Transcript Basic PFP Strategies for the New Year

Basic Personal Financial Planning
Strategies for the New Year
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Introduction
About the PFP Section & PFS Credential
• The AICPA PFP Section provides information,
resources, advocacy and guidance for CPAs who
specialize in providing estate, tax, retirement, risk
management and investment planning advice to
individuals and their closely held entities
• The CPA/Personal Financial Specialist (PFS)
credential distinguishes CPAs as subject-matter
experts who have demonstrated their financial
planning knowledge through experience, education
and testing
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What we will cover
Estate tax changes and planning
Income tax changes and planning
Asset allocation and importance of saving early
Retirement planning and safe withdraw rates
Insurance
Get your questions answered
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Estate Tax Planning
Necessary for Everyone to have:
• Will
• Health Care Proxy
• Power of Attorney
• Living Will
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Key “Permanent” Estate, Gift, and GST
Changes under ATRA
Estate, Gift and GST exemptions set at $5,250,000
for 2013
Applicable exclusion amount will be adjusted for
inflation
Top transfer tax rate is 40% (up from 35% in 2012;
down from 45% maximum rate in 2009)
Spousal portability made permanent
GST Provisions extended
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Estate Planning
Planning
• Review and Update your Will, Health Care Proxy, Power of
Attorney and Living Will.
• Gifting of $14,000 per person per year available before using
any of your $5,250,000 Lifetime Exemption.
• 5 year rule still in affect for transfers made before a Medicaid
application.
• State Estate limits are not necessarily the same as the federal
limits.
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Income Tax Rates
Top Ordinary Income Rate - Salary
Top Ordinary Income Rate - Investment Income
Top Capital Gain Rate
Top Tax Rate on Dividends
Payroll Tax
Medicare Surtax on Investment Income
Payroll Surtax on Earned Income
Estate Tax Rate
2012
35%
35%
15%
15%
10.40%
0%
0%
35%
2013
39.6%
39.6%
20%
23.8%
12.4%
3.8%
0.9%
40%
2013 Adj
41.292% *
44.192% **
24.592% ***
24.592% ***
12.4%
3.8% ****
0.9%
40%
*Includes phase-out of deductions and 0.9% healthcare wage tax
**Includes 3.8% Surtax and phase-out of deductions
***20% base rate plus 3.8% Surtax plus 0.792% adjustment for itemized dedcutions
****Threshold amounts are $200,000 for single filers, $250,000 for joint returns,
and $11,950 for Estates/Trusts
© 2013 Keebler & Associates, LLP
All Rights Reserved
[email protected]
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2013 Ordinary Income Tax Rates
10%, 15%, 25% and 28% rates made permanent
33% and 35% rates made permanent up to certain
threshold levels—
Single taxpayers
$400,000
Head of households
$425,000
Married filing jointly or surviving spouse
$450,000
Married filing separately
$225,000
Income above these threshold levels taxed at 39.6%
Threshold amounts are adjusted for inflation
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Long-Term Capital Gains & Dividends
20% tax rate for taxpayers with income above the
threshold amounts
• Their capital gain rate will actually be 23.8%, including the 3.8%
Medicare surtax
15% tax rate for taxpayers with lower incomes
Qualified dividend treatment is made permanent
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Income Tax Planning
Child Tax Credit: $1,000 permanently extended after
2012
Dependent Care Credit: $3,000 ($6,000 from $4,800
for more than one qualifying child) permanently
extended after 2012
American Opportunity Tax Credit – credit for tuition
at post-secondary education extended through 2017
for joint incomes less than $160,000 (phase-out
after)
Education Assistance Exclusion from Employer
extended
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Income Tax Planning
Student loan interest deduction made permanent
Sales tax and local income tax deductions made
permanent
Alternative Minimum Tax: inflation adjustment for
exemption made permanent and fixed retroactively
• No need to “patch” the law.
Payroll tax cut expired
• New healtcare tax for earned income over $200,000 (single) and
$250,000 (MFJ) of .9%
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Income Tax Planning
Watch for key income and taxable income
thresholds to keep out of the top tax rate brackets
Reduce current AGI and taxable income, especially
if near a tax rate threshold
Save more in employer retirement plans
Reduce current taxable income through IRAs and
Roth IRAs, Roth conversions, deferred
compensation plans, municipal bonds, etc.
