A question we are often asked is whether or not you can claim Social Security while working. The answer to this question is yes you can. However, it’s not that simple. The question to ask is should you claim Social Security while working? In answering this question it's important to understand the rules regarding earned income, taxes, and your Social Security benefits.
There are some key ages to keep in mind in connection with claiming Social Security benefits:
For those who are working, drawing Social Security benefits and who have not reached their FRA, there is a benefit reduction if your earned income exceeds $21,240 for 2023. In these cases, there will be a $1 benefit reduction for every $2 that your earned income exceeds these limits. Earned income is defined as income from employment or self-employment. This does not include income from sources like interest or investment gains.
For those working in the year in which they attain their FRA, the earnings limits increase to $56,520 for 2023. In this case, there is a $1 benefit reduction for every $3 in earned income above these limits.
There are no limits on your level of earned income, and no benefit reductions once you have reached your FRA. Note that any withheld benefits are returned to you in the form of a higher monthly payment once you reach your FRA. Even with this, it probably doesn’t make sense to claim your benefit prior to your FRA if you know that all or most of the benefit will be lost due to your level of earned income.
One issue that may confuse some people is the Social Security COLA or cost of living adjustment. The COLA for 2023 is 8.7%. If you defer claiming your benefit you do not lose out on this COLA, it simply will be factored into your benefit when you do claim in the future.
There is a once per lifetime do-over option once you have claimed your Social Security benefits. Let’s say you decided to totally retire at age 62. Since you had no plans to ever work again you decided to claim your Social Security benefits.
Nine months later, you realized that you were bored and decided to work with a consulting firm that serves companies in your former industry. Your compensation will be $75,000 which is well above the Social Security earnings limit.
You have the option to withdraw your application. This is a once per lifetime opportunity and must be done within a year after you initially claimed your benefits. Withdrawing the application allows you to reapply later when you are no longer working or you reach the age at which your benefit will no longer be impacted by the level of your earned income.
When doing this, all benefits received by you plus anyone else who received benefits based on your retirement application must be repaid. Additionally, these benefit recipients who are impacted must consent to this application withdrawal in writing.
Social Security benefits can be subject to federal income taxes based on your combined income, which the Social Security Administration defines as:
Adjusted gross income (AGI) plus nontaxable interest income plus ½ of your Social Security benefits.
For those filing as single:
For those filing married and joint:
Additionally, 12 states currently tax Social Security benefits in some fashion at the state level.
If you are working your benefits will almost certainly be subject to income taxes. It's important to increase your withholding to cover these added taxes.
We help our clients determine the best time to claim their Social Security benefits based on their overall situation. If you are still working this is certainly a factor in this decision. For help in deciding when to claim Social Security and in all aspects of financial and retirement planning please feel free to reach out to us. As both financial and tax advisors we help our clients design tax-efficient retirement income strategies.
Bill Canty, CFP®, CPA, Financial Planner
Ed Canty, CFP®, Financial Planner
Joe Canty, Financial Planner
Maureen Walsh, EA, Tax Advisor
Tina Alteri, CPA, Tax Advisor
This is a question we are asked frequently by clients. How much life insurance is enough will vary greatly depending upon your situation. We will discuss some of the factors that you should consider in making this decision.
The first thing to keep in mind is that the main purpose of life insurance is to replace income or build assets in the event of your death.
The best way to estimate how much life insurance you need is to take an inventory of the financial obligations that you would like to be able to cover in the event of your death. These will vary based on your unique situation, but here are some common examples we see in working with our clients:
These are just some examples of the types of obligations you may want to cover via a life insurance death benefit for your beneficiaries.
Part of the calculation of how much life insurance you may need is taking your other assets that could be passed on to your heirs upon your death into consideration. Everyone’s situation is a bit different, but some examples could include:
These and other assets can be used to fund the needs of your family or other heirs. These assets should be taken into account in your estate planning process and in deciding how much is needed in terms of a life insurance death benefit to meet their needs.
Whether you need life insurance and how much coverage will depend on a number of other factors. Among these are:
Age. We find that younger clients generally need a larger death benefit, especially if they are married and have children. They typically have not accumulated enough assets elsewhere to provide for their family in the event of their untimely death.
On the other side of the coin, clients in their 60s or older may not need any life insurance or may need a lower death benefit. Their kids are generally grown and they have accumulated other assets to pass on to their heirs and beneficiaries.
A key question is do you have beneficiaries who will need financial support upon your death? If you are single with no dependents the answer may be no. Likewise, if you are financially independent and have sufficient assets to leave to your spouse and other heirs.
One nice benefit of life insurance is that the death benefit passes to your beneficiaries tax-free. The tax-free nature of the death benefit will be appreciated by your beneficiaries.
Depending upon the nature of your other assets, a life insurance death benefit can be a good addition to your estate.
