Main Line 844-469-3904


Annual Bonus and Your 401(k)

The goal in retirement savings is to sock away as much as you can reasonably afford to.  Elective deferrals to company plans provide a mechanism to save money for retirement and defer income tax.

Elective Deferrals are amounts contributed to a plan by the employer at the employee's election and which, except to the extent they are designated Roth contributions, are excludable from the employee's gross income. Elective deferrals include deferrals under a 401(k), 403(b), SARSEP and SIMPLE IRA plan.

One issue with investing a percentage of your bonus, especially if you are a higher-income employee maxing out your 401(k), is that it might cause you to hit your annual contribution limit, currently, $19,500 ($26,000 if you are 50 or older), before the calendar year is up. And if you hit the $19,500 cap too early in the year, you could miss out on company matches in the later months. 

Here is an example, let's say you earn $200,000 and you are under age 50 (not eligible for catch-up contributions). By contributing 10% of your annual salary, you can stretch your contributions all the way into December. If you contribute any amount less than 10% you will not have contributed up to the $19,500 maximum by December. If you contribute more--let's say 15%--you will have already maxed out your $19,500 maximum contribution somewhere around the beginning of August, so you would miss out on collecting more than four months' worth of employer match. In the example above, 10% is the sweet spot in terms of 401(k) contribution percentage, where (depending on your salary) you are not exceeding the annual IRS contribution limit before the end of the calendar year, which will also allow you to also nab the full employee match. But also be aware that not all plans work this way--some plans match after-tax contributions or include provisions that "true-up" or reconcile the employer contribution to make sure employees get the maximum potential match. If you're not sure how your plan works, ask your benefits department or consult the plan document.


Highly Appreciated Investment and Capital Gains Strategy


Investors are often faced with having to take a potential capital gain on a highly appreciate stock, ETF or mutual fund investment when that investment begins to underperform and increases the risk in a taxable portfolio. This phenomenon often creates conflicting emotions as many investors seek to minimize tax or avoid them all together. Recently there are many examples of this due to a long bull market that appears to be entering its later stages and companies such as Facebook where headline issues have caused the stock to pull back significantly. The first instinct often is to sell the investment to reduce the risk and exposure. However, the realization that a large tax bill will accompany this transaction often will make an investor hesitate or not act at all. So, what can one do or how should one go about managing this issue.

First the good news is that paying capital gains tax means the investor has made money and that is ultimately the goal. In these situations, the tax treatment is typically long-term capital gains tax which is taxed at substantially lower rates than short term capital gains. A couple of ways to reduce the potential tax liability is to look for other positions to sell that may be at a loss either long term or short term. Those losses will be netted against gains and hopefully reduce tax liability. Carry over losses may also be applied if the investor has them. 

Other strategies are to donate the investment to a charity or donor advised fund and take a charitable contribution to reduce taxation and eliminate the investment from one’s portfolio. The investor in this case does not have the asset for personal use or the proceeds from a sale to use but they will get a tax deduction. The tax deduction will be for the Fair Market Value of the stock. The limitation on the amount of the deduction taken in the year donated will be 30% of Adjusted Gross Income (AGI) for a public charity or 20% of AGI for a private charity. Any amount left over can be carried forward for 5 years.

Two other strategies are to set up a capital gains budget by selling enough shares equaling an amount of capital gains the investor is willing to absorb and/or an amount of capital gains that can be absorbed by the investors current capital gains bracket without pushing them into the next higher tax bracket. Be careful to also consider the 3.8% Medicare surtax triggers at the higher income tax bracket levels. Lastly a Staggered or Staged Selling strategy may be used. This is where the investor agrees to sell at certain predetermined prices with a commitment from the investor to do so ahead of time regardless of market conditions. This is a more disciplined approach that requires the investor to understand that future growth in the investment can be lost in order to reduce potential tax burden's and further diversify the portfolio in order to reduce risk.



