Type of Insight: Articles

Women have a lot on their plates. Everyone experiences transitions throughout life, but women seem to get more than their fair share. Even with greater equality between the sexes, the bulk of caregiving still falls largely to women. Women are more likely to make adjustments to their careers in order to balance child rearing, caring for an aging parent and career.

That’s why it’s important to know as much as you can about how transitions work so you can navigate through them with confidence. Having confidence can help you make the most thoughtful decisions about what’s best for you and your family.

These are four things you need to know about transitions.

1. Treat transitions like a traffic circle.

We often think of transitions as road markers we pass on our travels through life. As you make your way, you encounter significant events that can alter where you’re going. These could be launching a career, finding a partner, starting a family, getting a promotion, filing for divorce, becoming widowed, caring for aging parents, launching children into adulthood, settling into retirement, to name just a few.

But life doesn’t always line up so neatly. You don’t always have the luxury of dealing with one transition before moving on to the next. In reality, transitions come at you fast and furious. You might be enjoying a hard-earned promotion when your child is leaving for college and your father requires around-the-clock care. In short, life is messy.

Rather than try to control the timing of transitions, women must get themselves “change hardy,” by building resilience. Even if you’re not born with resilience, you can develop this muscle by practicing.

2. Hope for the best. Plan for the not-so-great.

There are some life events you just can’t prepare for. One day things are humming along, and the next you might be dealing with a divorce and a major medical diagnosis. How do you plan for that?

Hopefully, you won’t experience too much misfortune. But just in case, it’s best to prepare so you aren’t caught flat footed each time a transition comes your way. Use the times in your life when things are stable to get yourself change ready.

Make sure to…

• Build a support network. Nurture your friendships and co-worker relationships. These are the people you’ll need to lean on if the rug gets pulled out from under you.

• Straighten out your financial house. Work diligently to reduce debt and build savings so you’re financially stable. You’ll be able to focus on the emotional and practical aspects of transitions, without worrying about money.

3. Understand transitions from all angles.

There’s a lot to each transition and it’s important you see them in all 360 degrees. There are four main aspects of transitions.

• Emotional. Line up the support you need, whether it’s a trusted friend who’s a good listener or a therapist who can help you work through your feelings.

• Family. Transitions rarely impact just one person. Make sure you’ve helped your family understand what’s happening and how it impacts them.

• Practical. Break down everything that needs to be done to deal with a transition. Doing something can help you feel a sense of control at a time when it seems like things are out of your hands.

• Financial. What financial resources will this transition require? If you’re dealing with boomerang kids, for example, that could impact your retirement security. If it’s a caregiving, you might need to take a leave of absence from your job. Will that reduce your chances for career advancement.

4. Don’t shy away from the essential conversations.

When it comes to difficult topics, it’s natural to want to duck and hide. But that strategy rarely results in the outcome we want. Take caregiving. Perhaps your parents would rather not talk about their end-of-life care and whether or not they have enough funds set aside for that care. But in order to help them control the situation and ensure that their wishes are carried out, these conversations must happen.

For better conversations follow these ideas:

• Start early. Whether you’re dealing with the kind of care your parents want when they can no longer care for themselves or how you and your spouse will split the responsibilities of parenthood, it’s important to have these conversations well in advance of the event. You’ll be more relaxed and clear-headed when you’re not in the heat of an emergency.

• Focus on the plan. Make a plan for the role that each person will play. If you’re discussing care for your aging parents, designate a job for each sibling, such as the person who will handle finances and who will deal with the medical aspects.

• Come back and talk again. Essential conversations are rarely a one-and-done kind of event. You’ll want to return to them to check in about how things are going and fine tune aspects of your plan that aren’t working as well as they should.

Life is always changing. While some changes — like getting married or a major promotion — are welcome, they can still cause stress in your life. And some transitions, like divorce, widowhood or caring for an ailing relative, are just hard. Since transitions are inevitable, it’s best to get yourself change hardy and build up resilience.

Use periods of stability to build a support network and shore up your finances so that when a transition comes your way, you’ll be prepared and confident.

An update on donor-advised funds vs. private foundations

Several months ago, we compared donor-advised funds to private foundations in an issue of Financial Planning Update that has become quite popular. Changes in the tax code since then warrant an update.