While there is no single right answer here, we generally recommend that our clients strongly consider term life insurance. We like term insurance as the premiums are generally cheaper and there are generally no hidden costs as is sometimes the case with permanent life policies. You are only paying for a death benefit and not some underlying investment option that may or may not be a good deal for you.
The other reason we typically recommend term life is that we find that many clients don’t need the death benefit as part of their estate planning as they move into retirement. Most have built up enough assets including investments, real estate, and in some cases their interest in a business where they are now considered "self-insured" and can live off of their accumulated assets instead of needing a large payout from life insurance.
For help in deciding on the amount of life insurance coverage that you need please feel free to reach out. We can help you incorporate life insurance into your financial and estate planning.
Bill Canty, CFP®, CPA
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Maureen Walsh, EA, Tax Advisor
Tina Alteri, CPA, Tax Advisor
The period leading up to your retirement is a critical time to ensure that you have your financial plan in place as you enter retirement. Financial planning doesn’t stop once you retire, things change and your need to stay on top of things and adjust as needed. This is the focus of much of our work with clients approaching and in retirement.
Here is a checklist of items to review during the 12 months leading up to retirement.
One of the most important things to do during this period is to formulate a retirement spending budget. This will drive almost everything else that you do financially in retirement. This budget should take into account your normal monthly costs plus money to cover things like travel or other activities that you plan to do in retirement.
During this period it's important to identify all sources of retirement income that you can tap. This might include many of the following:
Depending upon your situation there may be additional sources of income to consider as well. It's important to be sure that you have your arms around all potential sources of retirement income, and how much income you might generate from each of these sources. Additionally, you will want to be sure that you understand the tax implications of tapping each of these income sources.
Putting a retirement withdrawal strategy in place is critical. Which accounts will you withdraw funds from and in what order? This will be driven by a number of factors including your age at retirement. When you claim your Social Security will certainly be a factor in this strategy.
This goes hand-in-hand with your retirement budget and also encompasses tax planning in terms of whether to tap taxable or tax-deferred retirement accounts first.
Regularly reviewing and adjusting your retirement withdrawal strategy is vital for effective financial planning during retirement. Our team specializes in assisting clients with this essential aspect of retirement planning.
When our clients retire or leave their employer, they often ask about what to do with their 401(k) or similar retirement plan. We assist them with rolling over their plan to an IRA, developing a retirement withdrawal strategy, and ensuring their investments are aligned with their goals and time horizon.
For many individuals, the 401(k) or employer retirement plan represents their largest retirement savings, so it's crucial to develop a well-defined strategy for managing and investing these funds throughout retirement.
Transferring a 401(k), 403(b), TSP, or Deferred Comp to an IRA account offers several advantages for portfolio management. It provides a wider range of investment options, such as individual stocks, bonds, ETFs, and a more extensive selection of mutual funds compared to employer-sponsored plans. Rolling over the employer plan allows for better integration into an overall investment strategy and alignment with other managed assets. Moreover, IRAs often offer lower-cost investment options when compared to employer retirement plans.
When taking required minimum distributions (RMDs) or taking distributions from tax-deferred accounts, it's important to consider the associated tax implications and engage in tax planning. Additionally, careful consideration should be given to selling the appropriate investments to facilitate distributions.
A key budget item is the cost of healthcare. Depending upon the circumstances surrounding your retirement, how you cover the cost of healthcare may vary over the course of your retirement.
In the case of a married couple, if one spouse is still working while the other spouse retires the working spouse may be able to add their spouse to their employer’s policy. If you are retiring as part of an early retirement package from an employer, check to see if they offer any extended health insurance benefits.
Medicare is the main vehicle to cover healthcare costs in retirement and it's important to learn as much as you can about the basic coverage offered by Parts A and B as well as other options such as drug coverage and Medicare Advantage plans. You can learn more about the basics of Medicare in our article here.
Prior to retiring, you should obtain a copy of your Social Security statement and review it for accuracy. It’s important to be sure that all of your earnings are properly credited to your record as this is the basis of how your Social Security benefits are calculated. If you find omissions it's important to contact the Social Security Administration immediately to get this corrected.
During this time period, you should also review your benefit levels based on claiming at various points in time. This will help you determine when is the best age at which to claim your benefit as part of your overall retirement financial picture.
If you are covered by a defined benefit pension plan from your employer, this is the time to be sure you understand how to claim your benefit and any options available to you as to how to receive your benefit and the benefit level based on when you claim it.
Most defined benefit plans offer the benefit as a monthly annuity payment. The payment amount may differ based on the age at which you commence your benefit. Some companies may also offer the option to receive a lump-sum payment versus the stream of annuity payments.
You will also want to ensure that your beneficiary information is up-to-date. If you are married, the beneficiary is generally your spouse, but you should verify to be sure.
You may also be entitled to a pension benefit from a former employer if they offered a pension plan and you were vested in a benefit prior to leaving that employer. Vesting typically occurs after five years. You should contact that former employer to be sure you are on top of what needs to be done to initiate your benefit.