Aspects of the 2018 Tax Cuts and Jobs Act




The new tax plan will impact investors in many new ways. We will cover some of the more important aspects of the act and opportunities for 2018 tax year.

Rates, Exemptions and Standard Deductions

The new tax brackets for 2018 vs. 2017 are as follows:

















There has been some rate savings at the top 6 brackets and the income ranges that correspond with them have gone up which should help lower potential tax liabilities over all income ranges. The $4,050 tax exemptions have been eliminated for the taxpayer, payer’s spouse, children and other dependents. The standard deduction has almost doubled from $6,350 to $12,000 for single filers, $12,700 to $24,000 for joint filers. 90% of the people who will claim the standard deduction will likely see a lower tax bill and complete simpler tax returns. However, their opportunities for tax planning will also be limited to self-employment, fringe benefit and some credit strategies. One example many are talking about is the tax filer with a home in the $200,000 or so range and a mortgage of $160,000 will likely claim the standard deduction now eliminating the need to itemize deductions and reducing the tax incentives of home ownership.

Itemized Deductions

Many itemized deductions have changed.

Deductible medical expenses have a new threshold of 7.5% of taxable income down from 10%. This threshold was lowered for tax years 2017, 2018 and 2019 under the act. This may create and opportunity to schedule discretionary medical procedures to 2018 and 2019 under this new threshold.

State and Local Income, Sales, and Real and Personal Property Tax

The deduction on a filers federal return has been limited to $10,000. For high tax states like California and New York this will impact filers negatively. States such as California are exploring ways to help minimize the impact of the state and local tax deduction cap with restructuring how tax payments are characterized to include the portion that is more than the cap as a charitable contribution.

Mortgage Interest Deduction

Existing mortgages are grandfathered in and subject to the previous cap on interest expense on acquisition indebtedness of up to $1 million dollars. Under the Tax Act new interest indebtedness for up to two homes is capped at $750,000 for loans from December 15, 2017 through 2025. Interest on home equity loans is no longer deductible after 2017 through 2025. This also adversely effects tax filers in high property value states such as California.

Charitable Contributions

The deduction for charitable contributions remains unlimited but the amount deductible in any given year is subject to certain percentages of Adjusted Gross Income (AGI) depending on the type of property contributed. Any excess remaining is carried forward to be used in future years. Charitable cash contribution limitations have increase from 50% to 60% of AGI under the new law.

Tickets and Seating

The deduction for payments connected to the purchase of tickets and preferential seating at athletic events has been repealed.

Casualty and Theft Losses

The deduction allowance for casualty and theft losses is now allowed only for presidentially declared disaster areas.

Miscellaneous Itemized Deductions

Tax preparation fees, investment expenses and unreimbursed employee expenses after 2017 are now disallowed. Filers with significant unreimbursed cost for things such as employee expenses, mileage, internet and phone charges and education expenses are recommended to request an excludable working conditions fringe benefit arrangement or accountable plan from their employer.

Phase-out of Itemized Deductions

The phase out of deductions after higher levels of adjusted gross income levels has been eliminated under the new plan. For filers who are single and married with itemized deductions close to standard amounts a “bunching” strategy with discretionary deductible expenses may provide a tax planning opportunity. Discretionary expenses may include charitable contribution, medical expenses and the state and local taxes below the new $10,000 capped amount.

Alternative Minimum Tax (AMT)

2017’s AMT exemption is $54,300 for unmarried individuals and $84,500 for married individuals filing jointly. This exemption was phased out at $120,700 for unmarried individuals and $160,900 for married individuals filing jointly. The new tax act significantly increases these exemption amounts to $70,300 for unmarried individuals and $109,400 for married individuals filing joint returns. The phaseout thresholds have also been raised significantly. New threshold levels are $500,000 for unmarried individuals and $1,000,0000 for married individuals filing jointly. The effect of this is that many filers who have lost out on deductions, especially due to the state and local tax deduction cap, may pay more regular tax but may pay less total tax because they will now avoid the alternative minimum tax.