Whether the goal is to improve a local community or support a more far-reaching cause, charitable giving is an important goal for many investors.  With donations of cash or other assets, you can support a specific nonprofit organization’s mission, while also teaching future generations about empathy and generosity. According to the National Philanthropic Trust (NPT), in 2016, individuals donated more than $280 billion, about 72% of overall giving.¹ There are a variety of ways to support the causes you believe in, including the following:

How the Tax Cuts and Jobs Act may affect your 2018 income tax 

It’s the time of year again to consider steps you can take to potentially reduce your income tax liability. The Tax Cuts and Jobs Act (TCJA) reduced the highest tax rate from 39.6% to 37%, but that does not necessarily mean you’ll be in a lower bracket. If you’re a middle or upper bracket taxpayer, particularly a single filer or head of household, you may be pushed into a higher bracket. As in years past, it may be important to consider ways to reduce your taxable income and accelerate deductions.

In addition to new tax brackets, the TCJA contains other provisions that are likely to impact your financial plan. The seven steps below can help you understand some of those provisions, better manage your tax liability, and initiate conversations with your tax and financial professionals.

1. Evaluate withholding and estimated tax payments
If you have not yet done so, ask your tax professional to calculate whether the money you’ve paid in taxes so far this year is in line with your expected tax liability. If it’s not, you still have time to adjust the amount withheld from your paychecks or your final quarterly estimated tax payment. If your 2018 liability will be higher than it was in 2017, increasing your withholding or estimated payments may help you avoid a penalty. If not, reducing them will help you avoid paying excess tax.

2. Look for ways to maximize deductions
The TCJA increased the standard deduction to $24,000 for married couples and to $12,000 for those who file as single. You will no longer be in a position to itemize if your deductions do not exceed these higher levels. While this may make tax filing easier, it could also mean lower overall deductions. However, with a little planning, you might still be able to itemize in certain years. Here’s an example:

Suppose you have $22,000 of itemized deductions this year, including $4,000 in charitable contributions that you plan to make at year end. Instead of making the charitable contributions in 2018, you could bunch two years’ worth of contributions into 2019 so you’re eligible to itemize in that year. The table below summarizes the potential benefit.

The impact would be even greater if you bunched several years’ worth of contributions into one year. If you’re worried about providing a steady stream of donations to charitable organizations, ask your financial professional about setting up a donor advised fund (DAF). You would make a lump-sum contribution into the DAF and then dictate when and to whom the funds are disbursed over time. Likewise, you may be able to fund multi-year charitable contributions using the qualified charitable distribution (QCD) rule with required minimum distributions from your IRA.  If you’re 70½ or older, ask your financial professional about this way to reduce your adjustable gross income.

3. Break down your mortgage debt

The TCJA eliminated the deduction for home equity interest (unless used to buy, build or substantially improve a residence) and reduced the maximum mortgage interest deduction. You can now deduct interest on only up to $750,000 of mortgage debt ($1,000,000 if the debt was outstanding before December 16, 2017). Since you can deduct mortgage acquisition debt that you incurred to buy, build or substantially improve your primary or secondary residence, for 2018, you’ll want to consider what your debt is made up of and identify the portion used to buy, build or improve your home. You may also want to consider:

•  Consolidating non-qualifying debt into qualifying debt
•  Restructuring debt that doesn’t qualify into investment debt, which might qualify as investment interest

4. Take advantage of tax-favored health care plans

If you belong to a high-deductible health insurance plan, you may be able to take advantage of a health savings account (HSA) that allows you to contribute pre-tax up to $3,450 for self-only coverage ($4,450 if you’re 55 or older) and  up to $6,900/$7,900 for family coverage. Money socked away in an HSA does not have to be used up each year, as it does in a flexible spending account, and the earnings grow tax-free.

Note that the TCJA allows you to deduct unreimbursed medical expenses above 7.5% of your adjusted gross income, but that rate will rise to 10% in 2019. Therefore, it may make sense to pay all medical expenses for 2018 before the end of the year, especially if you will meet the deduction floor this year but not next, or if you won’t be able to itemize next year.

