When market volatility takes investors on a wild ride, fear and panic are common responses to this stock market roller coaster. Acknowledging these emotions may be a good first step, but acting upon them could result in impulsive, irrational decisions. Many experts warn investors to never let emotions drive their investing decisions but that’s easier said than done.1 What can you do to stay calm while markets are volatile?
One of the important decisions a business owner must face is when and how to step out of the business — in other words, business succession planning. Do you expect to retire from your business? Do you have a plan in place? What would happen to your business if you were to die today? Do you have children you hope to bring into the business? These are questions only you can answer, and your answers will lead you and your financial and legal advisors to a course of action.
When you develop a succession plan for your business you have two basic choices: you can sell your business, or you can give it away. Once you choose to either sell or gift, you can structure your plan to go into effect during your lifetime or at your death.
Many parents were not educated on investing themselves and therefore have no knowledge to pass on to their children. In addition, many children do not receive proper education on investing and finances through their school curriculum.
Making investing possible for your children, nieces, nephews and other loved ones may be the key to improving their financial future and getting them off to a good start in adulthood. Here are a few ways to help your children develop good habits regarding saving and investing.
In golf, as in finances, there are a few rules of thumb that may improve your game: keep a level head, avoid traps, practice before trying something new and stay the course. Applying lessons from the golf course to your financial life and vice versa may help you improve your game in both arenas. Here are three tips that may help you work toward success on and off the golf course.
Optimizing your Social Security retirement benefits means getting the best return possible on each dollar you've contributed to the system.
Once you are in your 60s, you are likely to focus less on growing your retirement funds than answering, "When do I retire?"
Spring can be a fantastic time to refresh your retirement plan and savings habits. With 2023 bringing increased limits for 401(k)s, individual retirement accounts (IRAs), Health Savings Accounts (HSAs), and other tax-advantaged accounts, it's worth taking a closer look at your retirement savings
Retirement is an exciting time, but it can be tough to leave behind the safety net of a stable income or the work routine you’ve followed for decades. Many seniors who reach retirement age end up working part-time; this can be for a variety of reasons, including wanting more spending money, miscalculations in retirement savings, or just a desire to experience new types of work.
Without credit, it may be difficult, even seemingly impossible, to participate in modern society. But some credit comes with high-interest rates, tricky terms, and other potential risks that could send you into excessive debt. What should you know before you open a new line of credit?
If you're thinking about working in retirement, you must consider a few things before making your decision. As you get older, the question of when to collect Social Security retirement benefits and how your monthly payment may be impacted by working is essential.
Each year, some of the biggest companies in the world fall victim to data breaches—in 2020, this list included Microsoft, Facebook, and Instagram. But just because small businesses aren't dealing with billions of electronic records like Amazon or Google doesn't mean they aren't just as vulnerable to data breaches.
Make sure you think about potential disruptions and plan ahead of time
Families inherit money and sometimes make the right moves investing and spending. Inheritances can also ignite disruption, divorce and a host of bad behavior – far from the hopes and plans of the benefactor.
Worried About Your Financial Health? It May Be Time For A Checkup
When was the last time you gave yourself a financial checkup? As the saying goes, there’s no time like the present. This is especially true when it comes to reviewing the current state of your finances and figuring out what you need to do to get – or stay – on track so you can pursue your financial goals. To do this requires you to take into account a variety of factors. Setting aside time to understand your financial condition and conduct an honest assessment of where you stand is a great way to get started. Before you jump right in, consider these seven steps that you can take to assist you in evaluating where you stand financially and to help you determine a reasonable course of action to plan for the future.
STEP 1: Evaluate Your Net Income, Income Sources, and Review Your Spending Habits
Do you know your net income? After all the benefits, social security, and taxes are deducted from your paycheck; you are left with your net income. This can be an eye-opener for some people. Say somebody gets hired at $60,000 per year. You will not be bringing $60,000 home. Hypothetically speaking, if you live in South Carolina, you pay federal income taxes, state income taxes, social security, and Medicare which amounts to over $14,200. That $60,000 just became a little more than $45,500.
Don’t forget: you also have to consider how much you pay for health insurance, vision, dental, and possibly life insurance if you have it. Knowing your net income is important because you have to be aware of how much money you bring in (income source) and, conversely, how much is going out. There are monthly bills, food, gas, entertainment, childcare, and more.