Child and Family Credit

The child tax credit increase to $2,000 per qualifying child under the new plan. $1,400 is refundable. It also adds a $500 nonrefundable credit for other qualifying dependents. The phase out ranges for this tax credit have been greatly increased from $110,000 to $400,000 for married filers filing jointly and from $75,000 to $200,000 for all other taxpayers.

The “Kiddie Tax” and Trust and Estate Tax

The new tax act completely changed the tax on unearned income of children. No longer does the parents income or the income of sibling’s factor in. Earned income is taxed at unmarried taxpayer rates. Net unearned income is taxed according to more unfavorable rates that are applicable to trusts and estates. Trust and Estates earning from $0 to $2,550 are tax at 10%, $2,550 to $9,150 at 24%, $9,150 to $12,500 at 35% and more than $12,500 at 37%.

Section 529 Savings Plans

The utility of the funds in these plans has changed to now include the use of up to $10,000 per year for a child’s elementary and secondary education for public, private or religious schooling.

Estate, Gift and Generation-Skipping

Under the new tax act, the exemption for estate, gift and generation-skipping tax has gone from $5.6million to $11.2million per individual. For couples it is now $22.4million. The income tax basis step-up or step-down at death remains.

Roth Conversions

No longer can an individual reverse a Roth conversion by re-characterizing it. A person can continue to contribute to their Roth IRA and re-characterize those contribution to a Traditional IRA if it happens before the due date of their individual tax return for that year.


The new law makes alimony and maintenance payments no longer deductible to the payor spouse or includible in the income of the payee spouse. Divorce settlement structures will certainly be impacted going forward.

Moving Expenses

The deduction for moving expenses is suspended under this law except for those in the Armed Forces (and their spouse and dependents) who are on active duty and move due to military order to a permanent change of station.

Before acting on any of the aspects discussed here, tax filers and investors should check with their accountants and advisors to make sure that their situation and needs are evaluated and proper advice specific to them is given.


Important Year End Estate Planning Task

Make sure your beneficiary designations are up to date and accurate.

  1. Check that the person or persons listed on all accounts that have beneficiary designations are the people you intend them to be.
  2. Make sure that the percentages given to these individuals are how you want them.
  3. Understand the type of designation you are making and what happens if one of your beneficiaries passes away before you do.
  4. Lastly, make sure that the beneficiaries on all of your accounts are coordinated properly with your wishes and other estate planning documentation.


Who Needs Estate Planning?

This chart comes from the College for Financial Planning and provides a quick reference guide for those wondering if they need estate planning.

Ultimately everyone can use some degree of estate planning weather it is simple Wills and Powers of Attorney to more sophisticated Trust structures designed to avoid taxation and provide instruction on who gets what and how they receive it upon death. 

Client Situation Primary Concern
Clients with minor children Need to provide for the personal and financial care of the minors in the event both parents die prior to the minors’ attaining the age of majority
Clients owning assets in multiple states Need to avoid ancillary probate so as to avoid increased administrative costs and estate shrinkage
Small-business owners Interest younger family members in the business; assure marketability of the owner’s interest if the interest is to be sold at retirement or death
Clients who have sufficient wealth to leave a taxable estate at death Ensure sufficient estate liquidity to pay taxes without having to sell estate assets
Clients who want specific assets (or a specific amount of assets) to pass to a specific beneficiary at death Need to avoid intestate distribution when property is not disposed of by will or will substitute
Clients in high-risk occupations, such as a doctor Need to protect personal assets from the claims of potential creditors
Clients who have non-U.S. citizen spouses Need to provide for spouse’s financial well-being after client’s death, but keep estate taxes to a minimum; the marital deduction is available only in limited circumstances
Clients who may become disabled in the future Need to appoint decision maker for medical and financial decisions; possibly qualify for Medicaid
Clients with domestic partners Need to avoid intestate distribution when property is not disposed of by will or will substitute



Roth IRA vs. Traditional IRA:Distribution Advantage

Roth IRAs have a specific advantage vs. Traditional IRAs when it comes to distributions.

