Financial Planning Tips to Round Out 2021 - August 2021

Full Episode Transcript

Mike Hanson:

Hello, and welcome to the Fisher Investments’ Market Insights podcast, delivering to you our latest insights on investing and capital markets. I'm your host Mike Hanson, filling in this week for Naj Srinivas.

It's been a scorching summer, but the dog days will soon wane and, believe it or not, it's time to start thinking about financial planning to close out 2021 and look forward to 2022. One thing you'll hear from us a lot at Fisher is to try and get ahead of financial planning as best you can, rather than leaving it to your end. Folks always seem so focused on what the markets are doing day in and out, yet tend to leave vital financial planning issues to the side, scrambling around the holidays when stress is high and time is scarce.

That's just a mistake. Your financial planning decisions, everything from IRAs and 401ks trusts, gifting, taxes, even education planning, and so very much more all have a huge impact on your long-term wealth—at times, as much as your investments themselves.

But, navigating this stuff all seems about as clear as mud. And frankly, it's pretty tedious, which is why I think we put it off to the last minute. Luckily though, we've got our own financial planning guru, Haley Bill in the studio to walk us through all the latest strategies, potential changes in taxes and helpful reminders to optimize your financial planning.

This is Hailey's second time on the show. And just like the last time, we had a great conversation and it will remind all of us of the things we know we should be doing with our assets. I'll admit it even put some good reminders in my head, too. But before we get to the interview, make sure to recommend and share our podcast to a friend who you think needs to hear this. Our mission to better the investment universe means we want these messages to reach as many ears as possible.

Without further ado then, let's talk to Haley Bill for a little clarity on financial planning. Enjoy.

 [TRANSITION MUSIC]

Mike Hanson:

So Haley, welcome back to the program. Last time you were here, we had tons to talk about, including the CARES Act, which I want to get to first and kind of do a refresher on that and see what's changed. But, first I just want to talk to you a little bit about what's going on with you and your group. Tell us a little bit about how your group works, what you do day to day, and what it's all about for our clients.

Hailey Bill:

Sure. Thank you for asking. Well, my job title is VP of Financial Planning Services. And, in practice, what that means is I run a group of people who collaborate together to help our clients—our private clients—with their financial planning needs that are above and beyond or slightly different than their needs for their investment portfolio.

So we want to make sure that, of course the baseline of any effective financial plan is an effective investment strategy, but we also know there are a lot of other pieces that go into feeling confident in your financial plan. And that's what our team is here for.

So whether it's more tax planning help, retirement planning, help with social security or Medicare, or even estate planning—we have specialists that focus on estate planning guidance. They all kind of work in partnership with the Investment Counselor to make sure clients feel supported in all aspects of their plan.

Mike Hanson:

Yeah. You know, it's amazing how important this stuff is. And it's just full of detail, which is why I'm really glad we have you on the program to walk us through so much of this. And, you know, for all the talk about investing—and people are always interested in what's the market going to do and so forth—this is the stuff that really builds wealth and can protect wealth over time.

So why don't we just jump right into it then? You were here a year ago—a little more than that—to talk about things going on, especially in the wake of the coronavirus. Some things changed and we were talking about the CARES Act. I know you want to give us an update on what's going on with the CARES Act for 2021. So tell us about that.

Hailey Bill:

Yeah, you're right. It has been over a year, and man did time fly for better or worse for a lot of that. But there are some things that we discussed about the CARES Act last year that are still relevant or worth reminding people about. First and foremost, a big impact of the CARES Act last year was the opportunity to take what we call hardship withdrawals. And that allowed some people who were negatively impacted by the Coronavirus to take a short-term withdrawal from their IRA accounts—their tax-deferred accounts—and pay it back within a few years and call that a rollover. Without getting into too many complexities about what is and isn't considered a rollover, the real impact there was that it gave people a short-term ledge to stand on if they were short on cash for a few months or even a year.

The impact now is that while hardship withdrawals are no longer available in 2021, they are allowed to be paid back over the next few years. So, um, for instance, we had a client last year, later in the year, reach out and work with our team because they had been laid off and were looking for work. And thankfully were able to find work, but their just start date was delayed a few weeks or, actually, I think a couple of months.