5. Maximize contributions to your retirement plans

Most contributions to retirement plans are made with pre-tax dollars, so maximizing those pre-tax contributions will increase your retirement savings and decrease your taxable income. You have until the end of 2018 to contribute up to $18,500 to an employer plan ($24,500 if you’re age 50 or older) and until April 17, 2019 to contribute up to $5,500 to an IRA ($6,500 if you’re age 50 or older). If you don’t already have an IRA, speak with your financial professional about the benefits of contributing to a traditional IRA and then converting it to a Roth IRA. An immediate conversion will have little or no tax impact.

6. Look for tax-loss selling opportunities

The markets have been rising for the longest period in history. If you’ve sold securities this year for a gain, consider selling others that would produce a loss if you don’t expect them to come back. You can offset the gains with the losses and reduce your taxable income. If you have more losses than gains, you can offset up to $3,000 of ordinary income and carry over extra losses to offset income next year.

7. Leverage expanded uses for 529 plans

Another way to set aside tax-advantaged dollars that grow tax-free is in a 529 education savings account. The TCJA extended the use of 529 plans beyond college expenses to allow up to $10,000 per year, per beneficiary to be used for elementary or secondary school tuition. You can open an account for a child, grandchild, or anyone else who might need the money for education. If the beneficiary is not old enough to benefit from the plan yet, opening an account now allows more time for the money to grow.  You can even open it in your own name and change the beneficiary later on.

The annual gift exclusion rules allow you to contribute up to $15,000 to each beneficiary per year ($30,000 if you and your spouse contribute). And, you can make up to five years’ of contributions at once if you don’t make other annual exclusion gifts over those years.

Four more considerations for business owners

If you own a business, there are a few more tax-related steps you can take.

1. Start a tax-qualified retirement plan

There are many options available, and each has its pros and cons. Some have to be established before year end but others give you until the tax-filing deadline of next year. A retirement plan can provide valuable business deductions starting this year if you act quickly. It also offers the opportunity for you to start growing tax-advantaged retirement savings. Talk to your tax professional to determine which plan is right for your business.

2. Find out if you’re eligible for a new 20% deduction

One of the most intricate and wide-ranging pieces of the TCJA is IRC Sec. 199A, which allows an additional deduction to eligible pass-through business owners of up to 20% of business income. This complex provision is not available to all pass-through entities and is limited in scope. As this is an entirely new provision, ensure adequate advance planning with your tax professional to learn if you qualify and to maximize the benefits.

3. Consider buying new business assets

Under the bonus depreciation rules, business owners can now write off the entire cost of qualifying purchases under changes enacted with the TCJA. Last year, the bonus limit was 50%. In addition, the IRC Sec. 179 deduction limit was increased to $1 million, subject to phase out after $2.5 million of purchases.

4. Don’t forget the R&D credit

This credit is available for businesses for specified research and development expenses, including those for qualified software development. It’s also available to business owners of pass-through companies and can be used to offset up to $250,000 in payroll taxes per year for 5 years for qualifying new or small businesses.  As the rules for claiming and documenting this tax credit can be complex, you should discuss this with your tax professional.

Should you be concerned about the estate tax?
With the increase in the lifetime exemption from $5.49 million per person to $11.18 million, many estates that were exposed to a potential estate tax may no longer be. However, if your estate is valued over $11.18 million (or you’re married with a combined estate over $22.36 million), here are some ideas to consider:

• You could use some of the additional lifetime exemption given to you before the amount reverts back to original levels in 2026. If you do that, make sure to leave yourself enough to live on.
• An option is to remove assets from your estate and freeze their values using a Spousal Lifetime Access Trust (SLAT). In a SLAT one spouse sets aside assets for the benefit of the couple’s children and, as long as the spouses remain married, the spouse can access it if needed. To insure equality, each spouse can set up a SLAT for the other, as long as they are sufficiently nonreciprocal to avoid IRS scrutiny.
• If you have an older estate plan that uses a formula, it could be booby-trapped due to the increase in the lifetime exemption amount.  See your tax professional about a possible rework.

Understanding the benefits of IRAs, 401(k)s and defined benefit plans for you and your employees

As a business owner, you naturally focus your energy, time and resources on growing and sustaining your business, while fostering an environment where your employees can thrive and support your vision. As you set your priorities, planning for retirement may fall to the bottom of your list. In fact, according to a 2016 BMO Wealth Management survey of more than 400 business owners, 75% had saved less than $100,000 for their retirement. This illustrates that most business owners prioritize their business over retirement planning.

