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What’s in the American Rescue Plan?

What’s in the American Rescue Plan?

 

There’s a lot to unpack in the newly-passed, newly-signed American Rescue Plan bill. The goal is to help relieve the economic suffering caused by the COVID pandemic in various sectors. The bill makes unemployment benefits more generous, health insurance more affordable, and having children less expensive. It also reduces the pandemic’s most damaging effects on low-income homeowners and the homeless, people with student loans, state and local governments, and school systems.  

 

Most of the press coverage has focused on the $1,400 checks. Not everybody is receiving them. Only single people with an adjusted gross income of $75,000 or below (households with $150,000 AGI or below) qualify for the full amount. The amount phases out entirely for people with incomes above $80,000 (households with AGIs above $160,000). The reporting period is the most recent year that people filed taxes; it could be 2019 or 2020.

 

Unemployment and Cobra

 

The American Rescue Plan also extends unemployment benefits (either through the Pandemic Unemployment Assistance program or the Pandemic Emergency Unemployment Compensation program) for an additional 25 weeks until September 6. It maintains the $300 per week supplemental benefit. It also makes the first $10,200 of those benefits tax-free for people who report less than $150,000 in income. The extra $300 federal supplement doesn’t count when calculating Medicaid eligibility and the Children’s Health Insurance Program.

 

The healthcare provisions will be a lifesaver for some ex-employees. Under the government provisions in COBRA, people who lost their jobs can continue buying health insurance through their former employer. Still, they pay full-price rather than the subsidized price companies offer to their workers. The new relief bill would have the government pay the entire COBRA premium from April 1 through September 30.

 

The bill will make health insurance much cheaper for those laid off than those who are still working. (This generous subsidy is not available for persons who left their job voluntarily.) Finally, the law imposes a cost cap on health insurance policies purchased through a government exchange. The premiums should not exceed 8.5% of a person’s adjusted gross income, which will benefit low-wage workers.

 

How the American Rescue Plan helps families

 

Families with children will receive additional benefits—but only families whose income qualifies them for the $1,400 checks. 

 

The bill raises the child tax credit from $2,000 to $3,000 ($3,600 for children ages five and under), and it increases the age limit for qualifying children to 17, from 16 previously. These amounts could apply as a tax refund even for people whose tax bill is zero; that is, those who don’t have any reportable income to offset. 

 

Families with incomes between $150,000 and $170,000 would receive the same $2,000 tax benefit as before, and that benefit phases out for married filers with incomes over $400,000 (singles above $200,000).

 

A bigger set-aside for families with children is a monthly child allowance. The government will send a monthly check of $300 for each child under six years old and $250 for each child between the ages of six and 17.

The American Rescue Plan sets aside $27 billion for financial assistance to people whose household income does not exceed 80% of the area’s median income to offset rent, utilities, and other housing expenses. 

The Rescue Plan sets aside $10 billion to help homeowners struggling to make mortgage payments and $5 billion to help the homeless.

Finally, if the Biden Administration decides to cancel student loan debt (which is not a given), the Act specifies that the borrowers wouldn’t have to pay any income taxes on the forgiven debt. 

The American Rescue Plan pie chart

You can see from the chart, with figures compiled by the nonpartisan Congressional Budget Office, that there is also money set aside to keep restaurants and bars afloat and money to help schools better control the risk of infection so they can reopen. $350 billion is going to state and local governments to prevent layoffs and allow them to continue providing essential services

COVID Economic Projections (002)

The administration passed the American Rescue Plan as a stimulus measure, but we can better characterize it as disaster relief. A graph prepared by the Congressional Budget Office (shown here) clarifies that the U.S. economy was on a path to never quite recover from the COVID recession before this legislation passed. 

With the American Rescue Plan in place, the best estimate is that the economy might fully recover as early as the 4th quarter of this year.

 

 

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Everything You Need to Know About RMD’s

Everything You Need to Know About RMD’s

As Ben Franklin said, “… [n]othing is certain but death and taxes.” Required Minimum Distributions (RMDs) are the method the IRS uses to ensure that you pay some taxes on your pretax retirement savings. They’re pretty straightforward, but there is a catch here and there.

 

What accounts are subject to RMDs?

To paraphrase George Carlin, Uncle Sam loves you and he needs money! Required withdrawals are generally only taken from retirement accounts that have pretax funds in them, with one exception. Because you haven’t yet paid any taxes on that money, you need to start taking money out to provide the government with some income tax revenue.

Traditional IRA, SEP and SIMPLE IRAs, and 401(k)-like accounts, such as TSP and 403(b)s, are subject to required minimum withdrawals. However, if you reach RMD age while you’re still working at the company whose 401(k) you currently contribute to, you don’t need to start taking them as long as you own less than 5% of the company. If you have 401(k)s from previous companies, however, you’ll need to take RMDs from them.