If you have received any type of stock-based compensation from your employer, you want to be sure that you understand what needs to be done to take full advantage of this prior to leaving the company.
This might include stock options, restricted stock units (RSUs), or other vehicles. Be sure that you understand when and how to convert these vehicles to shares and also any restrictions on selling the shares if desired.
Many might think that once you retire worrying about taxes is a thing of the past. In fact, taxes are among the top issues that retirees need to focus on. During the year leading up to your retirement, you will need to do some tax planning in conjunction with formulating your withdrawal strategy. You will also want to look at the tax impact of pension payments and other streams of retirement income. Assisting clients with tax planning is a regular part of our services, both as they approach retirement and throughout their retirement years.
In the year leading up to retirement, or prior to that time, there are a number of planning issues to resolve and things to verify. The items listed above are a good starting point, your list may differ a bit depending upon your own unique situation. The more prepared you are, the more likely you are to enjoy a financially successful retirement.
If you are looking for guidance about your retirement plan or any other financial issues, please contact us to discuss. We are here to help.
Bill Canty, CFP®, CPA
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Maureen Walsh, EA, Tax Advisor
Tina Alteri, CPA, Tax Advisor
The terms financial advisor and broker may seem interchangeable to some investors. Both financial advisors and brokers are financial professionals. The main differences lie in the types of services offered and in the way they are compensated by their clients.
A broker is an individual or firm that acts as an intermediary between their clients and one or more security exchanges. The broker buys and sells stocks and other securities on behalf of their clients on these exchanges.
Brokers and brokerage firms are typically affiliated with a broker-dealer. Brokers are typically compensated through transaction fees such as commissions earned for facilitating trades for clients.
While the term broker typically conjures an image of a person, brokers can also take the form of online brokers. Investors can submit their trades and the online broker will execute them within their account. Some of these online brokers may be discount brokers who offer low or in some cases no transaction fees.
The more traditional full-service broker often works at a full-service brokerage firm. These brokers were often referred to as stockbrokers in the past.
If you have a 401(k) or employer retirement plan, it's highly likely that you are using a broker to facilitate your investments.
A financial advisor provides their clients with financial advice in a variety of financial areas including investments, retirement, estate planning, and other aspects of the financial planning process. Financial advisors or advisory firms will generally be registered Federally with the SEC (Securities and Exchange Commission) or at the State level. Registered advisors are required to pass the Series 65 exam administered by the NASAA (North American Security Administrators Association) or one or more of several other exams.
Many financial advisors operate on a fee-only basis, meaning that they are compensated for the services and advice they provide and not for selling financial products.
Most Financial Advisors offer a wider offering of services when compared to traditional brokers. Some of these services include:
Many financial advisors have also earned the Certified Financial Planner (CFP) designation. The CFP has a number of requirements, including:
The CFP is considered to be the gold standard of professional designations for financial advisors.
This aspect can be very confusing for investors looking for the right type of financial professional for their needs.
Brokers are generally compensated by sales commissions or sales charges, called loads, from the sale of various financial products. This might include stocks, bonds, mutual funds, ETFs, and other types of securities. Additionally, they will also receive compensation from the sale of annuities and life insurance if applicable.
Many financial advisors adhere to a fee-only model. This means that the client pays the advisor for the advice they provide. There are a number of variations of this model, including:
When discussing compensation with a financial professional you are considering working with, or one with whom you have an existing relationship, ask questions about ALL ways in which they are compensated for working with you. Be sure to fully understand the broker or advisor’s compensation structure and any potential conflicts of interest this can lead to.
Financial advisors who are registered with the Securities and Exchange Commission, in many States, and those who are CFPs are held to a fiduciary standard. This means that they must put the interests of their clients first.
Brokers and others who work through broker-dealers are generally held to lower standards in terms of their duty to their clients. The suitability standard states that advice and product recommendations must be suitable for someone in the client’s approximate situation, but not necessarily for the client’s specific, exact situation.
The regulatory situation is evolving in terms of the duty of care that both financial advisors and brokers must adhere to. Again, be sure to ask any advisor or financial professional that you are considering working with if they are a fiduciary and if they will put this in writing. If they refuse, this again is a red flag.
Canty Financial is a fee-only registered advisor who works with clients as a fiduciary. We are transparent about fees and all aspects of our dealing with clients. We encourage client questions and will always provide full disclosure as to our fees, our compensation, and why we are recommending a particular investment or course of action.
Please feel free to reach out to us if you have any questions about your investment accounts, taxes, or financial planning. We are here to help.
Bill Canty, CFP®, CPA
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Maureen Walsh, EA, Tax Advisor
Tina Alteri, CPA, Tax Advisor
Asset location pertains to the types of investment assets that are best held in various types of accounts. Asset location is a tax minimization strategy that matches various types of investments with the type of account best-suited for that type of investment holding.
