. One household might pay the child support but the other pays for the mortgage, groceries, and sports clubs. The implications of this decision can be significant.

3. Formula changes

Short answer: Students can qualify for more awards.

As with the SAI calculation, the number of students a family has in school is no longer a factor for Pell Grant eligibility. By completing the FAFSA, you are considered for the maximum amount of Pell grants first (based on number of people in your household) and your AGI (Adjusted Gross Income) compared to the FPL (Federal Poverty Line). If not eligible, your maximum Pell Grant amount will be subtracted by the SAI. Finally, you will still be considered for a minimum Pell Grant if no award is given. These other factors in the formula for aid are listed in no order but should be noted for your situation.

The student income protection allowance threshold was raised from $6,800 to $9,400.

• Businesses and farms that employ 100 or more employees will be considered an asset going forward

• Capital Gains from the sale of investments will be considered income on the FAFSA

• Child support received is now reported with assets NOT income

4. Student income from outside sources

Short answer: A student’s financial aid won’t be penalized for withdrawing 529 funds early.

Currently students must report gifts or distributions from a 529 owned by a non-parent (e.g. grandparents or other family members) or non-custodial parent if the student's parents are divorced. Due to the FAFSA’s prior income year rules, a student who needed access to those funds before Jan. 1 of their sophomore year of college would be penalized in the formula for the withdrawal. Now they are completely removed from the aid formula calculation.

5. New student allowances for the cost of attendance

Short answer: FAFSA will cover more day to day student expenses.

Although these are smaller changes, college students alike must not overlook these valuable new allowances that the FAFSA will allow students to claim for ancillary items. Not only is there a small allowance for personal expenses if a student works part-time but a personal computer purchase with no enrollment status requirement. You can even have an allowance for transportation between home, work, and school. More details can be found here.

Proactive financial aid resources to guide your family

For a current or future college student, utilize the free Student Aid Estimator.

If these changes make need-based options harder to attain, look for colleges that offer merit scholarships. This does not mean forgoing the FAFSA completely but intentionally seeking out Merit scholarships at specific institutions. This process, known as Early Action, is detailed in this article with a list of colleges that offer Merit Aid. We recommend starting this process early as many colleges recruit students as early as late spring of your child's junior year!

Finally, contact financial aid offices to see if they will be awarding institutional dollars based on the current formula not connected to the EFC/SAI numbers.

We can help with education planning

The FAFSA is changing for better or for worse and will affect how parents and students think about college for years to come. If it would be helpful to consult a team of credentialed advisors with expertise in college planning, schedule a call here.

---

---

Related Articles

Two ways to approach low-risk investments

When considering safe investment options, two popular choices that often come to mind are FDIC-insured CDs (Certificates of Deposit) and US Treasuries. While both offer relatively low-risk investment opportunities, there are some critical differences between the two that investors should be aware of.

FDIC-insured CDs are certificates issued by banks and credit unions that offer a guaranteed rate of return for a specified period. The Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000 per depositor per bank, protecting against bank failure. In contrast, US Treasuries are debt securities issued by the US government to finance its operations. They are generally considered one of the safest investments available because the full faith and credit of the US government back them.

One key difference between the two is their liquidity. CDs have fixed terms ranging from a few months to several years, and if you need to withdraw funds before the maturity date, you may be subject to penalties. On the other hand, US Treasuries can be bought and sold in the secondary market and can be liquidated easily, making them a more flexible option.

Another difference is the level of risk. While both investments are considered safe, FDIC-insured CDs carry some risk due to the possibility of bank failure. While the FDIC provides insurance protection, there is always a small chance that a bank may fail, and investors may not receive their full investment amount. On the other hand, US Treasuries are backed by the US government and are considered virtually risk-free.

When it comes to returns, FDIC-insured CDs offer fixed interest rates that are lower than the returns available through US Treasuries. US Treasuries offer a range of maturities and yields determined by market demand, with longer-term securities offering higher yields.

In terms of taxes, both FDIC-insured CDs and US Treasuries are subject to federal income tax, but US Treasuries are exempt from state and local taxes. Additionally, you may be subject to capital gains tax if you sell US Treasuries for more than their purchase price.

