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Do I Have Enough to Sell My Business?

As a business owner, you’ve spent your life’s work growing your business, taking care of employees, managing your product or service, and looking after your people. Now, you may be getting to a point where your spouse tells you you work too much. Or perhaps you’re watching the clock more than you used to, counting down the minutes until you can head home and unplug from your “boss” responsibilities.

Whatever your reasoning, if you’re starting to ask questions like, “Do I have enough to sell?” and “Will that be enough?” then it’s time to focus on you for a change.

Why Business Owners Need Specialized Financial Planning

Business owners face a unique set of financial challenges and opportunities. Whether you are a small business owner or running a large corporation, the following considerations are critical:

  • Maximizing tax efficiency
  • Choosing the most appropriate retirement account type
  • Evaluating your retirement account options
  • Managing 401(k) and pension investments
  • Considering a defined benefit plan, i.e., “pension”
  • Aligning company benefits offerings with company goals

Our team specializes in helping business owners handle these and other issues while they’re still working. During those years, we help you work through proper planning techniques to diversify your assets, reduce risk, optimize your taxes, and offer competitive benefits. All of these steps help streamline and strengthen your business at the time — but they also set you up for a successful transition into retirement or your next business opportunity.

When you do get to the point of exiting, we help you bring all of this planning together into one critical decision: whether or not you have what you need to move on from your business and into your ideal retirement, whatever that looks like for you. 

Creating a Dream Retirement

At Warren Street, we’ve helped many business owner clients over the years answer the “Do I have enough to sell?” question and develop their exit strategies accordingly. 

If you choose to work with us during your own exit process, we’ll play a key role on your professional team alongside your attorney. While your attorney looks after the legal structure of the deal, we’ll handle related asset management and tax mitigation. For example, if you’re involved in an all-cash sale with multiple payments coming in the next few years, we will discuss tax deferral opportunities to add into your transition plan. Or, if you’re struggling with a go/no-go decision, we’ll conduct scenario planning to help you make an informed choice based on your current financial situation, projected future state, and personal goals.

No matter where you are in the exit planning process, we can help evaluate your current assets, investments, estate planning, and legacy goals, so you can make a clear and confident decision on what next steps are right for you.

If this sounds like you and you’re a current Warren Street client, please mention your interest to your Lead Advisor! Or, if you’re not a client but are interested in learning how we can help, schedule a complimentary introductory call with us. We hope to hear from you and look forward to exploring how we can make your post-exit dreams a reality.

Cary Facer

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Chevron 401(k) Changes: Unpacking Your New Funds

As a retired Chevron employee and financial advisor, I’m constantly keeping my finger on the pulse of what’s happening at the company. Last month, Chevron sent a letter to employees announcing that, as of June 1, the funds in their retirement plans will be changing. 

Given these updates, I wanted to take the time to make sure my Chevron connections understand what’s happening — and what it could mean for your portfolio.

What’s changing?

The gist is this: on June 1, 2023, your Fidelity NetBenefits account will reflect new investment choices. In many cases, your money will be automatically allocated to new funds. For example, If you’re currently in a Vanguard Target Retirement Date Fund, this will map to a BlackRock LifePath® Index Fund. All in all, the 16 existing investment choices will be funneled down into just 11 choices. This applies to both the Employee Savings Investment Plan (ESIP) and Deferred Compensation Plan (DCP).  

In my opinion, the most impactful change is the consolidation of three equity funds — Vanguard 500 Index, Vanguard Large Cap Value Index, and Vanguard PRIMECAP — into just one equity fund, the “Equity Index.” This is tricky, because for many people, it made sense to hold a pure S&P 500 fund such as the Vanguard 500 Index. Pure S&P 500 funds allow you to “own” the largest 500 companies in the US, compared to the “Equity Index,” which is more of a mix. 

We are currently investigating this and the other new funds to understand exactly what they entail and how they will interact with the rest of your portfolio.

What should you do?

This fund consolidation is neither good nor bad; however, it does mean that you should talk to an advisor about the impact it will have on your portfolio. The new funds have different risk and return profiles, expense ratios, and diversification characteristics than the old funds, and they’re not necessarily a direct map. It’s critical that you confirm your new funds still support your future retirement goals. 

