Tax season is in full swing, and it can bring some uneasy thoughts. “How much will I get back?” “How much will I owe?” “Am I forgetting anything?” “What can I expect next year?”
In a recent team meeting, one of our firm’s partners shared a question from a client that’s often not heard, “Why is my tax bill so low?!”
This client had been taking significant IRA distributions since the beginning of retirement as they had settled into a routine of travel and other retirement leisure. Of course, IRA distributions are generally going to be taxed as income, and the client became accustomed to paying a steady tax bill each year. In recent years, their travel slowed and their expenses correspondingly decreased, but their regular withdrawals had not.
During a meeting with us last year reviewing their financial plan, this client shared their updated spending with us. As our team reviewed the numbers, it was clear that they were taking far more than they needed even after accounting for required minimum distributions (RMDs) from their IRAs.
With less travel spending and a bloated checking account balance, our team updated the client’s plan and made the simple recommendation of reducing distributions to align with their current expenses. Specifically, reducing the excess withdrawals (above RMDs) from the IRAs lowered the client’s taxable income.
As the client filed their tax return, they were pleasantly surprised to find their tax bill is far lower: $20,000 lower!
This seeming simple tweak just illustrates the power of having a system, structure, discipline, and support in managing your wealth, and this example is just the tip of the iceberg. Life happens, and circumstances change. When is the last time you reviewed your situation to ensure your financial plan is still serving your needs?
The other day I read a Bloomberg article that cited a recent survey suggesting that while the average U.S. employee calculates that he or she will retire at age 65, as a group the odds are around 50% that they will still be working at age 70. By the tone of the story, I would surmise this is less by choice and more by need.
At Janiczek Wealth Management, we are very fortunate to work with financially independent individuals and families, who have successfully put themselves in position to control their own destiny as it relates to their financial well-being. In the majority of cases, this independence did not simply happen overnight, but was the result of hard work and perseverance that eventually resulted in a major liquidity event or accumulation of wealth that changed the equation from “having to work”… to “choosing to work”. It is a very powerful edge to know that you are going to work simply because you want to, not because you have to.
Wealthy families or their advisors rarely appreciate hearing the term “generation-skipping transfer tax” (GSTT) The nuances of this specific tax law can be quite complicated, but there’s a reason for it: families and individuals often enjoy giving from one generation to the next, and the GSTT offers a fixed rate that ensures such gifts are taxed appropriately.
There is a recent study from Boston College’s Center on Wealth and Philanthropy, an estimated $59 trillion will be transferred from 2007 to 2061. While not all of that is subject to the GSTT, it does illustrate how important such a tax is today – and will become for the future (simplistically thinking about our federal deficit and the upward trending expectations for servicing our debt through higher taxes—the government will get their cut!).
We recently hosted an expert team of six highly regarded advisors to have an open discussion and brainstorming session focused on how best to serve successful families, along with the inevitable complexities and nuances of managing different aspects of their significant wealth. Among this group included specialized experts exclusively serving financially successful families, business owners, and C-level executives. The players around the table included an estate attorney, a consultative tax professional (CPA), a life insurance advisor, a high-end property and casualty insurance agent, and two comprehensive wealth management professionals.
Take a deep breath… YOU have the golden ticket! Your thoughts immediately jump towards all your wildest dreams, and reality starts to kick in that money is no longer a hurdle to life experiences or the worldly goods you desire. If you can dream it up, you can do it! With such a substantial jackpot, it’s hard to fathom that someone could possibly blow through this type of fortune. Without a clear and concise plan, however… anything is possible!
So how do you protect yourself from becoming associated with the unwanted statistic that 70% of lottery winners eventually end up broke?
The giving season is upon us, and at Janiczek we are blessed to work with and guide a number of charitably minded clients whose life long mission is to give back to their favorite charities and causes on a regular basis. While their generosity and intentions really don’t revolve around the tax advantages (it is more about the philanthropies they support), to give wisely is a great way to benefit both the recipient and the donor.
So what are the main reasons for making a charitable gift? That answer may be very different from one person to the next, but I would suggest some of the more common motivations would include the following:
I recently sat down with one of our clients who had enjoyed significant success in building their wealth through the concentration of a publicly traded company. Throughout his twenty plus year career as an executive, he had amassed hundreds of thousands of shares of company stock representing several millions of dollars. With a goal of winding down his career in the next 3 years and
nearly 87% of his family’s entire net worth in this single stock, it was clear the potential dangers outweighed the benefits of having a portfolio so dependent on one single publicly traded company.
After showing the husband and wife through our Strength-Based Wealth Management™ (SBWM) process that they could not only meet but exceed their ideal lifestyle from the assets they have accumulated, I asked the following question…You can continue to take on this level of risk, but why? In this particular case, the couple agreed it was more than time to unwind this concentration and re-allocate to a broadly diversified, risk-adjusted portfolio. This decision released a level of tension and stress the couple had been feeling for a number of years, and offered peace of mind they would be able to weather any type of economic storm with a more balanced approach.
If I had to sum up our purpose when it comes to comprehensive wealth management, I’d have to say we deliberately aim to help our clients do everything possible to “deserve success” in all market conditions. As George Washington was often quoted throughout his leadership, “We cannot insure success, but we can deserve it.”
When I think about individual investors, many factors have to be considered when constructing a portfolio that is appropriate for their given goals and objectives. Not only does one need to build a diversified portfolio of investments (across stocks, bonds, cash, and alternatives), they also need to incorporate other assets and liabilities on their balance sheet such as real estate, loans, concentrated holdings, business ownership, and human capital.
I recently presented to a room full of successful business owners on the topic of “ensuring your business is part of your retirement strategy”. What became immediately clear was the level of success these individuals have recognized as they continue building their respective companies… and ultimately their net worth. The stories shared had many similar financial characteristics including: record sales growth, impressive earnings, strong revenues, great cash flow, ability to reinvest back into their companies, as well as healthy distributions back to the owner that allowed for living an enviable lifestyle.
Stepping away from the discussion of their shared business successes, I inquired on how many owners had a concise vision of when they planned to step away from their business and what their ideal retirement (or post-business life) looked like. Roughly 50% of the room raised their hand with the majority planning to exit within 3 to 10 years. They shared visions of extensive travel, second homes, giving back to their communities, spending quality time with family, new hobbies, starting a new business, etc. The overriding goal was to be financially independent of course!
I know the idea of reviewing one’s cash flow situation is probably not cracking your list of new and exciting priorities to tackle right out of the New Year’s gate. But staying on top of key financial numbers for cash flow and tax planning purposes could give you the opportunity to further maximize savings, reduce taxes, and continue towards building a bigger and brighter future. Consequently, I want to share one of the more concise resources that compiles key IRS tables for the 2015 calendar year, produced by the College for Financial Planning®.