Asset location is about strategically holding investments in accounts where you are likely to achieve the highest after-tax returns. This includes taxable investment accounts, tax-deferred accounts such as a traditional IRA or 401(k), or tax-free accounts which are usually Roth accounts.
Due to the nature of dividends, interest, or capital gains connected with certain types of investments, it might be most tax-efficient to hold them in one type of account versus another. This is the essence of asset location.
While it is not always possible to align your entire portfolio in a perfect fashion in terms of asset location for each holding, it does make sense to pay attention to this when deciding which investment holdings fit best into your various accounts.
The following types of holdings can be well-suited for a taxable account:
Note at this writing we don’t know what, if any, changes the current administration might propose to the tax rates for long-term capital gains. If capital gains rates are drastically increased as some have speculated, this might change some of our thoughts above.
Certain types of investments may be best suited for tax-deferred retirement accounts such as traditional IRA and 401(k) accounts or tax-free Roth accounts. Some examples include:
Asset location can be an important consideration in investing as we all want to invest in the most tax-efficient way possible.
In our opinion, however, asset allocation should govern your investing strategy. This includes the types of investment vehicles, the asset classes included in your portfolio, and the percentage amounts allocated to each of the various asset classes.
Sometimes your situation doesn’t allow you to perfectly align the asset location of every holding within your portfolio. This might be a function of the relative size of the balances in your various types of accounts or other factors.
Where appropriate and feasible, we feel that using asset location principles to determine which holdings are located in various types of accounts makes sense for most investors. However, we would caution investors to use good common sense in implementing an asset location strategy.
For example, incurring unnecessary taxable income to realign your portfolio generally defeats the whole purpose of asset location which is tax savings.
There are a number of ways to realign your portfolio to be more in line with an asset location strategy that best fits your situation. These include:
When considering an asset location strategy for your portfolio, it's important to keep both current and future tax implications in mind. For example, will you be in a higher or lower tax bracket in retirement?
Asset location should be implemented as part of your overall financial plan and your investing strategy. If done correctly, asset location can be a key tool in your tax planning efforts.
If you are looking for a fee-only fiduciary financial advisor who will always put your interests first, please give us a call to discuss asset location or any other financial issues. We are here to help.
Bill Canty, CFP®, CPA
Ed Canty, CFP®
Joe Canty, Investment Advisor Rep.
Maureen Walsh, EA, Investment Advisor Rep.
Tina Alteri, CPA, Tax Advisor
Estate planning is the process of ensuring that your assets are properly distributed to your heirs upon your death and designating who will handle your affairs should you become incapacitated. Estate planning is important for all of us, not just the ultra-wealthy. Here are some estate planning basics to consider.
The first step in the process is to take inventory of what you own. This includes everything from bank accounts to your home to investment and retirement accounts. It also includes non-financial assets such as art, collectibles and an array of other things. For business owners, this often represents a major component of their wealth.
Part of this process is to determine who should receive these various assets in the event of your death. If you are married, in many cases this will be your spouse. There may be assets that you would like to go to other heirs as well.
Another important part of this process is to review how each of these assets will pass to your heirs. This may include beneficiary designations, joint ownership or another method. It’s important to be sure that things are set up for each type of asset to correctly go to the people you desire.
One of the things we do with many of our clients is an “estate planning fire drill.” In other words, we help them look at what would happen to their various assets were they to die now. In some cases the results are eye-opening and not consistent with our client’s wishes. This is a good motivator to update their estate planning to reflect their current desires.
A will is the core estate planning document for most people. A will is a legal document that spells out your wishes for the distribution of your assets and property upon your death. It can also spell out your wishes regarding the care of any minor children. If you die with a will your estate may still be subject to probate, which can be an expensive and time consuming process. Assets that pass outside of a will do not have to go through the probate process.
In the case of minor children, if you don’t designate a guardian, the court might do it for you and they may end up with someone who you would not have approved of.
Some assets are passed to heirs via beneficiary designation, these override anything that might be contained in a will regarding these items. Beneficiary designations are often referred to as will substitutes. Retirement accounts such as IRAs and 401(k)s, the death benefit on a life insurance policy and annuities are prominent examples of assets where proper and up-to-date beneficiary designations are required.
As an example, if you are divorced and remarried and your intent is for the death benefit on your life insurance policy to go to your current spouse, you will need to change the beneficiary designation to reflect this.
Besides a primary beneficiary, don’t ignore secondary beneficiaries. These designations determine who receives the account or death benefit in the event the primary beneficiary were to die prior to your death.
The ownership of some types of assets is important for estate planning purposes. A house that is jointly owned with your spouse or another family member will generally avoid probate. Likewise with investment and bank accounts that are properly titled.
Life insurance can be a key component in the estate planning process. Life insurance can be used to build an estate and to ensure that your heirs receive the amount of the death benefit. Life insurance can be useful in funding a buy-sell arrangement for business owners.