No matter your age or retirement goals, it’s always a good practice to review your 401(k) plan on a regular basis and make sure it still aligns with your needs. The updates to the Chevron 401(k) plans are a good reminder to take a close look at yours and make any necessary changes.

If you don’t already have an advisor or are looking for a new one, I’m also happy to speak with you (no charge) about your portfolio. I’ve been helping Chevron colleagues and clients for more than 40 years and am an expert on the company’s employee benefits package. I’m available to answer any questions you have about the upcoming changes. 

Feel free to give me a call at 714-876-6200 or book time with me if you’d like to chat. I hope to hear from you and am here to help!

Len Hanson

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Secure Act 2.0: Summary for Individuals and Employers

Who doesn’t enjoy tying up year-end loose ends? The original SECURE Act was signed into law on December 20th, 2019. Its “sequel,” the SECURE 2.0 Act, was similarly enacted at year-end on December 29th, 2022.

Both pieces of legislation seek to reform how Americans prepare for retirement while juggling current spending needs. How, when, or will each of us retire? How can government incentives, regulations, and safety nets help more people safely do so—or at least not get in the way? 

These are questions we’ve been asking as a nation for decades, across shifting socioeconomic climates. Throughout, a hard truth remains:

Employers and the government play a role in helping you save for and spend in retirement, but much of the preparation ultimately falls on you. 

Neither the original SECURE Act nor SECURE 2.0 has fundamentally changed this reality. SECURE 2.0 has, however, added far more motivational carrots than punishing sticks. Its guiding goal is right there in the name: Setting Every Community Up for Retirement Enhancement (SECURE). Following is an overview of its key components. 

Note: Implementation for each SECURE 2.0 provision varies from being effective immediately, to ramping up in future years. A few even apply retroactively. Many of its newest programs won’t effectively roll out until 2024 or later, giving us time to plan. We’ve noted with each provision when it’s slated to take effect. 

Saving More, Saving Better: Individual Savers

First, key provisions include several updates to encourage individual savers: 

  • Expanded Auto-Enrollment Requirements (2025): Because you’re more likely to save more if you’re automatically added to your company retirement plan program, auto-enrollment will be required for additional new retirement plans. Even with auto-enrollment, you can still opt out individually. Also, the Act has made a number of exceptions to the rules, including, as described here, “employers less than 3 years old, church plans, governmental plans, SIMPLE plans, and employers with 10 or fewer employees.” 
  • Higher Catch-Up Contributions (2024–2025): To accelerate retirement saving as you approach retirement age, SECURE 2.0 Act has increased annual “catch-up” contribution allowances for many retirement accounts (i.e., extra amounts allowed beyond the standard contribution limits); and, importantly, tied future increases to inflation. However, in many instances, the updates also require high-wage-earners ($145,000/year or higher) to direct their catch-up contributions to after-tax Roth accounts. 
  • Faster Plan Participation for Part-Time Employees (2024): If you’re a long-term, part-time employee, the SECURE Act of 2019 made it possible for you to participate in your employer’s retirement plan. With SECURE 2.0, you’ll be eligible to participate after 2 years instead of 3 years (after meeting other requirements). 
  • Saver’s Match for Low-Income Savers (2027): A Saver’s Credit for low-income families will be replaced by a more accessible Saver’s Match for those whose income levels qualify. While the credit offsets income on a tax form, the match will be a direct contribution into your retirement account, of up to $1,000 in government-paid matching funds.  
  • An Expanded Contribution Window for Sole Proprietors (2024): If you’re a sole proprietor, you’ll be able to establish a Solo 401(k) through the current year’s Federal income tax filing date, and still fund it with prior-year contributions. 
  • Potential Tax Error “Do Overs” (2025): To err is human, and often unintentional. As such, SECURE 2.0 has directed the IRS to apply an existing Employer Plans Compliance Resolutions System (EPCRS) to employer-sponsored plans and to IRAs. The details are to be developed, but as described here, the intent is to set up a system in which “most inadvertent failures to comply with tax-qualification rules would be eligible for self-correction.” 
  • Finding Former Plans (2024): It can be hard for company plan sponsors to keep in touch with former employees—and vice-versa. SECURE 2.0 has tasked the Dept. of Labor with hosting a national “lost and found” database to help you search for plan administrator contact information for former employees’ plans, in case you’ve left any retirement savings behind. 