Since you paid taxes on your Roth contributions, you won’t have to take any money out of your Roth IRA. That’s for both contributions and conversions, because either way you already paid your taxes. Roth conversions often make sense in certain years with lower tax brackets, and to “fill up” your tax bracket. You get the added benefit of reducing the size of your Traditional account and thereby reducing required income in addition to accumulating more tax-free money.

The one exception for Roth accounts is for 401(k)s and similar employer retirement accounts (though not SEPs and SIMPLEs). Roth 401(k)s are subject to the same rules as the Traditional 401(k). Even though it’s after-tax money, RMDs are still the rule. Unless you’re still working for the company whose 401(k) you’ve been contributing to, in which case you don’t have to begin at age 72.

It’s easy to avoid this particular complication. Just roll your Roth 401(k) money into a Roth IRA instead. A direct rollover has no tax consequences, and you’ll eliminate the RMD from that account.

 

How much am I required to take out?

Fortunately, you’re not the one who has to calculate the amount! The financial institution that holds your retirement account will tell you how much you need to withdraw. If you have multiple accounts, the institution calculates the amount for each account.

The requirement is based on the account balance as of the previous December 31 and your life expectancy factor taken from IRS tables. The beginning requirement is usually around 4% of the balance, and the percentage increases as you age.

 

Which accounts can I use to satisfy the RMD requirement?

The money must come from a pretax retirement account in your name. The IRS doesn’t keep track of the individual amount that you owe, just the aggregate amount.

For example, suppose you have three IRAs at different brokerage firms. The RMDs are $2,000 on one, $3500 on another, and $1500 on the third so the total withdrawal is $7,000. You can take the entire amount from one account or split it up between them all, whichever makes sense for your financial plan.

We recommend consolidating accounts, especially retirement accounts. Fewer accounts makes keeping track of your RMDs much easier. If you miss a withdrawal, the penalty is pretty steep.

 

When do I have to start my RMD’s?

For many years, the starting age was 70 ½. That was changed during the last administration to age 72, and RMDs were waived for the 2020 tax year in the CARES Act, due to the coronavirus.

If you are age 72 or older you need to start your distributions (subject to the caveats noted in question 1). For the first year of RMDs, you can delay your distribution until April 1 of the following year. For every other year, you’ll need to make the withdrawal by December 31 of that year.

It’s usually not a good idea to delay your first withdrawal. If you don’t take it in the year you turn 72, then you’ll have two required withdrawals the next year: the one you were supposed to take at age 72 plus your RMD for age 73. The option is available to you in case there is some reason that it makes sense.

 

Is there any way I can avoid RMDs?

There’s no legitimate way to avoid the required withdrawals once you’re age 72 and no longer working for the company you were contributing to. However, you can avoid paying taxes on up to $100,000 of your RMD by using the Qualified Charitable Deduction or QCD.

Sending a withdrawal from your retirement account directly to the qualified charity of your choice satisfies your distribution requirement, but you don’t owe taxes since it’s a charitable donation.

The QCD strategy only works if the money comes from an IRA, because it doesn’t count from an employer retirement plan. In addition, the funds must leave the IRA institution and be sent immediately to the charity (a nonstop transfer). Any donation that makes a stop at your bank account loses QCD eligibility.

 

What if I don’t take my RMDs for the year?

The IRS levies a pretty hefty penalty of 50% of the RMD if you elect not to take it out, or on the portion that you didn’t withdraw if you did take some out.

Unless you can prove that you didn’t know you had to take it and you never received the notification from your financial institution, you’ll owe that penalty.

 

What happens if I die in the year I start my RMDs?

Your beneficiaries are required to take the required withdrawals by the end of the year (December 31), even if it’s the year you turned 72. Each of the beneficiaries has to take their proportional share, no matter if another beneficiary takes more than their share.

For example, suppose your RMD is $1,200 and you have four beneficiaries. Each one must take $300 before December 31, even if another beneficiary already took out the full $1200.

If your beneficiary is a trust or the estate, the trust (or estate) must make the withdrawal before December 31.

If you have questions about consolidating your accounts or potentially reducing your RMD exposure, please give us a call at 619.255.9554 or send us an email to set up an appointment.

 

 

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

How Pent Up Demand Could Fuel Economic Recovery

How Pent Up Demand Could Fuel Economic Recovery

With major league baseball’s spring training just around the corner, you may already be daydreaming about the smell of cut grass and roasted peanuts, hearing the crack of the bat and the roar of the crowd — just to feel normal again. 