Risks of Return on Investment: CDs

It's important to note that the FDIC receives no funding from taxpayers. Instead, it is funded by insurance premiums paid by banks and thrift institutions participating in the program. These premiums are based on the number of insured deposits each institution holds and the risk they pose to the insurance fund. In case of bank failure, the FDIC uses these funds to reimburse depositors for their insured deposits up to the $250,000 limit. This funding system helps ensure the banking system's stability and integrity while protecting depositors from loss.

While the FDIC insurance pool can become insolvent, it is highly unlikely. The FDIC has many safeguards to prevent insolvency, and its record of accomplishment in managing bank failures has been quite successful.

Firstly, as mentioned earlier, the FDIC collects insurance premiums from participating banks and thrift institutions. These premiums are based on the number of insured deposits each institution holds and the risk they pose to the insurance fund. The FDIC also has the authority to increase premiums to maintain the insurance fund's solvency.

Secondly, the FDIC has the ability to sell the assets and liabilities of a failed bank to another institution, thereby minimizing the cost of the failure of the insurance fund. This process, known as a purchase and assumption transaction, allows the acquiring institution to take over the failed bank’s deposits and assume its liabilities. At the same time, the FDIC pays out the insured deposits.

Finally, if the insurance fund were to become insolvent, the FDIC would have access to a line of credit with the US Treasury to cover any losses. The FDIC can also assess additional premiums on insured institutions to replenish the insurance fund.

It is worth noting that while the FDIC has never become insolvent since its creation in 1933, it has come close to doing so during times of economic stress, such as the savings and loan crisis in the 1980s. However, the FDIC's ability to manage these crises effectively and prevent widespread bank failures has helped to maintain public confidence in the banking system and the FDIC insurance program.

Risk of Return on Investment: Treasuries

If the United States were to become insolvent, it could have profound implications for US Treasuries, as the full faith and credit of the US government backs them. The creditworthiness of the US government is a key factor in determining the value of US Treasuries. Default or insolvency could significantly decrease demand for US Treasuries, resulting in a sharp rise in interest rates.

In addition, if the US were to become insolvent, it could lead to a global financial crisis, as domestic and foreign investors widely hold US Treasuries. A default could lead to a loss of confidence in the US government's ability to manage its finances, which could cause investors to sell off their US Treasury holdings, leading to a domino effect throughout the financial system.

However, it is important to note that the likelihood of the US becoming insolvent is extremely low because the US dollar is the world's reserve currency, and the US government can print its currency. This gives the government greater flexibility to manage its debt than other countries.

Furthermore, the US has a long history of managing its debt and has never defaulted on its sovereign debt. Even during times of economic stress, such as the Great Recession of 2008, the US government has been able to maintain its creditworthiness and continue to issue debt.

Overall, while there are risks associated with US Treasuries in the event of a US government insolvency, the likelihood of this scenario occurring is considered low. US Treasuries are still widely regarded as one of the safest investments in the world.

Implications of Printing Currency: A Double-edged Sword

The implications of the US printing more currency are complex and depend on a range of factors, including the current state of the economy, inflation rates, and global economic conditions.

On the one hand, increasing the money supply can help stimulate economic growth by making more money available for borrowing and spending. This can lead to increased investment and consumption, driving economic activity and creating jobs.

However, printing too much money can also lead to inflation, as the increased money supply can cause prices to rise. Inflation can erode the currency’s purchasing power and decrease consumer confidence and economic stability.

Furthermore, printing more currency can also lead to a depreciation of the currency's value relative to other currencies. This can negatively affect international trade, as a weaker currency can make imports more expensive and exports cheaper, potentially leading to a trade deficit.

Overall, the decision to print more currency should be carefully considered, considering a range of economic factors. While increasing the money supply can help stimulate economic growth, it is essential to strike a balance between promoting growth and maintaining economic stability and confidence in the currency.

What’s Your Timetable?

