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How much life insurance should I carry?

This is a great question! We hear it frequently, so we wanted to cover it here on our blog. The question is usually asked in the context of: “I’m about to purchase a life insurance policy. How much coverage do I need?”

The answer is – it depends.

If you’re like most, you want to be able to leave something to your progeny when you die. Leaving a legacy for our children is just part of the American dream of wanting them to “have it better” than we did. But many well-intended parents have had their wishes left unfulfilled because of simple errors in estate planning.

The Tax Cuts and Jobs Act of 2017 generally lowered federal income tax rates, with some exceptions. Among the ways in which lower rates impact tax planning, they make unmatched contributions to traditional employer retirement plans less attractive.

Example 1: Chet Taylor has around $100,000 in taxable income a year. Chet contributed $12,000 to his company’s traditional 401(k) in 2017, reducing his taxable income. He was in the 28 percent tax bracket last year, so his federal tax savings were $3,360 (28 percent of $12,000). An identical contribution this year will save Chet only $2,880, because the same income would put him in a lower 24 percent bracket.

Not everyone will be in this situation.

Many higher income taxpayers have long made it a practice to open investment accounts for their children, hoping to take advantage of their lower tax rates.  Many years ago, Congress imposed, what is colloquially known as the “kiddie tax” to place strict limits on the amount of investment income that can be taxed at those lower rates. 

One of the changes made by the recently enacted Tax Cuts and Jobs Act of 2017 made some significant changes to how the “kiddie tax” is administered, impacting the way adults pass investment income on to their minor children. 

The "kiddie tax" is a provision that taxes the unearned income of children under the age of 19 and of full-time students younger than 24 at a special rate. Under both the new law and the old, the first $1,050 of a child's income is tax-free and the next $1,050 is taxed at a rate of 10 percent.

The pros and cons of Roth IRAs, which were introduced 20 years ago, are well understood. All money flowing into Roth IRAs is after-tax, so there is no upfront tax benefit.

As a tradeoff, all qualified Roth IRA distributions can be tax-free, including the parts of the distributions that are payouts of investment earnings.

To be a qualified distribution, the distribution must meet two basic requirements:

Many folks faced the new year with a fresh-start mindset, new goals, and a handful of resolutions. For some, 2017 is still at the top-of-mind with credit card balance carry-overs and a loan or two. For others, the new year brings ideas of travel, home renovations, or major purchases. 

Regardless of the intent, oftentimes folks think they can simply borrow or withdraw from their 401(k) to pay for these things when their bank account is not liquid.  After all, the money is theirs and just “sitting” untouched.  So why not tap into the account – life is short, right?

While many entrepreneurs find satisfaction in owning their business and others simply love their jobs, most do not necessarily want to work for the rest of their lives. 

If you are such an entrepreneur, you are not alone. Many look forward to the idea of never having to work again, yet, the concern about whether there will be enough income to survive can’t be overlooked. This leads to the all-important question:  How much does one need to save for retirement?

The Journal of Accountancy recently published an interesting article addressing the issue of 'gray divorce.'  Gray divorce refers to couples divorcing later in life and while a 30-something divorcing couple may be squabbling over custody, visitation, and credit card bills, those couples divorcing over age 50 are facing battles over retirement funds, the long-term residence, and a diverse portfolio of assets.

Oftentimes, divorcing couples believe that because the court suggests a particular division of assets, that it is what they must do. Couples may not realize that the court will decide in the absence of either party striking an agreement. When the court makes a decision for the couple, this may not be in the best interest for either.

Learn more about retirement and estate planning in Gary's blogs

Meeting with your CPA, whether as a couple or individually, will allow you to take a closer look at the reality of the tax and financial implications depending on how the assets are ultimately divided.  Also, your CPA will run scenarios, especially if one spouse was the higher earner or if one spouse did not work, which will greatly affect the financial future of both.

Since their inception via the Revenue Act of 1978, 401(k) plans have been great tools to help workers save for retirement. While a 401(k) plan has many advantages, there are also some drawbacks to them that one should consider when creating a comprehensive retirement-strategy.

The advantages of a 401(k)

The basic concept of a 401(k) plan is to allow workers to make pre-tax contributions to the plan from their paychecks. As a result, money contributed is not included in their taxable income for that year.

Financial planning is one of the most important (if not the most important) and concerning money topics that many folks share. How much should you have saved by a certain age? Should new parents start to save now for their newborn baby or is it ok to wait awhile? How much will you need in retirement for healthcare costs or everyday living?