 

If so, you are not alone — not among fellow Americans weary of the COVID pandemic nor within the context of history. This would not be the first time Americans have lived through a period of austerity brought on by a pandemic that resulted in burgeoning pent-up demand and economic recovery. In 1918, the Spanish Flu and World War I largely curtailed social gatherings and other activities across the country. 

 

To be sure, the U.S. was a very different place in the early 20th century, but consider that attendance at baseball stadiums in 1918 was half that of the previous year.

 

By 1919, however, the pandemic had largely subsided, the war was over and attendance at games soared from 2.8 million in 1918 to 6.5 million in 1919. The decade that followed — the Roaring ‘20s a time of exploding economic recovery— coincided with the first golden age of the automobile. Americans eager to see the countryside bought nearly 26 million cars and 3 million trucks in the 1920s, according to Automotive News.

 

Could pent-up demand for travel and leisure drive a Roaring ‘20s economic recovery today? 

 

Ready, willing — and able — to spend

 

Indeed, cabin fever appears to have taken hold of consumers everywhere. There are signs that Americans are prepared to act: Savings rates have soared since the start of the pandemic, and though they have slowed a bit in recent months they remain relatively high.

 

 

Many consumers have boosted their savings during the pandemic

Bar graph showing US Savings Rate 2020

 

Once the current situation subsides, the desire to travel plus the ability for consumers to spend means we could potentially see a powerful economic recovery.

 

The economic environment is much different than the global financial crisis of 2008.  Today, looser fiscal policy, looser monetary policy, strong banking infrastructure and a higher personal savings rate could drive a sharp pickup in demand.

 

These conditions not only can benefit the travel and leisure industries but also the broader economy. To be sure, there will probably be hiccups along the way, and some areas will likely recover more quickly than others.

 

 

Passenger loyalty: A tailwind for cruise lines toward economic recovery

 

Cruise ships became the epicenter of the COVID crisis in February 2020, when 3,700 people were quarantined aboard the Diamond Princess after a shipboard outbreak. At the time, the ship accounted for half of all known cases outside mainland China.

 

Over the past year, this industry has gotten so much negative media, yet people are still booking cruises for 2021 and 2022. 

 

In fact, more than 70% of respondents to an industry survey said they will cruise again.

 

Loyal customers can keep cruise industry afloat

 

While cruising has resumed in Europe, the U.S. Centers for Disease Control imposed a “no sail” order that has not yet been lifted in North America.

 

There is still uncertainty as to when ships will set sail again, but there is a possibility that they will be cruising near full capacity quicker than many people expect.

 

What’s more, with intense focus on healthy sailing practices, there’s a case to be made that they could one day be considered among the cleanest places on earth to vacation.

 

Vacation plans up in the air

 

As was the case in the cruise industry, global air travel was down an estimated 66% in 2020, about 20 times worse than the previous record. Within the U.S., which is more dependent on business travel, the devastation was worse: Air travel declined as much as 95% in the early months of the crisis.

 

The rollout of the vaccines and, prior historical events, leads to increased confidence that demand will bounce back. For example, we also saw this after the September 11 attacks. A lot of people thought consumers would never fly again, and traffic recovered quickly.

 

Indeed, in China, where the virus is largely under control and the economy has rebounded, domestic air travel has nearly returned to pre-COVID levels.

 

Air travel in China has soared back. Will the U.S. soon follow with it’s own economic recovery?

The ripple effect for economic recovery waves

 

A revival in travel demand can also have a powerful ripple effect, creating the need for a range of goods and services and helping drive job growth across a variety of industries. Among these are aircraft manufacturers, jet engine makers, hotels, casinos and restaurants — all of which were devastated by the pandemic.

 

Consider aircraft engine makers, which operate a recurring revenue business model. Companies like Safran and General Electric build the engines and sell them at a modest profit, but the engines must be serviced regularly, and the engine makers can generate a great deal of revenue from the service contracts.

 

Unlike other sectors of the economy during COVID, aircraft engine makers are not going to see digital disruption upend their business. After all, there are no digital aircraft engines. 

 

Markets tend to anticipate recoveries

 

Markets often anticipate recoveries in the underlying economy, so it’s important to recognize underlying trends early. Consider the global financial crisis, a period when the housing and automobile industries were severely beaten down. By 2012 it became clear that demand was building, thanks to changing demographics and an aging auto fleet. In both industries, a full recovery took several more years, but a rebound in auto- and housing-related stocks anticipated the recovery in demand and earnings. From February 2009 through December 2010, auto sales fell 6% while auto stock returns advanced 496%.

 

 

Auto stocks rebounded ahead of sales after the global financial crisis

More recently, since the introduction of the vaccines, shares of companies across a number of travel-related industries have registered strong gains.