In conclusion, both FDIC-insured CDs and US Treasuries offer low-risk investment opportunities, but there are some key differences between the two that investors should consider. While CDs offer fixed returns and are insured by the FDIC, they are less liquid and carry some risk due to the possibility of bank failure. US Treasuries, on the other hand, offer higher returns, are virtually risk-free, and are more liquid. Ultimately, the choice between the two will depend on an investor's financial goals, risk tolerance, and investment horizon.

Authors Note: This article was written using prompts in ChatGPT. (2023, May 8). The author has independently verified the accuracy of the responses. The author edited and formatted responses from the prompts for clarity.

---

---

Related Articles

The cost of education, especially 4-year accredited university programs, continues to rise. The graphic below shows the average annual cost of college nationwide from 1980-2021 far outpacing the maximum Federal Pell Grants offered over the same time period. 

If there is an ability to pre-fund college, in whole or part, it will have lasting financial implications. Funding college early at the birth of a child or grandchild to a college savings account could reduce the future funding liability by six figures. 

In this article, we will discuss some ways you can start saving for your child’s education.

The most popular option, the 529 Savings Plan

A 529 College Savings Plan is one of the most popular options when saving for college. Not only does the money you contribute to a 529 plan grow tax-free but any distributions used for qualifying education expenses (tuition, room & board, books, computer, etc.), are tax-free as well. In the past, qualified expenses were limited to just tuition and boarding but recently the government has expanded this list. Beneficiaries of a 529 plan can also use the money to pay for trade school, community college, or even a 3-month certificate program.  

Oregon has a state-sponsored 529 Plan that allows residents to receive tax benefits for contributions they make to a plan in the state. This gives you a triple-tax benefit. Contributions to fund the account have a tax benefit, growth is tax-free, and qualified expenses are tax-free. There are also private plans that qualify under Oregon-state law. As of 2023, contributors can receive up to $300 in tax credits depending on their filing status and household income. As of 2023, families can contribute up to $17,000 annually in a 529 account. Anything after that is considered a “taxable gift” and subject to gift tax laws.  

Another feature about 529s starting in 2024 and beyond is that any leftover money up to a lifetime amount of $35,000 can be rolled over into the beneficiary’s Roth IRA.. For example, let’s look at two parents who invested $50,000 into a 529. Their child received a full scholarship to the college of their choice. The child ends up only spending $10,000 to cover other expenses during their time in college. That student can then roll over a lifetime amount of $35,000 into their Roth IRA account, as long as they have earned income and the 529 account has been established for 15 years.  

Coverdell ESAs act very similarly to 529 plans due to the withdrawals being tax-free for qualifying expenses. However, contributions are limited to $2,000 per child annually and are only available to families below certain income thresholds. 

Special accounts: Uniform Gifts TO Minors Acts (UGMA) or Uniform Transfers to Minors Acts (UTMA)

UGMA or UTMA accounts can help you save for college but aren’t just reserved for education. These accounts are savings accounts that are controlled by a parent or guardian, known as a “custodian.” You can gift up to $17,000 per year (as of 2023) in assets that are held in a custodial account until the child turns the age of majority (Age 18 or 21 depending on the state). In Oregon, the dependent cannot take over the account until they are 21.  

The custodian of the account can use this money only for the benefit of the minor to pay for things like food, education, and living situations. 

Pre-pay for college tuition and tuition discounts  

Unfortunately, in Oregon, there is no State-sponsored pre-payment plan for college tuition. There may be some private ones, but they are expensive. Some people do this in other states to pay for the full tuition during the current year rather than wait 17-18 years when prices go up even more. For your reference, here are states that offer pre-payment programs.

There is also a program known as the State and Regional College Tuition Discounts. Oregon has several schools that are members of the Western Interstate Commission for Higher Education.  

For more information about this make sure to research the WICHE site and Oregon’s student aid site.

Alternatives to college that can fast track career development

Despite the rising costs of college, there are other options to consider. College is not for everyone and you may decide not to send your student to college right away if you cannot afford to do so.  

Many high-paying and rewarding career paths do not involve a college degree like: 

• Computer programming and coding 

• Loan officers 

• Pilots 

• Plant operators and managers 

• Graphic designers 

• Trades like plumbers, welders, carpenters, farmers, etc. 