Saving More, Saving Better: Employers

There also are provisions to help employers offer effective retirement plan programs: 

  • Better Retirement Plan Start-Up Incentives (2023): Small businesses can take retirement plan start-up credits to offset up to 100% of their plan start-up costs (versus a prior 50% cap). Also, businesses with no retirement plan can apply for start-up credits if they join a Multiple Employer Plan (MEP)—and this one applies retroactively to 2020.
  • A New “Starter 401(k)” Plan (2024): The Starter 401(k) provides small businesses that lack a 401(k) plan a simpler path to establishing one. Features will include streamlined regulatory and reporting requirements; auto-enrollment for all employees starting at 3% of their pay; a $6,000 annual contribution limit, rising with inflation; and a deferral-only structure, meaning the plan does NOT permit matching employer contributions.
  • Expanded SIMPLE Plan Contributions (2024): Under certain conditions, SECURE 2.0 allows for additional employer contributions to, and higher participant contribution limits for SIMPLE IRA plans. 
  • New Household Employee Plans (2023): Families can establish SEP IRA plans for their household employees, such as nannies or housekeepers.
  • Small Perks (2023): Until now, employers were prohibited from offering even small incentives to encourage employees to step up their retirement savings. Now, de minimis perks are okay, such as a gift card when a participant increases their deferral amount.

Next Steps

Stay tuned for the next part of this blog series, where we discuss strategies under the Secure 2.0 Act.

Justin D. Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Reference Materials and Additional Reading:

Year-End Planning Checklist

2020 has been a strange year for all of us, and although some financial planning deadlines have been modified due to the CARES Act, most 12/31 deadlines remain in place.  Below are items we are considering as we wrap up the year with our clients.  Should you have questions about whether or how any of the items below apply to you, please reach out to us as we will be happy to assist.  

 2020 Year-End Planning Items with 12/31 Deadline

  1. Maxing out 401(k) contributions:  Employees can contribute up to $19,500 (plus $6,500 extra for those over 50), into their 401(k)s for 2020.   If you have not yet contributed the maximum amount and your cash flow allows, consider increasing your contributions now to reach the maximum contribution amount prior to year end.  
  1. 401(k) Matching:  If your company offers a 401(k) match, it makes sense to take advantage of the full match opportunity every year.  If you have not received the full match for 2020, let us review your company’s 401(k) plan rules to determine if you can contribute enough to receive the full 2020 match before year end.  
  1. Charitable Giving for 2020:  There are some additional charitable deductions this year as part of the CARES Act.  There is a $300 deduction for taxpayers who don’t itemize, and for clients interested in large donations, taxpayers can deduct up to 100% of their adjusted gross income (up from 60%) for cash donations made to public charities. For clients with taxable accounts, we frequently recommend donating appreciated securities instead of cash via a donor-advised fund (DAF).  This strategy works well when a taxpayer has highly appreciated securities in taxable accounts, and/or in a year when income is higher allowing a client to benefit from a larger charitable deduction.  
  1. Gifting:  The annual gift exclusion amount for 2020 is $15,000 per taxpayer to each recipient.  (Married couples can give $30k.)  Make your annual gifts prior to 12/31 if you haven’t already!  
  1. Tax Loss/Gain Harvesting:  At Warren Street, we employ a continuous monitoring of client accounts for tax loss harvesting opportunities.  Similarly, if a client is experiencing a particularly low tax year, it may be the right time to strategically harvest capital gains.  
  1. Roth Conversions:  Although market downturns are not fun, they can certainly provide an opportunity for strategic Roth Conversions.  This is an annual planning item that we analyze for every Warren Street client.  
  1. LLC / Entity Formation:  If you are in the process of business entity formation for 2020, you may need to have your documents signed and filed prior to the end of the calendar year.  

If you have any questions about the above checklist or any other year-end planning questions, please feel free to reach out to your trusted wealth advisor. We are here to help!

Emily Balmages, CFP®, CRTP

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Did the Fed make a mistake? – “A Few Minutes with Marcia”

Welcome back to A Few Minutes with Marcia. My name is Marcia Clark, senior research analyst at Warren Street Wealth Advisors.