STEP 2: Recognize How Rising Inflation and Interest Rates Will Affect You
The inflation rate has not been this high in nearly half a century. Interest rates are also rising. Because the cost of living is noticeably going up, there are a few things you can do to soften the burden on your wallet. Understanding your daily, weekly, and monthly spending habits and sticking to a budget may help you better manage your financial situation while you adjust to current inflation and interest rates.
According to a survey by The Penny Hoarder, over 55 percent of Americans do not use a budget to manage their income, and 56 percent of respondents said they didn’t know how much money they spent last month. [i]That is a big difference. Here are a few tricks to help you manage your money and your spending habits:
· Review your account statements and list the amount of money coming in.
· List the weekly and monthly expenses, including groceries, gas, entertainment, debts owed, and bills. Money can seemingly disappear if you are not taking account of your expenses, if you are not spending wisely, or if you are spending more than you are earning.
· If extra money is in your bank account, consider saving and investing it.
· In today’s technologically advanced world, there are even “apps” available that can be uploaded to help you monitor your spending and offer budgeting tips.
· Work on eliminating unnecessary expenses. Be honest with yourself about where the money is going.
· Consult with a financial professional to help you develop a financial plan that is appropriate for you and your specific situation.
STEP 3: Consider Investing
Investing is a way of taking money that you have saved and potentially growing your wealth over time. It is essential to understand the value of careful and knowledgeable investing instead of keeping your cash locked up solely in bank accounts that typically generate minimal returns and is tempting to spend. The real benefit of investing is the preservation and growth of your wealth. There are a few ways that you can invest. Having a diversified portfolio, especially in an unpredictable market, is wise in case one segment of the market falls harder than other industries. A few ways to invest include:
· Stocks – Buying stock is having ownership in a company. When you purchase, say, five shares of Amazon stock, you have now become a partial owner of Amazon, and if they do well and the stock increases, meaning it is worth more than when you bought it, and you sell it, you just made money which is called capital gains (though it is recommended to hold stocks with the intention of being a long-term investment. Day trading, buying and selling, hoping stocks go up and selling for small profits is extremely risky!). There are a variety of different stocks that you can buy including common, preferred, domestic, international, penny, and more. [ii]
· Mutual Funds – A mutual fund is an investment company that pools the money of many investors together and invests the money in different assets, including stocks, bonds, real estate, and more. Each mutual fund consists of multiple companies. As an investor, you buy shares in the mutual fund, meaning that you are buying ownership in multiple companies compared to a stock that is one company. This type of investment generates income in two ways; one of them is through capital gains which, again, means that the value (the price) of the shares increases compared to the price you bought them. If you sell it when it is higher than when you purchased it, you make money. The second way is through dividends. Dividends are distributions of a company’s earnings to its shareholders. [iii]
· Retirement Accounts – These are savings accounts with tax advantages that focus on long-term investing and saving. They can be either through your place of employment or personal. A few types include 401(k), Roth IRA, Traditional IRA, SEP IRA, Simple IRA and Simple 401(k), a Solo 401(k), and more. [iv]
· Other Ways to Invest – Bonds, Education Accounts, Exchange-Traded Funds, Custodial Accounts, Real Estate, and more.
STEP 4: Saving Enough Money for Emergencies in a Volatile Market
There is always the possibility of an unexpected financial emergency, whether a medical bill, car issue, income loss, or other unforeseen challenges. Setting up an emergency fund is essential to prepare yourself for financial obstacles. The general rule of thumb is to keep enough money in your savings account to cover three to six months’ expenses. [v]
STEP 5: Pay Down Your Debt
If you live an average life, it seems that accumulating some debt, whether a home mortgage, a car, or a personal loan, is just part of the equation. Some days it might seem like trying to climb Mount Everest in flip-flops, but there are techniques you can try that might help you gradually get ahead of the debt. These techniques include:
Debt Avalanche Method
You make the minimum payment on each account where you owe money but pay as much as possible to the one with the highest interest rate until it gets paid off. Then you apply this method with the second highest interest rate, and so on.