• Sales reps  

• Business owners and managers 

Community colleges, trade schools, and certificate programs are a fraction of the cost of a 4-year college program and in most cases pay well with little to no debt. Plus, 529 Plans cover these types of education programs too (certain restrictions may apply).  

Some 17-year-olds may not know what they want to do yet. They can work a job, apprentice under an expert, or even start their own business and find their passion before committing to a major program in college.  

If you need more advice, financial planners and advisors can assist you with planning for your student’s future. These laws vary from state to state so talking with a team of experts who are knowledgeable in this area is a wise choice.  

If you are looking to hire an advisor, please connect with us.

---

---

Related Articles

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.

---

---

Related Articles

It’s a new year, and there are still plenty of old questions about the economy & markets. We thought diving into some questions about today’s economy would be helpful.

2023 Economic Outlook

Many different sources (See Table 1) forecast a recession for 2023. With The Fed combating inflation by raising interest rates, expectations are these moves will force the economy into a downturn. The extent of the recession may depend on The Fed’s actions. If inflation recedes quickly, and The Fed cuts rates or stops raising them, that could minimize a recession or possibly avoid a recession entirely—this is called a “soft landing.” If inflation persists, and The Fed is determined to lower inflation in the face of a declining economy, the recession could be worse. However, market forecasts expect The Fed to cut rates in 2023 in response to a recession. The Fed has yet to forecast those same rate cuts. Based on our observations, the odds are we will experience a mild recession in 2023.

2023 Investment Outlook

Despite the prospects of a recession, investments grow over the long run, and volatility is expected. As we’ve previously covered, it can take years for your portfolio to recover from a downturn. We have always seen markets recover to new all-time highs. With a looming recession, 10-year forecasts for US stocks remain positive.

Downturns present a buying opportunity for investors, particularly workers accumulating for retirement. Continuing to purchase when stocks decline is an excellent investment. Saving more when times are tough is challenging. Ensure you are in good financial shape: have 3-6 months of expenses saved in an emergency fund, pay off any high-interest debt, and consistently spend less than you make. Then consider increasing your savings. Increasing your contribution rate is a wonderful forced savings tool if you have a 401(k) or similar plan.
 
Markets and the Economy
You may have heard the market is forward-looking. We know the market is a flawed prognosticator because prices still adjust daily to reflect new information. Let’s examine how closely market bottoms coincide with recessions.
 
There have been 11 recessions since 1950, according to the National Bureau of Economic Research (NBER). Using the NBER’s trough dates (i.e., the end of a recession), we can compare GDP with the S&P to see when both hit their lowest point. Looking at Table 3, the S&P 500 tends to do one of two things:

1. The market is at its worst about the same time as the economy.

2. The market is at its worst approximately six months before the economy bottoms out.

There are some caveats. Market data is live, and markets are open every business day. GDP data comes out quarterly, advance estimates come out nearly a month after the fact, and aren’t fully revised until around 60 days after initial release. For both the market and economy, knowing when you’ve hit bottom is nearly impossible to determine in the moment. Because it’s difficult to know when the worst is over, we recommend staying invested amidst the potential short-term tumult.

Be prepared for some turbulence this year

Economists and market prognosticators are expecting there will be a recession in 2023. The severity of the recession will vary depending on The Fed. The Unemployment rate remains below historical averages at 3.5%. In November 2022, there were nearly 6 million more job openings than job seekers, suggesting the economy can handle some tightening. Trying to time the market or economy bottom remains a guessing game. Long term, the outlook for returns is still strong. Be prepared for some turbulence this year, knowing you are headed in the right direction long term.