Today we’re going to spend a few minutes considering the pros and cons of the Federal Reserve Open Market Committee holding short-term interest rates steady at its June meeting. Most of my comments today are based on the FOMC announcement published on June 19, the press conference with Chairman Jerome Powell shortly thereafter, and remarks by Federal Reserve Governor Lael Brainard on June 21st.

Watch:

 

On June 19, the Federal Reserve Open Market Committee announced its decision to keep short-term interest rates unchanged at 2.25%-2.5%. Did they make a mistake?

To answer this question, let’s put ourselves in the shoes of the Fed and attempt to base our opinion on the available data. The Fed should reduce rates if they see the economy struggling. Is that what they see?

During a speech in Cincinnati on June 21st, Fed Governor Lael Brainard stated his assessment that the most likely path for the economy remains solid. He noted strength in consumer spending and consumer confidence, as well as unemployment at a 50-year low.

He did note a few areas of concern: cautious business investment due to policy uncertainty, slow growth overseas, and muted inflation.

  • Mr. Brainard said: “The downside risks, if they materialize, could weigh on economic activity. Basic principles of risk management in a low neutral rate environment with compressed conventional policy space would argue for softening the expected path of policy when risks shift to the downside.” But what does he mean by ‘compressed conventional policy space’?

The Fed has limited room to maneuver because interest rates are already low, and inflation and employment have not responded to changes in interest rates as predictably as they have in the past. 

  • On the plus side, this means the labor market can strengthen a lot without an acceleration in inflation
  • On the other hand, this low sensitivity along with already low interest rates gives the Fed less ability to buffer the economy in a downturn

 

If the Fed doesn’t get their interest rate call right, the economy could begin to spiral too far up or too far down.

Let’s take a deeper look at why low interest rates present a challenge for the Fed.

  • In the past, the Federal Reserve has cut interest rates 4 to 5 percentage points in order to combat past recessions
  • The chart on slide 6 shows the current Fed Funds rate sitting at less than half where it was before the last two recessions. 
  • Clearly there is less room to run if a recession hits

 

The chart also shows GDP beginning to stabilize at the end of 2016. With GDP on a more steady path, back in 2017 the Fed started raising short-term interest rates toward a more normal level in order to have some ‘dry powder’ for the next recession.

How did we get to this delicate balance point?

In December 2018, the Fed said more rate hikes were appropriate given the strengthening economy. The stock market reacted badly as at the same time trade talks with China were going nowhere and portions of the Treasury yield curve were inverted. Recession fears were on everyone’s mind.

In March 2019, Federal Reserve officials reassure markets that they will be “patient” with increasing short-term interest rates. To quote the FOMC statement after the March meeting: “the case for raising rates has weakened…” Notice that they didn’t say the case for cutting rates has strengthened.

And in June, the FOMC held interest rates steady and stated that the current level of interest rates is consistent with its mission to promote full employment and price stability. In its post-meeting statement, the committee said that the timing and size of future adjustments will be based on economic conditions relative to these two objectives. 

After the announcement, both stocks and bonds reacted positively to the decision, with the stock market indexes touching new highs before falling back a bit at the end of the week. 

Commentators speculated that the markets reacted well because a rate cut could be imminent. Equally likely, however, is that the markets reacted to the lack of a rate hike and prospects that a recession is not around the corner. 

During a press conference after the announcement, Fed chairman Jerome Powell responded to a question by saying that being independent of political pressure or market sentiment has served the country well and would do so in the future. He stated that the FOMC will react to data and trends that are sustainable rather than individual data points that can be volatile

But despite all the evidence, as we approach the end of June an astonishing 100% of futures investors are betting on a rate cut in July. These investors are wrong. 

Why am I so sure they won’t cut rates when commentators and the futures market clearly think differently?

You may have heard the expression ‘pushing on a string’. What this means is that applying force to something with no rigidity won’t have any impact – the string absorbs the force and the force doesn’t go any further. This is the current situation with monetary policy.

Imagine pushing a sofa across your carpeted living room versus pushing a mattress across the same room.

Once the feet of the sofa get out of the dent they made in the carpet, the sofa will move fairly easily. That’s because the sofa is rigid – when you apply force at one end, the sofa moves away from the force.

But a mattress is much more resistant to shifting. That’s because much of the force you apply is absorbed by the cushioning already in the mattress. The mattress will often bend before it will move. The force doesn’t go anywhere or accomplish anything.