For a Traditional IRA all distributions are deemed to consist of both contributions and earnings. This makes the entire distribution taxable becasue the contributions where made with pretax money.

Roth IRA potential distribution advantages over a Traditional IRA are based off of the order of distributions. There are three types of distributions that occur with Roth IRAs:

1) Return of Contributions: Principle is returned first, and there is no income tax or 10% penalty assessed on this portion.

2) Return of Conversion Amount: If there was a conversion of Traditional IRA money to a Roth IRA this money will not be subject to income tax, since it was taxed when converted. If the individual is under age 59 1/2 it will be subject to the 10% early withdrawal penalty if the funds have not been in the Roth IRA for at least 5 years from date of conversion.

3) Return of Earnings: Earnings come out last. They will not be taxed if it is a qualified distribution. Qualified Distribution is a distribution of money for an individual attaining 59 1/2 and the five year holding requirement has been met. If it is not a qualified distribution, then it will be subject to income tax and the 10% early withdrawal penalty for individuals under 59 1/2 years old.

Being able to distribute contributions first and avoid taxation is a big advantage of Roth IRAs. 



Taxes: Asset Location, Location, Location!

The old saying “It isn’t what you make, it is what you keep” is at the core of building an effective wealth management plan to achieve goals.

Taking time to get a complete understanding of a family’s total financial picture is key to developing strategies to effectively manage taxes. Taxes are inevitable and after tax returns are crucial to achieving wealth planning goals.

One strategy called Asset Location is a technique that can greatly enhance the amount of return that is kept and not paid out in taxes. Asset Location refers to how an investor distributes their investments over taxable accounts such as a Trust brokerage accounts, tax-deferred accounts such as IRA’s and 401ks, and tax-exempt accounts such as Roth IRA’s and Roth 401k’s. Allocating assets that pay the lower long term capital gains tax rates to your taxable accounts and allocating assets that pay higher income tax rates to tax deferred and tax exempt accounts allows investors to keep more of the return they make.

One simple example: An investor with $1 million in an IRA and $1 million in a Family Trust may have an asset allocation of 50% Equities and 50% Fixed Income. If currently both portfolios are situated with this allocation, shifting the assets that are taxed as ordinary income, 39.6% Federal rate, to the tax-deferred IRA and shifting assets that are taxed at the more favorable long term capital gains rates of up to 20% Federal to the taxable trust account could generate tax savings. The potential shift may be to move the taxable fixed income assets over to the retirement account and move the more tax favorable long term capital gains taxed assets, such as equities and ETFs intended to be held for longer than a year, to the taxable account. This will change the allocation percentages inside of each account; however with proper execution the overall 50% Equities, 50% Fixed Income allocation will remain constant in order to achieve the desired total investment allocation and risk profile.

Shifting assets in this way must be looked at and executed carefully. It may take time to implement in order to keep fees generated low and to minimize the unnecessary triggering of a realized tax liability.

In order for this type of strategy to work requires viewing all investment portfolios through one asset allocation strategy that all the accounts make up. Having the ability to get consolidated performance reporting for all of your accounts from your advisor no matter where they are held is important to monitoring the success of this strategy. 


Why Cash May Not Always Be King!


Cash as an asset is very comfortable for many people to own. It is an asset you can actually touch, feel and hold. Prudent financial and investment planning suggest that you should hold some cash, especially for emergency purposes. Often, 3 to 6 months and sometimes more depending on your personal situation is a good rule of thumb. There are some situations where holding more cash might be prudent. One example that comes to mind are people that have specific known medical conditions that require cash to cover the expenses of healthcare that insurance does not cover. Having cash often helps provide a sense of safety and a feeling of being able to sleep better at night. That is completely understandable!