And so they were looking for a way to get some short-term cash relief without having a long-term negative impact on their tax bill, because they already didn't have as much money as they were hoping for. That individual was able to take a withdrawal and know that as long as they pay it back within three years of receiving the money, that can be treated as a rollover and, most importantly, as a tax-free event.

Mike Hanson:

So that's the hardship part of this, but more broadly speaking, what about RMDs—required minimum distributions?

Hailey Bill:

Yeah. So speaking of retirement accounts and withdrawals from retirement accounts, on the flip side, if people were at a point where they didn't need their income from their IRA for the year 2020, where required minimum distributions were put on hold. Um, so it was kind of like a lost year for required minimum distributions. They don't have to pay them back this year or take twice as much this year, but they do have to kickstart them back up this year. That actually piggybacks on another change that came about in the SECURE Act in 2019, that kind of got looked over because COVID brought a lot more attention to the CARES Act, but the SECURE Act allowed RMDs to actually start later. So now individuals only have to start taking their required minimum distributions at age 72, whereas before it was 70 and a half.

Mike Hanson:

Yeah. I imagine actually clients are often, you know, either just not understanding what to do with that or when to do it. And then you get these things changing quite a lot and it gets fairly confusing. Okay. So now let's finish, let's round out the CARES Act, and talk a little bit about the charitable giving features of this too.

Hailey Bill:

Yes. So, one more change as a result of this CARES Act that actually did get pushed through into 2021 is additional opportunities for charitable giving. So, one thing we haven't mentioned yet is that at the end of last year in December, another follow-up bill was passed for COVID relief. It was called the COVID-Related Tax-Relief Act. So many of the bill—pieces of the CARES Act—were left behind, but the big thing that carried forward, in addition to additional unemployment benefits, were more opportunities for charitable giving. Specifically, it increased the the AGI (adjusted gross income) limit on cash contributions made to charities. So in effect, people can give up to a hundred percent of their adjusted gross income to charity and have that written off.

And there's an additional, what they call “above-the-line deduction”: $300 above-the-line deduction that kicked in as a result of the CARES Act, and has been pushed through into 2021. So even those that don't itemize their taxes—which is actually quite a few people because itemization requires quite a few different write-offs—they at least can give $300 tax-free.

Mike Hanson:

Yeah. You know, what's funny about itemizing taxes is it requires a lot of work. That's always one of the pivotal decisions in that if you ask me.

Hailey Bill:

It does. And unfortunately you kind of have to do the work to determine if it was worth doing. It's a bit of a catch 22.

Mike Hanson:

One of the best reasons we have computer software. Although you still have to check these things for sure. Okay. So let's switch gears a little bit now. That was all quite interesting and I think that people are really going to have to grapple with the CARES Act features, but you know, the other part of all this is that people anticipate legislation and change to these things. And I know that that this is a year in which that's happening. So, we've seen some new legislation proposed, um, things like the American Families Plan, which is still being debated. What should we tell listeners who are thinking about making financial changes based on this legislation? How should they think about this?

Should you anticipate this type of thing, or how would you do it?

Hailey Bill:

Yeah, I know, Michael, you're well aware that we want to be careful about over-anticipating legislation that's just being proposed. So the American Families Plan was just announced in April as a proposal by the Biden administration. And, proposals are really just the starting point for Congressional negotiations. So, there's a lot that could be subject to change, a lot that is really discussed in the media, and a lot of rhetoric around worst-case scenario if this bill passes. But, what we have to keep in mind is that there's a negotiation process through Congress. Inter-party gridlock can definitely play into effect here. And even if it passed without full changes this year, the American Families Plan, specifically, would only really impact those with an annual taxable income of over more than $450,000.

So, it is a small portion of our listeners and our investors that could have a notable impact on their plan. So, most of the time when our team is having conversations with investors about this, we try to slow them down and say, “Let's think about some opportunities that would be beneficial to you either way, but not make huge changes to your tax plan or estate plan.” Knowing that there's really a good chance that this doesn't come to play the way it's been communicated about so far.