Debt Snowball Method –
You pay off the smallest balance first and then work up to the largest.
STEP 6: Keep Track of Your Credit Score
A solid credit score is essential in pursuing your financial goals. Many people do not regularly monitor their credit or even know what their current credit score is, but making regular payments on accounts you owe has the potential to impact it tremendously. If possible, you want to try and pay off any credit card or personal loan balances in full. Stay on top of it, even if you cannot pay in full at this moment in time.
STEP 7: Work With a Financial Professional
Trying to manage your finances and complete everything involved on your own can potentially be overwhelming. The hassle of collecting and organizing your financial information can be a nightmare by itself. Having an experienced financial professional in your corner may help you navigate the complexities of financial planning and you can work together to mitigate mistakes that could cost you in the long term. Take the time to research and consult with a financial professional so you can start planning today for you and your family’s future.
[i] These Budgeting Statistics Show Most of Us Don’t Track Our Spending (thepennyhoarder.com)
[ii] Types of Stocks: Understanding the Different Categories (fool.com)
[iii] Mutual Funds and ETFs (sec.gov)
[iv] Types of Retirement Plans | Internal Revenue Service (irs.gov)
[v] An essential guide to building an emergency fund | Consumer Financial Protection Bureau (consumerfinance.gov)
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Investing in mutual funds involves risk, including possible loss of principal. The funds value will fluctuate with market conditions and may not achieve its investment objective. Upon redemption, the value of fund shares may be worth more or less than their original cost.
Dividends payments are not guaranteed and may be reduced or eliminated at any time by the company.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Financial Marketing Solutions.
LPL Tracking #1-05335330
Financial wellness, like physical wellness, isn’t something you should ignore. Instead, it's a critical concept for anyone who wants to be knowledgeable and confident about their finances, and in fact, financial wellness is so important that more than half1 of employers now offer financial wellness programs to their workers.
So, what is financial wellness and why is it so important? Keep reading for an overview of this concept.
What Is Financial Wellness?
Financial wellness refers to having a happy, healthy, and relatively stress-free relationship with your finances. Typically, people who have financial wellness have the following four elements in place:
Their income covers their expenses and allows them to stay on top of their debt repayments.
They have savings for emergencies or financial upsets such as critical home repairs, unexpected medical bills, or job loss.
They are saving and working toward long-term financial goals.
They have the freedom to make choices that allow them to enjoy their lives.
Which Factors Determine Your Financial Wellness?
The amount of money you earn plays a significant role in your ability to create a plan for financial wellness, but this is certainly not the only factor you need to take into account. You should also consider how you manage your money.
For instance, someone could make a million dollars per year but feel stressed due to overspending, not having a savings account, or being in an excessive amount of debt. In contrast, another person could earn $100,000 a year and have financial wellness due to managing their money carefully.
How Do You Manage Financial Wellness?
If you are having trouble with financial wellness, look for tools and education to help you develop a healthier relationship with your finances. Depending on your situation, this may involve attending financial seminars, using budgeting apps, or working with a financial professional.
Ultimately, to help you pursue financial wellness, you should consider bringing the following elements together:
Earning a sustainable income
Getting control over your day-to-day and month-to-month expenses
Creating and maintaining effective money management strategies
Setting up a savings account for financial emergencies
Outlining long-term financial goals
Saving for your long-term financial goals
Why Is Financial Wellness Important?
Financial wellness is critical for all people because it can help lower your stress levels. Stress related to money can affect every aspect of your life. Your personal and professional productivity could potentially suffer due to financial worry. In fact, this is one of the key reasons that so many employers offer financial wellness programs. Employers are well aware of how stress reduces productivity, and recognize that helping their employees learn about financial wellness can help strengthen the business's bottom line.
Financial wellness can help you in the long run. If you're focused on financial wellness, you're also working on your long-term goals, and as a result, you are likely to enjoy both your present and your future more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult a financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources
1. https://www.forbes.com/sites/johnwasik/2019/10/11/why-you-need-financial-wellness/?sh=48e0d59e55d6
Content Provider: WriterAccess
LPL Tracking: 01-05080839
If you struggle to find a gift for the person who has everything—or want to do your holiday shopping without having to leave the house—consider giving stock as a gift. Doing so is easier than you think, and it may offer a few benefits for you as well. Here is some information on giving stock as gifts and the benefits of doing so.