The current U.S. economy is like the mattress in this example. The U.S. economy has plenty of available capital and interest rates are already low. Reducing the Fed Funds target from 2.375% to 2.00% is unlikely to accomplish much other than encouraging unwise borrowing and ultimately sparking inflation.

Yes, bad things can happen to our economy and the Fed needs to guard against a recession. But a recession overseas is much more likely than in the U.S., and no U.S. recession has ever been caused by a recession overseas. Dropping interest rates to ease market concerns or satisfy political sentiment is not the Fed’s mandate and would be counterproductive.

Barring some catastrophic political event or natural disaster, the U.S. economy is unlikely to falter between now and mid-July. 

Recognizing the Fed’s dual mandate of stable prices and full employment are both being met at the current level of short-term interest rates, right now the downside risk of lowering rates outweighs the potential stimulus benefit. The FOMC should keep the Fed Funds rate steady when they meet in July.

This has been ‘A Few Minutes with Marcia’. I hope you are a bit clearer on how to assess the likelihood of Fed policy decisions going forward. As always, comments and questions are welcome!

Sources:

 

Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

DISCLOSURES

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications.

Form ADV available upon request 714-876-6200

Market Volatility – “A Few Minutes with Marcia”

Volatility measures the frequency and magnitude of price movements, both up and down, that a financial instrument experiences over a certain period of time. The more dramatic the price swings, the higher the level of volatility.

Learn the basics of market volatility with Marcia Clark, CFA, MBA.

Watch:

For those who prefer to read!

Welcome to A Few Minutes with Marcia. My name is Marcia Clark, Senior Research Analyst at Warren Street Wealth Advisors. Today we’re going to talk about the 4th quarter 2018 stock market dive and 1st quarter 2019 rebound in an attempt to understand more about market volatility.

Prior to 2018, the stock market had experienced 2 years of unusually low volatility, despite a few bumps along the way. After a mixed start to 2018, the Dow Jones Industrial Average looked like it was back to its winning ways, then came the 4th quarter tumble. Investors were caught by surprise by the huge swings in market prices – volatility – and started selling stocks like crazy. To better understand these market dynamics, let’s put the recent activity into context.

You may have heard of a common measure of market volatility called the ‘VIX’ – the Chicago Board Options Exchange volatility index. The VIX measures expected future volatility by evaluating the prices of put and call options traded on the exchange. If you’re looking at the slideshow, you can see how much calmer the VIX index was during the quiet years of the stock market, especially in 2017. As the market swooped up in late 2017, expected future volatility spiked shortly thereafter – remember that volatility can spike when prices go up as well as down.

When the market gave back some of its gains in early 2018, the volatility index fell back as well. Then came the market tumble in late 2018. The VIX index starts jumping around like a Richter scale during an earthquake. As we move into 2019, even with the recent pick up in volatility the graph shows that the VIX is at a pretty normal level compared to prior years. We’re just not used to ‘normal’ volatility anymore.

Where do we go from here? No one knows for sure, and if anyone says they can predict the future they’re kidding themselves and their clients. What we can say is that financial markets react to rumors and headlines, many of which don’t fundamentally change the financial landscape. This ‘knee jerk’ reaction causes market volatility, and this volatility is normal. In fact, active investment managers appreciate market volatility, because market dips based on headlines rather than fundamental changes in the economic landscape give investors with a strong stomach and an evidence-based outlook the ability to buy good assets at cheap prices. If all goes well, those assets will recover their value plus more over time, and patient investors will be rewarded.

 

Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

DISCLOSURES

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications.

Form ADV available upon request 714-876-6200

Does PG&E’s Recent Bankruptcy Announcement Scare You?

Here Are The Things All Employees Should Be Aware of Regardless of Where You Work

By Justin D. Rucci, CFP® 

As many of you are likely aware, PG&E recently announced a bankruptcy filing as the result of roughly $30B in potential liabilities stemming from recent California wildfires. Regardless of whether or not you work for a public utility, it is only natural to have questions around what to expect or what precautions you should be taking with your own money. With that said, below are some items you will want to remain cognizant of should more wildfires occur or things change.