Whether you don’t see the benefit of planning now or simply have not had the time for it, failing to plan for retirement can come at a high cost. You may forego the tax and wealth planning opportunities that a well-structured retirement savings strategy can provide, while your employees may miss an important benefit that can help them prepare for their futures.

Below, we review three categories of retirement savings plans available to business owners – Individual Retirement Accounts (“IRAs”), 401(k)s and defined benefit/pension plans. We identify the pros and cons of each and provide specific ideas to help you put a plan in place. We’ve also included a detailed comparison chart to help you decide which may be right for you.

Do you really need a retirement plan?

If your business is thriving and generating a steady income, you may not see the benefit of putting retirement money aside today. Perhaps you are overwhelmed by the options available or are hesitant to add another responsibility to your already lengthy list. If the value of your business has been growing, you may plan to sell it and monetize the value later in life, essentially considering the business to be your retirement plan. However, unforeseen factors may impact the value of your business and your ability to continue running it, such as health, family or economic changes. In such cases, a separate retirement plan can help provide an important safety net.

With a retirement plan, you can:

• Take control of your future, particularly if you don’t have the benefit of a company pension or stock plan.
• Realize tax benefits today and in the future that can save you money every year.
• Earn compound growth on your nest egg, giving you greater flexibility to work as much or as little as you want as you approach retirement.
• Retain valuable employees by providing an important benefit to them that may be of minimal cost to you.

IRAs: The easiest way to start saving

Both you and your employees can take advantage of the benefits of an Individual Retirement Account, at little to no cost to your business.

• Traditional or Roth IRA. Anyone with earned income can open an IRA (though there are income limits for Roth IRAs). Although these types of IRAs have the lowest contribution limits, you can set one up in conjunction with another retirement plan to increase savings.
• SIMPLE IRA. Designed for small businesses with fewer than 100 employees, a SIMPLE IRA allows employees and employers to make contributions. Employees can choose whether or not to contribute, but as the employer, you must make matching contributions up to 3% of compensation or 2% nonelective contributions, so you will need to be committed to the plan year after year. In addition, the business (generally) cannot maintain another retirement plan in conjunction with a SIMPLE plan.
• SEP IRA. With this plan, the contribution limits are higher than with any other type of IRA; you can potentially put away up to $55,000 per year for yourself, depending on your income. In addition, you have the flexibility to contribute or not each year, depending on the cash flow needs of your business. The percentage of salary contributed to all plans must be equal, so if you have employees, you’re required to invest the same percentage of their salary in their accounts as your own salary.

• Employer-sponsored IRA. Designed to help your employees save faster, this plan allows them to contribute to an IRA through payroll deductions.
• Self-directed IRA. These plans allow you to direct your retirement savings to an area of investing in which you’re particularly savvy, such as real estate, private equity or hard money lending. Traditional and Roth tax benefits and contribution limits apply.

Pros and Cons of IRAs

(+)

• Low cost and very easy to start
• No plan administrator required
• No annual compliance testing
• Flexible contributions (except SIMPLE IRAs)

(-)

• May have lower contribution limits than defined benefit or 401(k) plans
• No loan options

401(k)s: Greater savings ability with greater flexibility

In general, 401(k) plans may be a bit more complex and costly to set up than IRAs. However, most plans will allow both you and your employees to set aside more money for retirement.

• Solo 401(k). This solution allows a sole proprietor with no employees (except a spouse) to make contributions as both the employer and employee, potentially up to $55,000 (plus $6,000 catch-up if you’re over age 50), depending on your income. Contributions as employee and employer may be fully tax-deductible, further reducing your income taxes. You can also establish the plan as a traditional 401(k) or Roth 401(k), depending on your goals.

• Traditional 401(k). Employees can contribute up to $18,500 pretax per year, commonly through payroll deductions. Business owners can make matching contributions to encourage employee participation, or profit sharing contributions based on cash flow each year, all of which are tax deductible for the business.
• Roth 401(k). Like a Roth IRA, there is no up-front tax savings, but any growth and subsequent withdrawals are tax-free in retirement. Contributions to a Roth 401(k) are not subject to the income limits that apply to Roth IRAs. Employer matching contributions are pretax and may not be directed to the Roth portion.