When it comes to giving stock as gifts, there is one key benefit for both the giver and the recipient.
If you held a stock until it increased in value, selling it could mean paying capital gains taxes. But giving the stock to someone else means transferring these gains to the recipient, allowing them to take possession of the stock at its appreciated price.1
For example, if you purchased 100 shares of a stock and each share is now trading for more than the purchase price, cashing the stock might mean paying capital gains taxes on the amount the investment increased. If you give this stock to someone else, this person begins with a stepped-up-per-share cost basis. If they later sell the stock once it goes up more, they may only owe taxes on the profits-per-share difference.
Giving stock as gifts may also be a good way to begin passing down wealth to the next generation while minimizing your tax obligation. Cashing out stock and passing along the cash may mean paying capital gains taxes. The proceeds may also be subject to income taxes. This tax may depend on the type of account holding the stock and how long the investment was in the account.
Transferring stock to your children, grandchildren, or other loved ones may help them learn about investing in the stock market while reducing the assets you may eventually want to pass down through the inheritance process.
There are a few different ways to give stock as gifts, but the simplest ones involve setting up a brokerage account.
If you plan to give stock as gifts to your children, a custodial brokerage account allows you to transfer shares and buy and sell stock on your child's behalf. Your child may take control of the account once they are a certain age, usually 18 or 21.
If you want to give stock to an adult with no strings attached, you may transfer them to that person's existing brokerage account—or open and fund a brokerage account for them yourself. Talk to your financial professional for more information on giving stock as gifts this holiday season.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Stock investing includes risks, including fluctuating prices and loss of principal.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
LPL Tracking #1-05337702.
1 How to Give Stock as a Gift (And Why Tax Pros Like the Idea), Nerdwallet, https://www.nerdwallet.com/article/investing/gifting-stock#
RECONCILING YOUR LOSSES IN A TOUGH MARKET THROUGH TAX-LOSS HARVESTING
It has been a tumultuous year for the investing community, with interest rate hikes, rumors of a looming recession on the horizon, and a seemingly continuous rising inflation that has left the U.S. and global market reeling. From the outside looking in, it might appear that investors don’t have much this year that can generate excitement. However, the downturn in your investments is not a complete loss. Some investors turn to a little-known strategy called “tax-loss harvesting.”
What is tax-loss harvesting?
The name tax-loss harvesting conveys a perception of complexity. However, it is not as ominous as it sounds. The IRS allows you to offset your gains with your losses in a taxable account. Individuals can ultimately offset $3,000 of investment losses against their taxable income, or if the investor has no capital gains to offset in the year the capital loss was “harvested,” they can carry the loss forward to a future tax return. There is no expiration date for this strategy. [i]
How does tax-loss harvesting work?
Tax-loss harvesting works by looking at the losing positions and determining if there is anything you can close for the amount of the gain that would be taxable. Typically if you have a profit and want to close one of the positions at a gain, you would add the amount to your income if held less than a year or generally pay 15 to 20 percent if held for more than a year. [ii]
Can I use any investment instrument?
One thing to keep in mind is that tax-loss harvesting only works on taxable investments. Certain retirement accounts, for example, a 401(k) or IRAs, are tax-deferred and therefore do not allow you to offset taxable gains. [iii]
Is there anything else I should be aware of when considering tax-loss harvesting?
Something else to be aware of is a “wash sale.” You cannot benefit from tax-loss harvesting if you sell an investment and repurchase it, having bought the investment 30 days before or 30 days after you sold it. So essentially, before you sell an investment for tax-loss harvesting purposes, ensure you did not purchase the same security in the last 30 days and refrain from rebuying it for 30 days after the sale. [iv]
How do you benefit from tax-loss harvesting?
You may be wondering at this point how you can actually benefit from tax-loss harvesting. The idea is that you can potentially lower your tax bill and earn a return on the money you would have paid in taxes. This technique has the potential to be complicated even for professionals working with investments, so it is highly recommended that you seek the guidance of a financial professional with tax-loss harvesting experience before attempting this strategy.
What is the first step that should be taken when considering employing the tax-loss harvesting strategy?