Life insurance death benefits pass directly to the policy beneficiaries and are not subject to probate. Life insurance can be used to pay estate taxes that might be due either at the federal or state level. Life insurance can also be used to equalize the inheritance levels among various heirs. If certain assets are left to particular heirs, the life insurance benefit can be used to equalize the amount of the inheritance among your other heirs.
There are various types of trusts available and the right type of trust can be useful in estate planning.
One commonly used trust is a living trust. Under this arrangement, the trust is created, and your assets are retitled to the living trust. This might include investment accounts, bank accounts, real estate and other assets. The assets in the trust are used for your benefit while you are alive. Upon your death, the assets pass to the beneficiaries of the trust. Some benefits of a living trust include:
There are numerous trusts that can be used to handle various estate planning situations. We generally work with our clients to help determine if a particular type of trust is warranted and then work with their estate planning attorney to get the trust established and funded.
A living will is a document that is sometimes referred to as an advance healthcare directive. It provides direction regarding your wishes as to certain healthcare decisions if you are unable to provide direction yourself. It will spell out things such as whether or not you want doctors to take extraordinary measures to keep you alive under certain conditions.
A healthcare power of attorney is another type of advanced directive that designates someone to make these decisions on your behalf if you are unable to do so.
Having an appropriate advanced directive for your healthcare in place can save your family a lot of grief and can help preserve your estate based on your wishes.
You’ve worked hard to accumulate assets and to build an estate. You want your assets to go to the people or organizations that you choose. Proper estate planning can help ensure that the heirs of your choosing benefit from your hard work and success upon your death.
If you are looking for a fee-only fiduciary financial advisor who will always put your interests first, please give us a call to discuss your estate planning or any other financial issues. We are here to help.
Please call us at 518-885-3230 or 239-435-0090 or email [email protected] to let us know if you have questions.
Bill Canty, CFP®, CPA
Ed Canty, CFP®
Maureen Walsh, EA, Investment Advisor Rep.
Joe Canty, Investment Advisor Rep.
Tina Alteri, CPA, Tax Advisor
The term “financial planning” is a common one that is often written about in the financial press. Many financial advisors list financial planning among the services that they offer to clients. We believe this is a critical part of the services that we provide our clients.
But what is financial planning? We think its important for our clients and for anyone considering our services to understand what financial planning entails.
The CFP Board defines financial planning as:
“Financial Planning is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.”
We concur with this definition, especially that it is a collaborative process. Here are the key points in the process from our perspective.
The financial planning process is about financial advisors devising strategies to help their clients achieve their various financial goals. A good financial advisor will ask their clients a lot of questions about their financial goals and then listen to the answers. Beyond any training or certifications that a financial advisor might have, their most important skill is the ability to listen.
Client goals may include saving for retirement, managing their income in retirement, saving for college, a new home or a host of others. Advisors should ask about a client’s goals regarding providing for dependents or family members via estate planning.
Client goals and priorities will vary among clients based on their age, family situation and a host of other factors.
A key part of the process is for the financial advisor to gather data from their client to use in their analysis of the client’s situation. Much of the data gathering concerns gathering formation about the client’s assets and liabilities. This includes retirement accounts, investments, a pension, ownership of business, stock-based compensation, real estate and a host of other types of assets. On the liability side your advisor should ask about any mortgages, business indebtedness, student loans and other liabilities you may have to others.
They should ask about any estate planning documents that are in place as well as any life, disability or long-term care insurance that is in place. Ensuring that all beneficiary designations on insurance policies and retirement accounts are up-to-date is a critical issue that can be dealt with here. Many financial advisors will ask for recent tax returns as well as there is a wealth of information there, and the return may raise some additional questions from the advisor.
Data gathering goes beyond financial information, the data gathering process should include details of the client’s family as well.
Once the financial advisor has gathered the relevant financial and personal data, and they are comfortable that they understand their client’s financial goals and risk tolerance it's time to develop the initial financial plan. This will include the advisor’s recommendations in areas like retirement planning, an investing strategy, estate planning, tax planning and other relevant areas. In the case of a business owner client it will likely include strategies around business exit planning if applicable.
Once your financial advisor has completed the initial version of the financial plan they should share this document with you to allow you time to review it. Once you’ve had a chance to review the plan the next step is generally a meeting with the advisor to review it together.
This review process is a good time to be sure you understand what the advisor is recommending as next steps. It is also a time to ask questions. It's important that you feel comfortable with the plan and the implementation steps that the advisor is suggesting. In some cases a look at the initial draft of the plan might cause the client to review their own goals and make some changes if needed.
This is all positive and any good financial advisor is glad to revise their plan based on their client’s input. The whole point of the financial planning process is to help clients visualize their financial goals and to buy into a strategy to achieve their goals.
Perhaps the most important part of the financial planning process is the realization that this is not a one-time thing. If you are working with a financial advisor on an ongoing basis, part of the periodic reviews they conduct with clients should include reviewing all or part of the financial plan to determine if things are on track.
In addition to determining if a client is on track towards a goal like retirement, the review process will help the advisor understand any changes in the client’s circumstances, or perhaps in their financial goals.