Sources
1. Federal Reserve Bank of New York. The yield curve as a leading indicator. January 2023.
2. The Wall Street Journal. Economists in WSJ survey still see recession this year despite easing inflation. January 2023.
3. Bloomberg. Economists place 70% chance for US recession in 2023. December 2022.
4. Vanguard. Vanguard economic and market outlook for 2023: Beating back inflation. December 2022.
5. BlackRock. 2023 global outlook. January 2023.
6. Charles Schwab. 2023 market outlook: Cross currents. January 2023.
7. Fidelity. Global outlook 2023: New world disorder. January 2023.
8. Charles Schwab. Schwab's 2023 long-term capital market expectations. January 2023.
9. Vanguard. Market perspectives: December 2022. November 2022.
10. BlackRock. Asset return expectations and uncertainty: as of September 2022 November 2022..
11. Data courtesy of YCharts & NBER

---

---

Related Articles

The IRS adjusts tax brackets and rates each year to account for inflation and combat “bracket creep.” Bracket creep is when taxpayers are pushed into higher income tax brackets or do not receive adequate credits and deductions due to inflation. Are you aware of how an increase in the standard deduction and tax brackets will impact you?

What has changed?

1. The standard deduction will increase for the 2023 tax year. See below for a summary of the increases:

 2. Federal income tax brackets will increase to account for inflation in 2023:

What does this mean for you?

While this is welcomed news, these updates will not significantly impact your taxes, cash flow, or budget. These updates are enacted to hedge against inflation and keep things consistent for taxpayers.

In sum, the increase in standard deduction means households will have less income subject to taxes, and the income subject to taxes will be subject to better tax brackets.

We wanted to re-vamp our tax example from 2022 with the updated 2023 numbers to provide a familiar and helpful guide to your taxes. Read on to see a fictitious example of the impact of the increased standard deduction and tax brackets in 2023.

Meet Martin & Angela

Below is a breakdown of their taxable income and taxes due in 2022 compared to 2023.

As you can see, they reported $100,000 of combined income, which is reduced by their pre-tax 401(k) contributions and the standard deduction of $27,700. Because the standard deduction increased from $25,900 in 2022 to $27,700 in 2023, Martin and Angela’s taxable income decreased. This means they are on track to pay less this year in federal taxes.

PORTIONS OF YOUR INCOME GET TAXED AT DIFFERENT RATES

Tax brackets calculate the tax rate you will pay on each portion of your income. Tax brackets are part of our progressive tax system, which means the tax rate increases as someone’s income grows. There are seven federal tax brackets in 2023 (see image 2).

As shown in the image above, Martin and Angela’s taxable income will be split to take advantage of the lowest tax bracket. This means they will be taxed at 10% on the first $22,000 of their joint income, and their remaining taxable income will be taxed at 12%. In 2022, the maximum income allowed at the lowest tax bracket of 10% was $20,550. In 2023, the maximum income allowed will be $22,000.

If Martin and Angela fall into a higher tax bracket in the future, their taxable income will be broken down into each respective bracket to take advantage of the lower rates on what they can.

DRUMROLL, PLEASE…

After completing this exercise for all their taxable income, you can see that Martin and Angela’s total taxes owed in 2022 is $7,881 compared to $7,636 in 2023. This means they will pay $245 less federal taxes in 2023 than in 2022. While this is welcomed news, it is not a life-changing update.

If you have questions about your unique tax situation, please schedule a time to connect with our team. As always, we would love to hear from you!

Disclaimer: This post is for educational purposes and not predictive of your 2022 tax situation. The fictitious example is not a complete presentation of a tax filing.

---

Related Articles

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.

---

---

Don’t let time run out on these end-of-year tax plays. Not having a tax projection done can be a costly mistake. Besides giving you peace of mind in April, in order for you to pay the lowest percentage of taxes over your lifetime you have to plan and utilize every opportunity. Sometimes this means paying more dollars in tax in the current year to seize and maximize that lower rate.

For Lower Income Tax Brackets

 While your income is low, it may make sense for you to realize more income now and better utilize your low tax rates. 

1. Roth 401K and Roth IRA contributions: Contributing to a Roth 401k or Roth IRA may cost you more in taxes today, but it allows those dollars to grow tax-free. If you can do this early in your career and give your retirement dollars a long time to grow, the tax savings will be enormous.