Consider consulting a financial professional to see if tax-loss harvesting could work for you. Tax-loss harvesting is not for everybody, but it can be beneficial for individuals where it is feasible.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Marketing Solutions
[i] How Tax-Loss Harvesting Works for Average Investors (investopedia.com)
[ii] Topic No. 409 Capital Gains and Losses | Internal Revenue Service (irs.gov)
[iii] 5 Situations to Consider Tax-Loss Harvesting - TurboTax Tax Tips & Videos (intuit.com)
[iv] How Tax-Loss Harvesting Could Boost Your Income This Year (forbes.com)
LPL Tracking # 1-05351867
Many parents may find it uncomfortable, or even believe it is unnecessary, to inform their children about personal finance matters. Yet, communicating openly with your family members can help to reassure them about your financial and health care wishes. This may also ease the decision-making process for your family in many important areas.
Many parents may find it uncomfortable, or even believe it is unnecessary, to inform their children about personal finance matters. Yet, communicating openly with your family members can help to reassure them about your financial and health care wishes. This may also ease the decision-making process for your family in many important areas.
As time goes by, informing your children of financial, estate, and medical arrangements that could affect the entire family helps everyone prepare and plan for the future. This does not need to include detailed facts and figures; however, you may want to consider sharing the following information with your adult children:
Life Insurance. Life insurance is typically purchased to provide a death benefit to help cover final expenses, estate taxes, outstanding mortgages, other liabilities, and lost income. Knowledge of the existence and location of life insurance policies can be of the utmost importance to children when settling their parents’ finances in a timely manner.
Other Insurance. Be sure to inform children of other insurance policies that you may have, including health, disability income, and long-term care insurance. If you’re age 65 or older, make sure your children have a basic understanding of Medicare coverage and are aware of any health insurance policies that exceed Medicare coverage. Older adults can greatly benefit when their children understand and follow appropriate procedures, as well as submit any necessary forms on deadline.
Wills. Preparing a will allows you to avoid leaving the disposition of your estate up to your particular state and its probate laws. To help ensure that your assets are distributed according to your wishes, both you and your spouse should prepare wills, review them regularly, and make necessary updates as circumstances change.
Although specific contents can be kept private, it is important to disclose the existence and location of wills to several family members or a trusted legal advisor. Keep in mind that bank safe-deposit boxes may be temporarily sealed at death, so you may want to choose an alternate location for this key document. For example, the original will may be left with your financial advisor for safekeeping.
Trusts. Trusts can help protect your estate from unnecessary taxation or mismanagement. Make sure to discuss pertinent terms with those who will be involved. As children reach adulthood, it is common for parents to select a responsible son or daughter to act as trustee in the event of the parents’ death.
Living Will. This document specifies your preferences regarding the administering or withholding of life-sustaining medical treatment. Under many state statutes, a patient must be considered “terminal,” “permanently unconscious,” or in a “persistent vegetative state” before life support can be withdrawn. Be sure to provide copies of living wills to anyone who may be involved with the health care of you or your spouse, and keep the originals in a safe, readily accessible place.
Health Care Proxy. This legal document allows you to appoint a person to act as an agent on your behalf to make medical decisions, should you become incapacitated. It is important to file a copy of the health care proxy with your primary doctor and your hospital, if possible. In addition, be sure that the individual appointed as your agent retains a copy.
Durable Power of Attorney. With a durable power of attorney, an individual or financial institution may act as an agent to oversee your legal and financial affairs, even if you become incapacitated. Grown children need to be informed of the steps that have been taken to ensure the competent direction of your finances, should the need arise. However, their actual involvement in your financial matters may be limited, according to your wishes. A power of attorney automatically terminates upon the death of the principal.
Assets and Debts. It can be beneficial for your children to know that you have compiled a list of your assets and debts, even if you choose not to show them the list. An asset list updated regularly may include information on your bank accounts, real estate holdings, pension payments, annuities, business agreements, brokerage accounts, boats, cars, artwork, collectibles, jewelry, or other valuables, and insurance policies. A debt list may include information on your current mortgages, consumer indebtedness, personal loans, and business obligations. For both lists, be sure to identify where the paperwork and associated files for each item can be found.