Watch investment income and plan capital gains to
avoid the extra 3.8% Medicare surtax.
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Asset Allocation
Each Investment Asset Class has an Expected
Return and a Standard Deviation.
Combining two or more Asset Classes has the Effect
of Increasing the Expected Return and Decreasing
the Standard Deviation of the Total Portfolio.
Look at All of your Holdings When Developing an
Asset Allocation; your 401(k), outside savings,
possible pension, spouse’s assets.
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Starting Early
Comparison of:
• A 21 year old saving $2,000 each year in the 401(k) plan for 10
years and then never investing again through retirement at age
67. Total invested = $20,000
• A peer who waits 10 years later to start saving and saves $2,000
each year in the 401(k) plan from age 31 to age 67; a total of 37
years. Total invested = $74,000
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Starting Early
Assumption made:
• Both individuals invest with Blue Ocean Strategic Capital, LLC
and enjoy a 7% annual rate of return from the moment they
begin saving until the age of 67.
• What will each person have at age 67?
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Starting Early
Of course you know the answer:
The 21 year olds $20,000 investment has grown to
$361,418 at age 67
The peer who started 10 years later and invested
$74,000 has a nest-egg of $343,122 or
$18,296 LESS.
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Starting Early
End up like this
Not like this
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Safe Withdrawal Rates
Now as you near retirement, what can you safely
withdraw from your savings and 401(k) plan to
assure that it will last the rest of your life; a
minimum of 30 years?
Or put another way – if I want to spend $XXX, how
much money do I need in my accounts to safely
retire?
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Safe Withdrawal Rates
Challenges of safe withdrawal rates:
• Stock and Bond Market Volatility.
• What is the Optimal Portfolio Allocation to Survive Volatility?
• How High of a Withdrawal Rate Would Have Survived any
Historical market Scenario?
• Sensitivity to the date of retirement (timing).
• Portfolio Changes to Manage Risk.
• Fees and Taxes.
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Safe Withdrawal Rates
According to a study performed by Michael Kitces,
Director of Research at Pinnacle Advisory Group,
the following facts are presented:
• Using rolling 30 year periods from 1868 to 1980, the safe
withdrawal rate ranges from a low of 4.3% to a high of 10.7%
with the 112 year average of 6.6%.
• The Safe Withdrawal Rate is Heavily Influenced by Early
Returns.
• Valuation Environments are Predictive of Safe Withdrawal
Rates.
• Volatility necessitates 2% reduction from Historical Averages.
• Taxes and Fees necessitates an additional .5% reduction.
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Safe Withdrawal Rates
In Summary:
• The Optimal Portfolio Mix is 60% Equity/40% Fixed.
• The Base Safe Withdrawal Rate is 4 – 4 ½ %.
• Adjust the Safe Withdrawal Rate on Current P/E Ratios
- P/E above 20.0 – use the Base
- P/E between 12.0 and 20.0 – Increase the Base by .5%
- P/E below 12.0 – Increase the Base by 1%
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Insurance
Types of life insurance
• Term
• Whole Life
• Universal Life
• Variable Universal Life
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Insurance
Other Insurance to own/consider
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Disability
Long-Term Care
Property and Casualty
Automobile
Umbrella
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The Top 5 Items To Do Financially
5. Establish a budget for your household that covers
your day-to-day expenses but also includes paying
yourself (meaning saving for retirement), saving for
short-term goals and saving for education. Include
planning for income and/or estates taxes through
strategies that take advantage of tax deductions and
credits to reduce AGI and taxable income.
4. Assess risk – Review insurances and determine if
you are sufficiently protecting your loved ones.
3. Make sure your Will, Health Care Proxy, Power-ofAttorney and Living Will are current and up-to-date.
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The Top 5 Items To Do Financially
2. Make saving for retirement a priority!
And the Number One Item…………
1. Remember that the science of asset allocation is
totally opposite of high school science – the more
things you mix together that have unlike properties
the less likely it is that it will blow-up in your face! In
other words, DIVERSIFY!
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Q&A
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Special thanks to Theodore J. Sarenski, CPA/PFS, CFP® and Robert
Keebler, CPA, MST, AEP (Distinguished) for contributing content.