I have found that the job of a professional advisor is to listen to a client’s needs and craft a plan that has the greatest chance of achieving those needs. I tell my clients that my job is not to tell you what makes you feel good but to advise you on what needs to be done to achieve those goals. That said let’s take a look at Cash as an asset and how potentially the good feeling of having lots of cash, “Cash Is King” may not be the best and potentially could be increasing your risk.


In order to understand that cash may not be king we must understand the effects of inflation on our buying power, and current and historical interest rates on cash. We will use CPI (Consumer Price Index) as the proxy for inflation and the 30 day treasury bill rate for the interest rate on cash, as is customary.


First: inflation as measured by CPI can be defined as a sustained increase in the general price we pay for goods and services over a period of time. We all know that the price of a loaf of bread has gone up since we first started eating it in our childhood. So we understand that things get more expensive over time. If we put money in our mattress when we were 3 years old to buy 10 loafs of bread at the price we would have paid for it then and took it out several years later we would likely not be able to buy as much bread. That can be what holding cash can do if no interest or rate of return is achieved on it.


Second: cash as an asset class is typically not stored in mattresses. More commonly it is stored in bank accounts and brokerage accounts. Rates of interest on cash have varied widely over the past 20 years and for quite some time have averaged 0% in most cases.


Let’s now assume that for a period of 5 years inflation averaged 2.5% and cash averaged 0% interest. Our simplistic real rate of return on that cash is not 0% it is negative 2.5%. Hence we have been losing money during that time and not even potentially realizing it because, well, we still have the same amount of dollars on hand so “I did not lose any of them.” That is factually correct that you have not lost any of the dollars you can count but you have lost on the amount of goods you can turn those dollars into.


Starting off in a position where you are in a negative return scenario right out of the box is a hard perspective for investors to grasp but that is exactly what has been happening for the majority of the last 5 years. Looks to me like holding cash is risky and potentially more risky than many know. This is at the core of why Financial Professionals after understanding a person’s current situation, future goals, feelings and family dynamics, as well as one’s understanding of risk and tolerance for it may need to recommend less cash as a percentage of portfolio holdings than someone may find comforting. We as professionals need to strike the best balance we possibly can in order to achieve those goals. Even if the goals are not exactly achievable, it is our duty to provide a plan that can make the money invested last as long as possible, to achieve as much of the goal as possible. Ultimately, however, investors comfort levels are important and should they decide that holding cash still feels best in light of what we just reviewed then "Maybe Cash Is King" for those investors.


For those of you who are technically and visually minded the following chart will illustrate this issue. It is a 20 year chart dated 03/18/1995 to 03/18/2015:

Ycharts_chart (23)




This chart illustrates the relationship between the inflation rate (measured by CPI) in the United States and interest rates on cash (measured by 3 month treasury rate). We have named the blue line US Inflation rate which is the monthly inflation rate measured by CPI. The Orange line is the cumulative growth of the consumer price index which illustrates the cumulative effect of inflation on goods and services. The Red line is the average monthly rates of return on a 90 day treasury bill, our proxy for interest rates on cash.


What we see is that although inflation rates and 90 day treasury bill rates diverge, cumulative inflation continues to increase, showing that our goods and services get more expensive over time and interest rates on cash do not always help us combat this phenomena. Furthermore, we can be in periods of time, which are multiple years in length, where cash interest rates are lagging behind the rate of inflation. This greatly reduces the effectiveness of our cash as a purchaser of goods and services. Also important to understand is that these negative divergences require us to spend more money on an item in times of low interest rates or negative real interest rates on cash, further hampering the ability for our money to grow when cash rates of return are higher. Why is this, it is because we have to spend more of the cash during these times and we have less of it saved for when rates are above inflation helping us actually grow our money.


Ultimately we must all be comfortable with our investment portfolios and cash is a major component of the mix of assets we own. Hopefully next time you here the phrase “Cash is King” you remember that maybe it truly isn’t as safe as you once thought.


Disclaimer: The Charts provided in this article was produced by Ycharts a third party provider of analytical data and charts. We believe that the information used to create this chart is accurate to the best of our knowledge however we cannot guarantee the accuracy of its content.