Initially, preparing these lists and the associated documentation may seem like an overwhelming task. However, once completed, both you and your adult children may experience a sense of relief in the knowledge that thoughtful planning was discussed and implemented according to your wishes.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This article was prepared by FMeX.
LPL Tracking #1-05215762
End of Year (EOY) Deadlines Checklist
For many of us, a new year is an opportunity for fresh starts and discovering the best versions of ourselves, but some things—like tax contributions and retirement deadlines—don't change much, if at all. And with that shiny new year right around the corner, meeting end of year deadlines and getting tax efficiencies in place now may prepare us for a smoother transition. Read on for several things you'll want to accomplish before 2022 draws to a close.
In 2022, a Keogh plan, or a tax-deferred pension plan that's available to unincorporated businesses or the self-employed, allows contributions of up to $61,000 per year—far more than the $20,500 that can be contributed to a traditional 401(k).1 But to take advantage of these tax savings in 2023, the taxpayer must establish (and contribute to) a Keogh plan by December 31, 2022.
Anyone with an IRA, 401(k), 403(b), 457, Simple IRA, or SEP IRA must begin withdrawing from these accounts at some point. These withdrawals, which are computed using the applicant's age, life expectancy, and the total balance of the account, are known as RMDs, and are subject to income tax.
The SECURE Act boosted the RMD age from 70.5 to 72. But because the penalty for failing to take an RMD (or for taking a distribution that's too small) can be a 50 percent excise tax, missing this deadline can be an expensive mistake.2
If you're likely to deduct more than the $25,900 standard deduction (for married couples in 2022) or $12,950 (for single filers in 2022), itemizing your deductions can make sense.3 But in order to itemize, you'll need to actually spend this money in 2022. Some of the expenses that can be itemized include home mortgage interest, property, state, and local income taxes, medical expenses, charitable contributions, and investment interest expenses.
Generally, taxpayers can deduct charitable contributions so long as these contributions are made in cash and don't exceed 60 percent of the taxpayer's adjusted gross income (AGI). However, certain "qualified" contributions can be deducted up to 100 percent of the taxpayer's AGI.4 Like other 2022 tax deductions and credits, these contributions must be made during the 2022 calendar year in order to be deductible.
The end of the year can be a good time to take stock of your holdings and rebalance them if necessary. You may find that the rise in certain sectors (like tech) and decline in others (like energy) has skewed your asset allocation; selling certain over performing holdings and reinvesting these proceeds according to your desired asset allocation can help bring your portfolio back into line. Before selling stock (and potentially incurring capital gains in the process), you may want to sketch out a rough draft of your federal income tax return to see whether your proposed stock sale will be enough to potentially move you into a higher tax bracket.
Sources
1 https://www.investopedia.com/terms/k/keoghplan.asp
3 https://www.investopedia.com/terms/s/standarddeduction.asp
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Asset allocation does not ensure a profit or protect against a loss.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
A YEAR-END CHECKLIST FOR TRADITIONAL & SAFE HARBOR 401(k) PLANS FOR AN EMPLOYER
The popularity of 401(k) plans today is because they offer certain tax advantages to employers and employees. For employers to qualify to have 401(k) plans, they must meet specified fiduciary responsibilities. Managing these tasks is complicated and can feel, at times, overwhelming. Receiving guidance from a financial professional can help you navigate the myriad of tasks you might face. We compiled a year-end checklist to help you get organized in preparation for that consultation with a financial professional.
☐ Have you completed all the required tasks?
☐ Has your plan document been updated within the past few years?
☐ Have you distributed the following required notices?
☐ Qualified Default Investment Alternative (QDIA) notice
☐ Safe harbor 401(k) notice (if applicable)
☐ Automatic (negative) enrollment notice
☐ Participant fee disclosure notice
☐ Forms or website instructions (for newly eligible employees)
☐ Beneficiary designations (for newly eligible employees)
☐ Have you completed the nondiscrimination tests? (This only applies to Traditional 401(k) plans)
The Employment Retirement Income Security Act (ERISA) requires several tests annually to ensure 401(k) plans do not discriminate in favor of employees earning higher incomes. The tests get broken up between non-highly compensated employees (NHCEs) and highly compensated employees (HCEs). To be considered a highly compensated employee, you need to:
· Own more than five percent of the interest in the business at any time during the year or the preceding year without regards to the amount of compensation earned or received. [i]
· Being in the top 20 percent of employees when ranked by compensation, or, for the preceding year, received compensation from the business of more than $135,000 (2022 and 2023), up from $130,000 in 2021.