Mike Hanson:

Yeah. I'm glad you really put it that way, because listeners of this podcast and of our materials generally know that whether it's markets or even issues like this, you really have to wait and see what they do, not just what they say. And this is so important, because you can really go off in a lot of directions here trying to anticipate what changes there may be.

And when we say, you know, “Wait for these things to happen…There'll be phased in slowly…You have to be patient.” This is really what it's all about, as much as it is about any type of market-timing issue and so forth. So, is there anything though that you would suggest based on this sort of thing that listeners should perhaps take note of and start to plan for maybe.

Hailey Bill:

Yeah. You make a good point. We talk a lot about being patient. That's not always so easy or, really, motivating for people who are paying attention and thinking about what can I do to benefit me and my taxes.

So there are a few things that I would consider kind of evergreen strategies for people to consider that have the potential of reducing their tax bill currently and their estate-tax bill that shouldn't change should the American Families Act come into play.

The first and foremost—and the one we talk about most commonly—are Roth conversions. So, as a refresher—and this is actually something we talked about in the podcast last year as well, because 2020 was a good opportunity for some people to participate in Roth conversions, but it is continually something to consider. So I'll pause and discuss exactly what a Roth conversion is first.

Mike Hanson:

Yeah, that would be great.

Hailey Bill:

So a Roth conversion is when an investor moves assets directly from a tax-deferred IRA into a Roth IRA, where it will go tax-free. So money in a tax-deferred account grows tax deferred. Once it's withdrawn, it's taxed as income.

If it's in a Roth account, it's considered post-tax. So the money went in taxed, and once it comes out, it isn't taxed again. So it can grow tax-free.

Where this can be impactful is for people who are potentially before required minimum RMD age, or required minimum distribution age, but in a place where they expect their tax bracket to not be completely filled up. And so they might be able to pay taxes on taking money out of their IRA in order to put it into a Roth IRA where it will grow and then they can take it later in their retirement years and pay fewer taxes later. This has beneficial before required minimum distribution age, because it reduces the value of the IRA accounts that will require taxable distributions once you hit age 72.

Mike Hanson:

Yeah. You know, in my experience—and not everyone can do this, of course—but if you're really trying to anticipate future tax changes, one of the best strategies is diversification. I mean, if you happen to have something that's like a 401k that's tax-deferred, it's good to have something that's tax-exempt then.

And you know, you can diversify yourself that way and not everyone can do that, of course, but you know, to me, jumping back and forth and anticipation of these things can also be harmful. And it's the same feature. It's the same advice you want to just wait and see and see what's right for you before you go and do these things. And so on that note, if someone's considering this, what are next steps for converting to a Roth?

Hailey Bill:

Well, it's definitely something you want to talk about with a certified tax planner. And that's because, as you mentioned, you want to make sure that this is relevant for your specific tax situation. And that's going to take into account a lot of different factors about what taxes you're likely to pay this year, how many taxes you're likely to pay into the future. And whether that tax bracket has some wiggle or not. We don't want people to be too impulsive and assume that a Roth conversion is always right for them, because there could be larger impacts on their tax bill into the future.

Mike Hanson:

Yeah, indeed. That's, that's really where the technical knowledge of a professional really comes in handy. If we're talking—and we're talking about Roth conversions—but what are some other things listeners can do? And I'm very interested specifically in gifting because gifting is such a huge tax strategy area in general.

Hailey Bill:

Yeah. Gifting has… Well, first of all, there are a lot of different opportunities for gifting that I don't think we talk enough about. And so I'll talk about some of the most common, in addition to the opportunities we talked about that came into play as a result of the CARES Act. There are some strategies that have been around for a while.

We talked earlier about RMDs and the fact that last year, people didn't need to take RMDs. And this year they might have to start doing that. What is common, particularly with clients we talk to, is that they might not actually need the money they're required to take out of their IRA as cashflow to support their goals for the year or into the future. So one opportunity is what's called qualified charitable distributions.