Pros and Cons of 401(k)s

(+)

• Higher tax-deferred contribution limits
• Employer matching of employee contributions allowed
• End-of-year profit sharing to incentivize employees allowed
• Tax-free loans up to IRS limits

(-)

• More costly than IRAs
• Additional forms for bigger plans

Defined benefit/pension plans: Maximum Retirement Savings

These plans allow you to sock away more than any other type of retirement plan. An actuary uses statistics, such as the age of the participants (you and your employees), salary levels and years until retirement to calculate the contribution limits. Older business owners with younger employees can potentially maximize benefits to their own accounts based on these calculations, in some cases resulting in allowable contributions of $100,000 or more. Contributions are fully tax deductible. If you’re looking to put away as much as possible, and have the cash flow to do so, a defined benefit plan may be right for you.

Pros and Cons of Defined Benefit/Pension Plans

(+)

• Save more than any other type of plan
• Can be paired with a 401(k) or profit sharing plan to maximize contributions

(-)

• Most expensive option to maintain
• Requires annual reporting and actuary calculations
• Must have consistent income available to cover IRS minimum funding requirements

Getting started

Establishing a retirement plan does not need to be complicated or time-consuming. Your financial professional can help by handling the setup, directing you to investment options that are appropriate for your situation, and sending you annual reports to share with your accountant. Start by engaging your financial and tax professionals to help you:

• Project your retirement needs and define how much you can safely put away to meet those needs.
• Project the annual tax savings possible given your personal and business situations.

You may find it makes sense to fully fund a tax-deferred plan up to IRS limits, split savings between pretax and after-tax vehicles, or save a portion to a tax-deferred account and put the rest back into the business. Working with your advisors will enable you to make the best decision for you and your business.

Just as a business plan sets your company up for success, a retirement plan can help both you and your employees prepare for a better future. Ask your financial professional for help understanding and choosing the right business retirement plan for you.

Tips to avoid scams and other online security threats

The Internet has become a common feature of daily life, with nearly 90% of American adults saying they go online.  Unfortunately, anyone using the Internet can be the potential target of online scams and security threats. From email scams to malicious websites, it’s more important than ever to protect your personal information and financial accounts online. Whether you’re a baby boomer or younger adult, understanding the potential threats and taking some basic precautions can help keep your information safe and help you to make the most of your digital life.

Protecting yourself from email scams

Hackers and scam artists are usually after one thing: they want your personal information so they can steal your money or your identity. Personal information includes your bank or investment account numbers, credit card details, online passwords and other private data, such as your social security number. These threats may surface in your email, perhaps disguised as an offer to “click here” for a free prize or a vacation. It may appear that the emails were sent from a trusted place, such as the Social Security Administration, Medicare, the IRS, your bank or a charity. They may also threaten an action unless you reply quickly.

Don’t be fooled. Websites or emails that ask for your personal information are typically not legitimate. Banks and other institutions will never request your personal information through email. Never enter your social security number, account number, date of birth or your mother’s maiden name online unless you have verified that you are on a legitimate site that has a genuine need for that information.

It can be difficult to identify a malicious email or other online scams. Here are some tips that can help:

• Read your emails carefully before you reply. Typographical errors or phony-looking logos are a sure sign that the email is not trustworthy and likely does not come from a legitimate source.
• Don’t open an email if you don’t recognize the person or organization that sent it as it could contain a dangerous computer virus. Move the email directly to your trash folder or recycle bin without opening it.
• Be wary of any offers that sound like they are too good to be true.

Case study: Beware of bogus requests to wire money

This past holiday season, Anna and others in her Florida retirement community received emails that appeared to be from a friend claiming to be stranded in India. The message included instructions to wire money in order to help the person get back to America. Some of the residents, including Anna, were each duped into sending thousands of dollars to an unknown recipient. Unfortunately, this type of scam is all too common. Many scam artists will try to convince you that they are a friend or relative in distress, a debt collector or government agency claiming you owe money, or a technology company trying to protect your computer from a virus. Make sure you take the time to verify the truthfulness of an email—perhaps by asking a relative—before sending money to anyone.

Reducing your vulnerability to hackers

Hackers are people who use computers to gain unauthorized access to data. They’ve made national news headlines by attacking major institutions and stealing millions of people’s credit card details, addresses, and other personal information. While large organizations are often the victims, even your personal computer is a potential target.