Things to Think About:

401k

While your 401(k) account is technically “tied” to your employer, your contributions and vested matching contributions will not be at creditor risk should your company go bankrupt. As part of the Employee Retirement Income Security Act of 1974(ERISA), your 401(k) assets are required by law to be held in trust separate from the company. This means the assets are not commingled with the company’s general operating funds and are not accessible to the company should they need operating capital or funds to pay creditors. Your investments within the 401(k) are always subject to your own investment risk, so be sure to contact Warren Street Wealth Advisors if you would like guidance on the plan’s investment options.

Pension

Pension plans are another common concern for those worried about their company potentially filing for bankruptcy. Luckily ERISA comes into play here as well. As part of the enacting of ERISA, a government agency titled the Pension Benefit & Guaranty Corp.(PBGC) was formed. This agency is designed to step in to pay benefits should a private pension plan fall to bankruptcy. This agency will step in to pay receipt of your pension benefits at normal retirement age, annuity benefits to your survivors, disability benefits, and most early retirement benefits. The PBGC will not however pay for severance packages, vacation pay, or similar benefits. While benefits are guaranteed by the PBGC, they do enforce limits on what is covered by the agency, meaning it is possible that you would not necessarily receive your entire benefit. Maximum benefit guarantees can vary, but more information is available on the PBGC website here.

Retirement

How should you time your retirement if you are worried about your company going bankrupt? The short answer is, you probably shouldn’t dictate your retirement decision based solely on the possibility of a corporate bankruptcy. While the possibility of benefits being cut and severance package offerings are very real for companies that are struggling financially, often times it makes sense to take an individualized approach to analyze the situation before making a rash decision on retirement. Pension plans may change from a defined benefit annuity stream to a cash balance “lump sum” in some cases, but this does not necessarily mean it is time to retire. I would recommend speaking to an advisor should you have questions about your specific company and situation to determine what the best course of action may be for you.

What Should I Do?

For those interested in learning more about retirement and would like to meet with professional advisors, Warren Street Wealth Advisors hosts many events throughout the year. You can view our upcoming events here.

If you have any questions, contact info@warrenstreetwealth.com or call 714-876-6200. We are well versed in interpreting company benefits and are happy to talk through any of your questions or concerns.


Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Sources

https://www.bankrate.com/retirement/your-pension-when-the-unexpected-happens/

https://money.usnews.com/money/blogs/on-retirement/2010/12/14/what-happens-to-my-pension-if-my-company-goes-bankrupt-

End-of-the-Year Money Moves

End-of-the-Year Money Moves

Here are some things you might want to do before saying goodbye to 2018.  

What has changed for you in 2018? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2019 begins.

Even if your 2018 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.  

Do you practice tax-loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust. (1)  

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years. When you live in a high-tax state, this is one way to defer tax. (1)

Do you want to itemize deductions? You may just want to take the standard deduction for 2018, which has ballooned to $12,000 for single filers and $24,000 for joint filers because of the Tax Cuts & Jobs Act. If you do think it might be better for you to itemize, now would be a good time to get the receipts and assorted paperwork together. While many miscellaneous deductions have disappeared, some key deductions are still around: the state and local tax (SALT) deduction, now capped at $10,000; the mortgage interest deduction; the deduction for charitable contributions, which now has a higher limit of 60% of adjusted gross income; and the medical expense deduction. (2,3)

Could you ramp up 401(k) or 403(b) contributions? Contribution to these retirement plans lower your yearly gross income. If you lower your gross income enough, you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so contributions to those accounts are not deductible and will not lower your taxable income for the year. They will, however, help to strengthen your retirement savings. (4)

Are you thinking of gifting? How about donating to a qualified charity or non-profit organization before 2018 ends? In most cases, these gifts are partly tax deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift. (5)

If you donate publicly traded shares you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2018, you may be able to claim a full or partial state income tax deduction (depending on the state). (2,6)

Of course, you can also reduce the value of your taxable estate with a gift or two. The federal gift tax exclusion is $15,000 for 2018. So, as an individual, you can gift up to $15,000 to as many people as you wish this year. A married couple can gift up to $30,000 in 2018 to as many people as they desire. (7)

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and workplace retirement plan? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go, should you pass away. Lastly, look at your will to see that it remains valid and up-to-date.   