2. 0% federal tax on capital gains: Many people are unaware that the IRS actually allows for a 0% tax on capital gains (Example: Gain from sale of stock). If your taxable income is below $44,625 Single $89,250 Married-Filed-Jointly, you may want to realize additional gains this year by selling stock to take advantage of these low rates. Keep in mind you may still need to pay state & local taxes on these sales but selling at the 0% federal tax bracket is an opportunity you can’t afford to pass up.

3. Lower your tax bracket when your income is low in retirement: Sometimes this situation occurs not when you are starting your career but when you are ending it. In the years between retirement and age 72, when Required Minimum Distributions start, there are opportunities to take advantage of these low tax brackets as well.

4. Lower your tax withholdings in January: If you are getting a large refund, adjust your withholdings on your paycheck for the next year. Adjusting early in the year keeps more money in your pocket each month. Do not give the IRS an interest-free loan.

For Middle Income Tax Brackets

As you start making more money and entering higher tax brackets, this is the time to start looking for deductions. 

1. Maximize your employee benefits: Have you maximized your employee benefits (including catch-up at age 50), H.S.A., and other benefits? When you are a W-2 employee, the best place to look for deductions is at work. Many companies will also offer some sort of match on retirement contributions. By not putting enough or anything into your workplace retirement plan, you may be leaving money on the table.

2. Tax loss harvesting: One place you might go looking for additional deductions is your brokerage account. While no one likes to lose money on their investments, Capital losses can offset up to $3,000 of ordinary income each year. If your income is high you may want to harvest losses for two reasons:

   1. Taking losses now allows you to put off paying tax in favor of paying down the road when it might be cheaper, potentially 0% or 15% federally.

   2. To stay out of the 20% highest capital gains bracket ($492,301 Single, $553,851 Married-Filed-Jointly for 2023)

3. Non-Deductible IRA contribution: If you are already doing the items above and want to put more away for retirement, you might consider funding a non-deductible IRA. You (and your spouse) can put up to $6,500 (for 2023) into an IRA each year. This puts after-tax dollars into an IRA which could later be converted to a Roth IRA, which can grow tax-free. Keep in mind that the IRS views all of your IRAs as one IRA. Any distribution or conversion must be done proportionally to your taxable and non-taxable balances. If you have taxable amounts in your IRA, you may owe tax on any conversions.

4. Raise your tax withholdings in January: If you owed a lot in April last year, it may be an indicator that you need to adjust your withholdings for the coming year or make estimated payments. The IRS requires you to pay the tax due at least quarterly. January is a good time to adjust your withholdings because you have the entire year for the changes to take effect. This means you can make the smallest change to your net pay and still yield the desired effect at year-end.

For Higher Income Tax Brackets

When you find yourself with a surplus of money, living generously may yield additional tax savings.

1. Charitable contributions using stocks: While contributing to charity generally does not save you more than you spend on your taxes if you have the heart to give there are efficient tax strategies that can allow your donation to go further. As changes to itemized deductions have vastly limited the amount of benefit many people can get from making charitable contributions, with careful planning, there are ways you may still save big.

   1. Contributing long-term appreciated stock may allow you to gain a charitable contribution for the fair market value of the stock and never pay the capital tax from the sale.

   2. Utilizing a donor-advised fund may allow you to bunch several years of donations into a single year. This could allow you to take larger deductions over several years.

   3. If you are over age 70.5 and not itemizing your deductions it may make sense for you to contribute straight out of your IRA with a Qualified Charitable Distribution. These donations get paid straight from your IRA and are not taxed.

2. $16,000 gifts to your children: If you are planning to transfer a large estate to your children upon your death it may make sense for you to utilize the annual gift limits and give each year to potentially lower taxes on your estate. These gift limits are annual and adjust with inflation. Current limits are $16,000 per year per individual. This means a husband and wife could give $16,000 each to a child for a total of $32,000. If that child is married, they could also give their child’s spouse the same amount without filing a tax return.

   To be clear, you can give all the way up to your lifetime limit in a given year without paying taxes, but giving more than $16,000 requires you to file a gift tax return and reduce your lifetime estate.

When it comes to taxes, Benjamin Franklin said it best when he said “failing to plan is planning to fail”. If you have not done so already, get your tax plan going before the end of the year. 

---

---

Related Articles