When your computer is not protected, hackers can wreak havoc in a number of ways. For example, they may install a keylogger to copy your usernames and passwords as you type them, then log in to your account later to transfer money out of your account and into theirs. They may also tap into your email and send malicious emails to all of your contacts in order to spread computer viruses and malware. In the worst case, hackers have accessed computers to deal in or hide the true origin of illegal activities.

You can limit the possibility that a hacker will gain access to your computer by safeguarding your system passwords, including both your modem and Wi-Fi passwords. Most people might only be familiar with their Wi-Fi password settings, but your modem security settings connect your computer to the Internet through your Internet Service Provider (ISP). It’s a good idea to change these passwords periodically. Tip: You may need to contact your ISP to learn how to access and change your modem password.

Here are some other ways to protect your computer from hackers:

• Never allow someone access to your computer remotely. One exception might be your ISP if you’ve called them to fix a specific problem.
• Keep your software up-to-date. Operating system updates typically include the latest security features.
• Use anti-virus software. Although most operating systems have built-in security protection, such as a firewall, it’s usually a good idea to supplement with anti-virus software that is specifically designed to detect and destroy computer viruses. Unix-based operating systems, such as those used by Apple, may be less vulnerable but determined hackers may still find new ways to exploit users.
• Don’t save your credit card details on your computer for later use. It’s worth the effort to enter them each time you make an online purchase.
• Create strong passwords with a combination of letters, numbers and special characters, and change them often.
• Never store your passwords in a file on your computer or in your browser unless you use a secure password management system that you trust.

Case study: Usernames can be just as important as passwords

Michael used his first initial and last name as his username for his online bank account. He was unaware that hackers had figured out the username and were trying random combinations of characters to decode his password. Every time the hackers entered an incorrect password three times, his account would be locked from online access. He would then need to reset his password in order to get back into it. When he called the bank, he learned there had been numerous attempts to log in that he had not initiated. Michael immediately changed his username to something less obvious and also changed his password.

Staying safe on websites

Many websites require you to enter sensitive information, including a username, password, account number or credit card details. With some diligence, you can minimize the risk that a hacker will uncover your data. Here are some tips:

• Before you enter personal information on a website, be sure the URL begins with “https.” The “s” at the end stands for “secure” and means the data is encrypted and can’t be seen by anyone but you.
• Log out of your accounts before you leave a website or close your browser. This ensures the account won’t be visible to the next person who opens the browser.
• Log in to your accounts only from your home, where you know that your connection is safeguarded. Internet connections from public places such as coffee shops and airports may not be secure.
• Use caution on social media. Scam artists create fake profiles to entice you to follow links to malicious websites or to give up sensitive personal information.
• Be careful on dating websites where prowlers may try to gain your trust and then ask for a credit card number or money.
• Beware of counterfeit drug scams targeting people who search the web for better prices on medication.

Ignore pop-up windows that open automatically when you’re searching the web. They often simulate virus-scanning software and will try to fool you into either downloading a fake anti-virus program (at a substantial cost) or an actual virus that will expose whatever information is on your computer to hackers.

How data aggregation tools can help you monitor your financial accounts

Considering the various online threats, it’s more important than ever to keep track of your accounts and be watchful of suspicious activity. This can be challenging if you have several bank, investment and credit card accounts. Data aggregation tools provide a way to view the transactions and balances in all of your accounts in a single, secure location. Using a dashboard-like interface, these tools provide a concise summary of your finances that you can access from your computer, smartphone or tablet.

Typically you cannot make a transaction from a data aggregation dashboard, so there is no risk of your money being accessed from these systems. Also, aggregators do not store your complete account numbers; they use truncated numbers, such as the last 4 digits. In addition, many data aggregation tools have alert features. For example, BMO Wealth Connection will notify you through email whenever a transaction in any of your accounts exceeds a dollar amount maximum that you have set.

At any age, it’s important to understand online scams and threats, and to take precautions to protect your personal information and financial accounts. If you suspect you’ve been the victim of a scam or hack, don’t be embarrassed. Tell someone you trust or seek help from your advisor or National Adult Protective Services (http://www.napsa-now.org/get-help/help-in-your-area/).