Life isn’t static and neither is the financial planning process. For example, if your investments have performed better than expected, the advisor might adjust your asset allocation to reduce risk a bit to help preserve your investment gains.
Clients change their plans as well. If a client decides to retire early, either voluntarily or due to a layoff, this will have an impact on their financial plan and will likely call for some adjustments. The death of a spouse, a divorce or leaving a job to start a business are all life situations that will likely call for adjustments to your financial plan.
One way to judge if you are working with the right financial advisor is the frequency and quality of their communications with you. Updates in the form of reports or newsletters are great. Beyond this, a key issue to consider is whether or not your advisor asks questions on a regular basis.
This should start with your initial meeting with them and through the process of developing the initial financial plan. But the process of asking questions and listening to the answers is something that a good financial advisor will do throughout their relationship with you.
This might be the most important part of the financial planning process. Asking questions and getting clients to discuss issues of importance to them is the best tool that an advisor has to help them in determining if changes to a client’s financial plan are needed.
If you are looking for a fee-only, fiduciary advisor to help you develop a financial planning strategy now and through the years, please give us a call to discuss your situation and see how we can help you.
Bill Canty, CFP®, CPA
Maureen Walsh, EA, Investment Advisor
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Tina Alteri, CPA, Tax Advisor
Taxes, investments and financial planning are more intertwined than ever. Decisions about investments and financial planning increasingly include weighing the tax implications. Add in the multitude of potential changes in the tax legislation proposed by Congress and the need for an expert financial and tax advisor who understands your entire financial situation is more critical than ever.
If these experts are the same person, or at least within the same firm, they have the benefit of understanding your total financial situation inside and out. While having your financial advisor prepare your taxes can offer a number of advantages, it's important to be certain that any advisor touting both types of services is truly qualified in both areas.
Here are the benefits of having your financial advisor also prepare your taxes.
Your financial advisor is involved in all aspects of your financial situation from general financial planning to retirement planning, investing and more specialized areas of planning such as business succession planning. They also likely have a good handle on your monthly budget, especially if you are near or in retirement. All of these areas have a number of tax implications. Your financial advisor will have first-hand knowledge of what is happening that they can use in preparing your taxes and providing tax planning advice.
If your financial advisor is also your tax professional, they have access to all of your tax and financial information. This can help your advisor run a number of alternative scenarios to determine if a financial planning or investment move makes sense from a tax perspective as well, and if so the impact of doing more or less of a suggested financial planning or investment alternative.
Tax planning is one of the most significant components of financial planning. In order to provide the client with an in-depth financial plan, a financial advisor needs to know that client's tax situation. Some financial advisors do not even take a client's tax situation into account when providing investment advice, which we think is a major red flag.
Tax planning is not a one time event. Your tax situation constantly changes year by year and it is important that your advisor is aware of these changes in your life. As your tax situation changes throughout life it will cause your advisor to make adjustments to your financial plan.
There are many components of financial planning that take taxes into account. Some examples of these are Roth conversions, capital gain realization, IRA withdrawals, tax loss harvesting and asset location. At Canty Financial we believe that Investment advising and tax planning go hand in hand. In order for an advisor to provide the best quality of service we think it is essential that they offer tax planning as well.
As the legendary folk rocker Bob Dylan said, “For the times they are a-changin'.” Changes proposed by Congress touch on a number of areas including certain Roth conversion strategies, estate planning, what can be held in retirement accounts, capital gains taxes and tax rates in general. In our experience, the one sure thing about tax and financial planning rules is that they are always changing.
Many, if not all of these proposed changes can impact clients of financial advisors. Having a coordinated team of tax professionals and financial advisors working together in the same firm can help streamline strategies to offer clients with the best guidance possible.
When a client has to deal with a separate financial advisor and tax advisor, often something gets lost in the translation so to speak.
One of the issues we often work with our investment clients on is asset location. This entails deciding which types of investments to hold in taxable accounts versus in tax-advantaged accounts like an IRA or their 401(k).
A lot of this is about being tax-efficient. A financial advisor who also does your taxes has a leg up in our opinion in providing advice on issues like asset location.
Some may think that your tax issues are over when you retire. In our experience nothing could be further from the truth. A case in point is crafting a retirement withdrawal strategy that maximizes your income and does so in the most tax-efficient way possible.
A financial advisor who is also your tax advisor has a leg up in helping you craft a tax-efficient retirement withdrawal strategy. Key factors will be your income in retirement, your age, whether or not you are drawing Social Security and the types of investment accounts available to you. The latter includes traditional and Roth retirement accounts, as well as taxable accounts.
Minimizing your tax liability when tapping your retirement nest egg is a key factor in helping to ensure that you don’t outlive your money in retirement. Planning around required minimum distributions, any pension income or income from employment can help determine which accounts to tap in which order.