Once the NHCEs and HCEs are identified, you look into the plan’s benefits, rights, and features to ensure they are non-discriminatory. The actual deferral percentage (ADP) and actual contribution percentage (ACP) tests are used for this purpose.
☐ Actual Deferral Percentage (ADP)/Actual Contribution Percentage (ACP) test
☐ Excess deferral (IRC section 402(g)) test (Included in the ADP test in the year the amounts were deferred)
☐ Annual addition (IRC section 415(c)) test
☐ Rate group (IRC section 401 (a)(4)) test [ii]
☐ Top heavy (IRC section 416) test. Lastly, the top-heavy test evaluates the overall benefits that key employees have accumulated. Suppose the total value of the plan accounts of key employees is more than 60 percent (different from HCEs) of the total value of the plan assets. In that case, the plan is top-heavy, and certain minimum benefits may need to be provided to the non-key employees. If a 401(k) plan is top-heavy, the employer must contribute up to three percent of compensation for all non-key employees. To be a key employee requires the employee to be:
· An officer making over $200,000 (for 2022);
· Be a five percent owner of the business; or
· An employee owning more than one percent of the business and making over $150,000 for the plan year.
A non-key employee is everything else. [iii]
☐ Are you up-to-date on contributions, distributions, deposits, and refunds to correct failed ADP/ACP tests?
· If your employees have Safe Harbor 401(k) plans you are required to contribute to their accounts whereas a Traditional 401(k) plan does not require it, but contributions can be made. Both Safe Harbor and Traditional plans have an annual contribution limit that may not exceed the lesser of 100% of your compensation or $61,000 for 2022 (possibly increasing as much as $67,000 in 2023; $66,000 if inflation is less than 0.25 percent per month for July, August, and September). [iv] This includes elective deferrals, employee contributions, employer matching, discretionary contributions, and allocations of forfeitures but does not include catch-up contributions for those aged 50 and older. However, if you are 50 or over, you qualify for catch-up contributions, increasing the ceiling to $67,500. [v]
☐ Matching or nonelective contributions made to appropriate employees under the plan terms
☐ Top-heavy minimum contributions made
☐ Hardship distributions made
☐ Safe harbor or Qualified Non-Elective Contribution (QNEC) contributions made
☐ Distribute contribution refunds to correct a failed ADP/ACP test with a 10 percent excise tax (non-safe harbor plans only)
☐ Distribute Required Minimum Distributions (RMDs) to participants that became RMD-eligible in the prior year
☐ Ensure employee salary deferrals and loan payments are deposited timely
☐ Cash-out account balances associate with terminated employee participants
☐ Process any defaulted loans
☐ Use any unallocated forfeitures
☐ Deposited employee elective deferrals
☐ Are all eligible employees identified and given the opportunity to make an elective deferral? [vi]
☐ Was form 5500 filed? [vii]
☐ If IRS form 5500 was not filed did you request an extension to file it using IRS form 5558?
☐ Have you taken the steps to seek guidance from a financial professional?
· There is a lot involved with year-end 401(k) planning if you are an employer. Still, with the help of an experienced financial professional, you can create a strategy to manage some of the potential challenges that come with completing the necessary fiduciary responsibilities.
Important Disclosures
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Marketing Solutions
Tracking # 1-05341284
Footnotes:
[i] Definitions | Internal Revenue Service (irs.gov)
[ii] 401(k) Annual Administration - A Checklist for Business Owners (2022) (employeefiduciary.com)
[iii] 401(k) Plan Fix-It Guide - The plan was top-heavy and required minimum contributions were not made to the plan | Internal Revenue Service (irs.gov)
[iv] 2023 401k Contribution Limits: 'Unprecedented' Increase Projected - 401(k) Specialist (401kspecialistmag.com)
[v] Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits | Internal Revenue Service (irs.gov)
[vi] Publication 4531 (Rev. 8-2021) (irs.gov)