So those are distributions you can actually start as early as 70 and a half. And they're charitable distributions, so they're not taxed, but they also give the benefit of drawing down that IRA so that your required minimum distributions are smaller. So that's one common strategy. Of course you'll want to identify a charity that you want to give to. But if you're trying to figure out where to put this money, charity is of course an option.

Getting a little bit more complex from there. If you are charitably minded, we always suggest people talk to an attorney about charitable trust options. If you have concerns about your estate being taxable, and you're trying to reduce your taxable estate before you were to pass away, charitable trusts are really, a notable option.

And then, of course, gifting. So one thing that's been a part of the rhetoric around the American Families Plan a lot is the potential for increased taxes on estates and inheritance tax. One way to avoid that if it comes to play is to reduce your estate before you pass away. So if you already know you want to give as much assets as possible to your beneficiaries—whether that's your children or your family—you can front run that by starting to gift now. Up to $15,000 annually per person can be gifted. A

And that could be everything from each child in your family and each of your grandchildren, you can give $15,000 without having to file a gift-tax return.

Mike Hanson:

Now, correct me here, Hailey, if I'm wrong. But to me, one of the most important features of all this, when you do gifting is how much control you give up of the money, right? And, if you're deciding between, let's say a 529 plan for education or a trust or whatever, it may be not just the tax implications, it's the…how much control do you have over that? And that's where you really want to dig deep and understand what you're doing there. Does that seem fair?

Hailey Bill:

Yeah, that's a very fair point. If you're just giving away $15,000 to your 19-year-old grandchild, you might have some apprehension about that. And that's true also, frankly, if you were to let that those assets pass after you die, free of any trust or any structure.

So that is actually where trusts can be really beneficial, as you can preemptively say exactly what control you want over that. You also mentioned 529 plans. With 529 plans, you have the benefit of determining how that money is invested, but it's also limited in scope as to how it can be used.

So if you want to contribute to a younger person and make sure they use it for education, a 529 plans a really good option. It's also beneficial because you can do what's called super funding, or front-loading, a 529 plan, which means you can give up to five years’ worth of that $15,000 limit all in one year.

So, in fact, put $75,000 into a 529 plan in one year. And that allows that money to grow quick more quickly, because you're putting the money in sooner and you still don't have to have additional gift taxes filed for that gift because it's considered kind of a five-year plan paid all at once.

Mike Hanson:

Okay. Well, Hailey, that was a lot to take in, but very deftly explained. I just want to say thank you again so much for coming in and being with us again.

Hailey Bill:

Yeah. Always a pleasure. Happy to come back.

And as you mentioned, we have a lot of resources. I know, hopefully people didn't feel like they had to take a ton of notes because we've got a lot of resources and guides. If they want to dig deeper into any of these topics.

Mike Hanson:

We will have all relevant dates and milestones for all these things we're talking about listed on our webpage, in fact, with links. Wonderful. I'm sure we'll be having you back more than once again in the future because this stuff never goes away,

Hailey Bill:

That it does. Thank you. Thank you.

[TRANSITION MUSIC]

Mike Hanson:

Well, that was financial planning with Hailey Bill. Thanks as always to Hayley for her time and knowledge.

You know, I've been in finance for more than 20 years, and this stuff never seems to get less complicated—only more so really. But, by the same token, if you commit to spending a little time with it and really take charge of your situation, or if you're lucky enough to have the guidance of a team like we have here at Fisher, it's not at all out of reach to feel confidence in your financial plan for the future.

So, if you haven't already, subscribe to Market Insights and have new episodes delivered instantly to your device. And find all the great Fisher Investments resources we provide LinkedIn, Twitter, Facebook, Instagram, and even our official Fisher investments YouTube channel.

Have questions or comments you'd like answered? Leave a comment on any of those venues and you just might hear your question answered on the show. Stay tuned is always for the latest thinking on global capital markets and current events from our team here at Fisher.

And until then, I'm Mike Hanson wishing you and yours, a great close to the summer and much prosperity ahead. Take care!

Disclosure:

Nothing herein constitutes legal tax or investment advice. Please seek the guidance of a CPA when making tax-planning decisions investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis, or reconsideration. Copyright Fisher investments, 2021.