Mortgage Interest And Points Paid:Tax Deductible?



I often get asked questions about how much mortgage interest is deductible and what size loan to use when financing a home purchase. Also it is common to get into a discussion about if paying points to pay down interest make sense and if they are deductible. 

While every situation is different with regard to mortgage size, and I am a fan of getting the largest mortgage that one can possibly afford in most cases but not all, I will tackle the deductible nature of interest and points here to clarify how it works.

Mortgage Interest: Interest paid on a qualified residence is limited to interest on the acquisition indebtedness secured by a principal or secondary residence up to a maximum debt level of $1,000,000, plus home equity indebtedness secured by a principal or secondary residence up to a maximum debt level of $100,000.

Points Paid: Points paid on a loan are really nothing more than prepayments of interest. Generally points must be capitalized and amortized over the life of the loan. However, the points incurred on a loan that is used to buy or improve a principal residence generally are deductible in the year the points are paid. 

Points Paid on Refinance: These points must be deducted ratably over the life of the loan (amortized). If it is a second refinance the un-amortised (not deducted) points from the first refinance are deductible in full when the first refinance loan is paid off.

Choosing to pay down loan interest by paying points can help lower a payment to a level that is more affordable. Often I suggest that not doing so is the better decision. Buyers will have use of the funds used to pay the points and often through investment may be able to generate a better return on those funds than paying down the points would generate over time. However, doing so really is specific to the home purchasers own situation. In many cases, home purchases are as much an emotional decision as they are a financial decision and if paying down points to make a payment more affordable gets a buyer in the home they love and want that may in itself make paying points well worth it.



Roth IRA Conversions Benefits

Not working


Roth IRA conversions: are often a great strategy used to minimize the effects of taxation on your hard earned and saved money. Taxes are important to understand in managing our wealth. It is not just about how much money we have it is also about how much we can use for our own purposes.

With a Roth IRA conversion investors convert a Traditional IRA to a Roth IRA. This allows for the utilization of the Roth IRA rules which can often be more beneficial than Traditional IRA rules. Primarily the benefit of not having to pay income tax when you withdraw funds for retirement out of a Roth IRA is what is attractive to investors. Not everyone is eligible to contribute to a Roth IRA. Individuals are not allowed to contribute if their income exceeds Roth IRA income limits.

People that do not qualify to invest in a Roth IRA often end up investing in 401k plans and Traditional IRAs. Traditional IRAs also are subject to income limits and other eligibility requirements, allow for a tax break on the contribution but you pay income taxes in retirement. 401(k) plans have similar tax treatment on contributions and distributions in retirement to a Traditional IRA. Roth IRAs are opposite.

The IRS allows for individuals to convert their Traditional IRAs to Roth IRAs without income limitations. There is no 10% early withdrawal penalty as long as the funds are moved into the Roth IRA in a 60 day period. Most often the conversions are done immediately.

When you convert to a Roth IRA from a Traditional IRA you pay income tax on the contributions. The taxable amount that is converted is added to income and regular income tax rates are applied.

Why Convert?

Paying as little tax as possible allows for investors to enjoy more of their money. Conversion to a Roth IRA generally allows investors to save money in the long run. Choosing a year where an investor might know their taxable income is going to be lower than others allows them to execute a conversion in a low income tax bracket year. If the government announces upcoming income tax rate increases this also provides a reason to execute the conversion in the existing lower tax bracket year.

The benefit then becomes that in retirement the entire balance of the funds in your Roth IRA are available for investors to use and there is no after-tax balance calculations to manage. The original owners of the Roth IRA are also not subject to Required Minimum Distributions (RMDs) beginning at age 701/2 like owners of a Traditional IRA and other retirement plans are. This is often also perceived as a potential benefit for owners.

Please keep in mind though that high income earners may convert to a Roth but may not be able to make additional contributions of funds.

For more information and an analysis on how this strategy might benefit you please call us at 310-433-5378 or contact us via the web at