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday, and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are not taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. A Roth IRA conversion can no longer be recharacterized (reversed). (8)

Can you take advantage of the American Opportunity Tax Credit? The AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels. (9)

See that you have withheld the right amount. The Tax Cuts & Jobs Act lowered federal income tax rates and altered withholding tables. If you discover that you have withheld too little on your W-4 form so far in 2018, you may need to adjust your withholding before the year ends. The Government Accountability Office projects that 21% of taxpayers are withholding less than they should in 2018. Even an end-of-year adjustment has the potential to save you some tax. (10)

What can you do before ringing in the New Year? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.


Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Citations

1 – nerdwallet.com/blog/investing/just-how-valuable-is-daily-tax-loss-harvesting/ [4/16/18]
2 – marketwatch.com/story/how-to-game-the-new-standard-deduction-and-3-other-ways-to-cut-your-2018-tax-bill-2018-10-15 [10/15/18]
3 – hrblock.com/tax-center/irs/tax-reform/3-changes-itemized-deductions-tax-reform-bill/ [10/10/18]
4 – investopedia.com/articles/retirement/06/addroths.asp [2/2/18]
5 – investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp [10/1/18]
6 – savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth [9/27/18]
7 – fool.com/retirement/2018/06/28/5-things-you-might-not-know-about-the-estate-tax.aspx [6/28/18]
8 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [9/15/18]
9 – fool.com/investing/2018/03/17/your-2018-guide-to-college-tuition-tax-breaks.aspx [3/17/18]
10 – money.usnews.com/money/personal-finance/taxes/articles/2018-10-16/should-you-adjust-your-income-tax-withholding [10/16/18]

Taking a Loan from Your Retirement Plan = Bad Idea

Taking a Loan from Your Retirement Plan = Bad Idea

Why you should refrain from making this move.

Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice about that because these loans are not only risky but injurious to your retirement planning.

A loan of this kind damages your retirement savings prospects. A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan. (1)

In borrowing from a 401(k), 403(b), or 457, you siphon down invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense. (1)

Most plan providers charge an origination fee for a loan (it can be in the neighborhood of $100), and of course, they charge interest. While you will repay interest and the principal as you repay the loan, that interest still represents money that could have remained in the account and remained invested. (1,2)

As you strive to repay the loan amount, there may be a financial side effect. You may end up reducing or suspending your regular per-paycheck contributions to the plan. Some plans may even bar you from making plan contributions for several months after the loan is taken. (3,4)

Your take-home pay may be docked. Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored. (1)

If you leave your job, you will have to pay 100% of your 401(k) loan back. This applies if you quit; it applies if you are laid off or fired. Formerly, you had a maximum of 60 days to repay a workplace retirement plan loan. The Tax Cuts & Jobs Act of 2017 changed that for loans originated in 2018 and years forward. You now have until October of the year following the year you leave your job to repay the loan (the deadline is the due date of your federal taxes plus a 6-month extension, which usually means October 15). You also have a choice: you can either restore the funds to your workplace retirement plan or transfer them to either an IRA or a workplace retirement plan elsewhere. (2)

If you are younger than age 59½ and fail to pay the full amount of the loan back, the I.R.S. will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty. (3)

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you are younger than 59½. (1)

Would you like to be taxed twice? When you borrow from an employee retirement plan, you invite that prospect. You will be repaying your loan with after-tax dollars, and those dollars will be taxed again when you make a qualified withdrawal of them in the future (unless your plan offers you a Roth option). (3,4)

Why go into debt to pay off debt? If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.   

You should never confuse your retirement plan with a bank account. Some employees seem to do just that. Fidelity Investments says that 20.8% of its 401(k) plan participants have outstanding loans in 2018. In taking their loans, they are opening the door to the possibility of having less money saved when they retire. (4)

Why risk that? Look elsewhere for money in a crisis. Borrow from your employer-sponsored retirement plan only as a last resort.


Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

 

Citations
1 – gobankingrates.com/retirement/401k/borrowing-401k/ [10/7/17]
2 – forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/ [1/16/18]
3 – cbsnews.com/news/when-is-it-ok-to-withdraw-or-borrow-from-your-retirement-savings/ [1/31/17]
4 – cnbc.com/2018/06/26/the-lure-of-a-401k-loan-could-mask-its-risks.html [6/26/18]