This is not a one-time analysis, but rather something that we update annually with most clients based on their changing situation and any changes in the tax rules. Again, being both our client’s financial and tax advisor gives us a leg up in this critical aspect of retirement planning.
As our clients make plans to pass their wealth on to their heirs, we have found that estate planning is a very tax-intense area. Changes in the rules such as those for inherited IRAs under the SECURE Act are a prime example.
The tax rules surrounding certain types of trusts as well as annuities and life insurance can be complex. Proposed changes by Congress would limit the ability of people to pass on their appreciated investments and even a small business in a tax-advantaged way with the elimination of the step-up in basis above certain asset and income limits.
As both financial planners and tax advisors, we have in-depth knowledge of the tax and financial implications of different planning strategies. We help our clients devise the right strategies to maximize their wealth.
These are just a few examples of why your financial advisor should be preparing your taxes. Of course you will want to ensure that any financial advisor who holds themselves out as a tax expert truly is one.
We have been meeting the financial and tax advice needs of our clients for many years. We’d love to discuss how our services can help you integrate your financial advice and tax preparation needs under one expert umbrella.
Bill Canty, CFP®, CPA
Maureen Walsh, EA
Ed Canty, CFP®
Joe Canty, Investment Advisor
Tina Alteri, CPA, Tax Advisor
Hiring a financial advisor is an important decision. Whether this is your first relationship with a financial advisor, or you are replacing an advisor who is no longer right for your needs, it's important to do all you can to ensure that you are hiring the best financial advisor for your situation. Asking the right questions is a critical part of the process. Here are some questions to consider asking a prospective financial advisor.
It’s important to understand your advisor’s qualifications and experience. How long have they been in the business? What is their educational background? Do they have any professional designations such as the CFP® certificate, a CPA designation, have they passed any parts of the CFA exam or do they have an MBA? These are similar questions that you might ask of any professional you are considering in other areas of your life.
It’s important to understand how any financial advisor that you are considering is compensated. Fee-only advisors are compensated based on a percentage of the assets they manage for clients, via a flat-fee retainer or on an hourly or project basis. All of these compensation options are fees paid by the client.
Some advisors may be compensated by fees or commissions from products they sell. This might be from sales loads on mutual funds or annuity and insurance products. In some cases they may sell managed account services whereby your money is managed by a third-party asset manager who typically uses expensive, fee-laden investments in the managed account.
Learn more about advisor compensation and the importance of a fee-only financial advisor here.
It’s important to determine if a financial advisor that you are considering working with works with clients in similar financial and life situations as yours. This is similar to selecting a doctor. If your foot hurts you likely wouldn’t go to a dermatologist.
While financial advisors often work with a variety of clients with different planning needs, you want to be sure that you aren’t the first client they will have worked with in your particular situation. If you are a business owner looking to fund your exit strategy or perhaps a senior company executive nearing retirement, you want to be sure you select a financial advisor with experience helping clients like you.
A financial advisor who acts as a fiduciary toward their clients puts the interests of their clients first in all financial recommendations they make, period. This often aligns with an advisor’s compensation and is a reason why we have chosen to work as a fee-only advisor.
Don’t be afraid to ask any advisor you might be considering if they are a fiduciary and ask them to put that in writing for you.
Conflicts of interest often arise from how the advisor is compensated. We are not saying that advisors who are compensated as fee-based, which is generally part fees and part commissions on some product sales, do not offer solid advice. Rather compensation arrangements linked to the sale of a financial or investment product can lead to conflicts of interest where the advisor puts their financial interest above that of their clients.
Be sure to ask a prospective advisor about any and all conflicts of interest they might have in working with you as a client. Ask them to disclose these potential conflicts in writing to you.
Every client's needs are a bit different, and they may evolve over time. It’s important to know what services a financial advisor offers. Do they just do financial planning work? How about providing in-depth investment advice including managing your portfolio? On the investment side, it's important to understand the advisor’s investment process to ensure it is in line with your needs and expectations. Do they use managed accounts from a third-party firm or do they construct a portfolio from scratch based upon unique needs?
Does the advisor incorporate tax planning into the overall advice that they provide? Can they help with complex estate planning issues including business succession and others?
One thing we learned from the Bernie Madoff scandal is that it is important to know where your money is being held. Madoff acted as both the investment advisor and the custodian for his client’s assets making it easy for him to have committed the fraud that he perpetrated on his clients.
It’s important to know where your financial advisor will be housing the assets that they will be providing advice on. You will want to be sure this is an independent, third-party custodian. You also want to be sure to understand how you can view your account online and how you can access your money if needed. While this would likely be done via your advisor, it’s your money and you should be secure in the fact that you can access it when and if it's needed without any hassles or roadblocks.
If a prospective advisor tries to convince you that their private custodial services are a better option, this should raise a big red flag. We suggest that you exit any meeting with such an advisor immediately and look elsewhere for advisory services.