 

 

 

The market often reflects a recovery in earnings before they materialize.  In a year from now, we could be in a very different environment where demand and earnings for some of these companies begin to recover in a more meaningful and sustained way.

 

 

 

Maintaining a balance

 

 

 

Students of history can look to many examples of past crises and declines that were followed by powerful economic recoveries thanks in part to pent-up consumer demand. Examples include the travel sector after 9/11 and the housing and auto industries following the end of the great financial crisis in 2008–2009. 

 

 

 

For investors and their advisors, it is important to make sure portfolios are balanced with exposure not only to growth strategies but also to strategies focused on more value-oriented companies, like many of the travel-related stocks.

 

 

 

A review of more than 4,000 portfolios by Capital Group found that investors significantly reduced allocations to value equities over the last three years. It may be time to rebalance. 

 

 

 

Returns for leading growth companies have continued to be strong, for good reason. But it may be shortsighted for investors to become seduced by the runaway growth stories, considering that many of the beaten down stocks in travel and other sectors have attractive valuations. And recently there have been some early signs that the market rally may be broadening as many of these stocks have posted meaningful gains.

 

Investors have scaled back their exposure to value funds

 

We just experienced a market downturn and recovery where the growth-oriented companies led during the decline and on the way back up.  Historically, that is an unusual pattern.  As the vaccines roll out and the recovery broadens we may begin to see companies in the travel industry, or perhaps energy or financials, all of which had been very hard hit during the downturn, participate in the recovery.

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Financial Independence for Women

Financial Independence for Women

Your road map to financial security.

 

Women face many unique challenges when it comes to personal finance and investing.

  • Physical and emotional – longevity, more subject to elder abuse, more likely to struggle after divorce or death of partner.
  • Workplace – lower salary over fewer earning years, out of workforce caring for family.
  • Behavioral – less confident about investing skills, more likely to start investing later, invest in less risky assets, less likely to participate in workplace retirement plans.

What does freedom mean to you – starting your own business, going part-time or leaving the workforce, moving abroad, leaving a relationship or job that isn’t right for you, living without debt hanging over your head?

 

Make your future self happy.

In his TED Talk, Daniel Goldstein tells us that our present self doesn’t want to save but wants to consume and have fun but our future self wants our present self to save. Present self is the one that’s in charge, so how do we convince our present self to pay attention to our investment accounts?

Click here to view on YouTube >>

Draw a persuasive picture.

 

  • Imagine yourself in the future.
  • Anticipate your emotional reaction when future self is able to retire without stress.
  • Visualize reaching your goals.
  • Positive reinforcement about good things your past self has done.
  • Remove obstacles such as inertia.
  • Put decisions on automatic pilot

Where do you want to be?

 

  • When do you want to retire?
  • What does retirement look like to you?
  • How much will that retirement cost?
  • Do you have flexibility?
  • Do you have short-term goals that also need to be funded?
  • What is your time horizon?
  • Do you know how much your Social Security Benefit will be?
  • How much do you need to save?
  • How will you bridge the gap?

.

Debt Best Practices

Pay on time every time! Call your credit card company and request a rate decrease. Transfer high rate balances and consoldate into a low interest loan. Clean up your credit report. Review your credit activity yearly. www.annualcreditreport.com

 

 

4% Rule

You can withdraw 4% each year from a  balanced portfolio (60% stocks 40% bonds) over a 30-year retirement period with a high probability of success of not running out of money.

1M portfolio x .04 = $40,000 per year.

 

Reading List

Lean In by Sheryl Sandberg

Don’t Ask by Linda Babcock and Sara Laschever

The Marshmallow Experiment

4% Rule by Bill Bengen

 

Action Plan

Now is the time to review your accounts, to check for diversification, and to make sure your asset allocation matches your risk tolerance.

So, what is the right portfolio for you?

The asset allocation decision is driven by your risk tolerance.  Risk tolerance is actually a two-prong test.  It encompasses your willingness to take risk and your ability to take risk, which are sometimes at odds with one another.  Willingness is determined by how much portfolio volatility you are comfortable with, which is a subjective choice.   The ability to take risk is an objective determination based on a number of factors including, but not limited to, your goals, your cash flow needs, and tax considerations.   

    Would you like to know your risk tolerance score?

     

    We invite you to complete our online risk tolerance questionnaire. You will receive a personalized and comprehensive risk report. Once you have an idea of your risk number, you can give us a call and we will be happy to review the results and look over your investments to make sure your allocations are aligned with your risk profile

     

    Risk Tolerance Questionnaire

    Find out your personal risk capacity and risk tolerance.

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    In a couple of weeks we will have a secure portal for you to sign in and view the full Women’s Alliance Round Table presentation, along with questions and answers from coworkers, tools and downloads for your continued financial journey.

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    Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

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