It’s important to ask questions of any financial advisor that you might be considering. The questions above as well as others will help give you a flavor of what it might be like to work with this advisor and their firm. If you are looking for a fee-only, fiduciary advisor we’d love to talk with you. Please give us a call to discuss your situation and how we might be of help.
Bill Canty, CFP®, CPA
Maureen Walsh, EA, Investment Advisor
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Tina Alteri, CPA, Tax Advisor
Ballston Spa: 518-885-3230
Naples: 239-435-0090
We are in the midst of the greatest intergenerational transfer of wealth in history. Financial services research firm Cerulli Associates estimates that nearly 45 million U.S. households will transfer over $68 trillion in wealth over the next 25 years.
If you are the recipient of an inheritance, how should you adjust your financial plan? Our discussion below assumes the inheritance is not received from your spouse.
While everyone’s situation is different, it’s best not to adjust your financial planning on the expectation of receiving an inheritance. While it might seem likely that you will receive something from parents or perhaps other relatives, things can change over time. Families can have a falling out, or the person from whom you were expecting the inheritance might hit financial troubles that deplete their wealth.
It’s easy to overestimate the size of an expected inheritance as well. Data from the Federal Reserve indicates that about 50% of all inheritances amount to $50,000 or less. About 30% are in the $50,000 - $250,000 range. Roughly 2% of all inheritances are in excess of $1 million.
In all cases when a client receives an inheritance we help them look at how this money fits into their financial plan. This will depend upon the size of the inheritance and the state of their financial situation.
Regardless of the size of the inheritance, it makes sense to look for areas of your financial situation where the money can be best applied. These might include:
Depending upon the size and nature of the inheritance, one or more of these areas might be addressed with the inheritance.
The form in which the inheritance is received may dictate some planning on your part before you put the money to use. If the inheritance is received as cash, that’s pretty easy to deal with.
A cash inheritance might come in the form of a life insurance death benefit from a policy in which you were a beneficiary. Or you might inherit the balance in a bank account. However, this is not always the case.
Inheritances can come to heirs in a variety of ways. This can include securities such as shares of individual stocks, ETFs and mutual funds. It could take the form of real estate, art and collectibles or an interest in a privately held business.
The inheritance might come in the form of the deceased’s IRA or 401(k) account. With the advent of the SECURE Act at the beginning of 2020, the rules surrounding inherited IRA accounts for most non-spousal beneficiaries changed drastically. These beneficiaries are now required to withdraw the entire account balance within a ten year period.
Depending on the nature of the assets inherited, there may be tax or liquidity issues to deal with.
In the case of publicly traded securities, they can generally be sold any day the markets are open. With these assets, you may receive a step-up in basis, meaning that your cost basis will be the market value on the date of death, not the deceased’s original cost basis. In the case of highly appreciated stocks, ETFs or mutual funds this can save a huge amount in capital gains taxes if you sell the shares.
Real estate can also experience a step-up in basis in some cases as well. Assets like real estate, art, collectibles and others will not be as liquid as publicly traded securities. Besides the potential for a longer time horizon to sell these assets, they may or may not bring in the amount of money you are hoping for.
In the case of an interest in a privately held business, how you proceed will depend upon whether you are or would like to be involved in the business or whether you are looking to sell the business interest to other owners of the business or to an outside third party.
Taxes can also come into play in some cases. With the federal estate tax at $11.7 million for 2021, not many of our clients have to worry about this tax. However, there may estate taxes at the state level depending upon where you live.
Regardless of the size of the inheritance, it's important to make a plan for the money once it's available to you to use.
When we advise our clients on how to integrate money from an inheritance into their financial plan we look at a number of factors.
First we start with the size of the inheritance. If it is smaller, say in the $50,000 range, we might look at one or two targeted uses. This may be to help pay for their children’s college education, to pay off a debt or add to their investment portfolio.
For a larger inheritance, we suggest that clients focus on investing the major portion of this money for the longer-term. This often means incorporating this money into their investment strategy as part of their portfolio.
We may suggest using some to cover college costs for their kids or grandchildren. In some cases we may suggest using a portion to retire the remainder of their mortgage, especially if the client is nearing retirement.
We always want to be sure our clients have a sufficient emergency fund, so we may suggest that some of the inheritance be earmarked for this purpose.
Especially with a larger inheritance, it's OK to use some of it to buy something you want. Perhaps that’s a sports car. Maybe this is funding you need to take that around the world trip you’ve always dreamed of.
This type of expenditure is fine with a portion of the money, but overall we advocate that our clients incorporate the money from an inheritance into their financial plan to ensure they are able to achieve their goals, whether that’s retirement or something else.
If you are looking for a fee-only fiduciary financial advisor who will always put your interest first, please give us a call to discuss an inheritance or any other financial issues. We are here to help.
Bill Canty, CFP®, CPA
Maureen Walsh, EA, Investment Advisor Rep.
Ed Canty, CFP®
Tina Alteri, CPA, Tax Advisor
Joe Canty, Investment Advisor Rep.
