Do You Know Your Spouse’s Beneficiary Designations?

Posted On June 20, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

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Beneficiary designations are important. The people you list on your IRAs, retirement plans, and life insurance policies will receive those monies regardless of the instructions in your will. What happens when you don’t indicate a beneficiary or if the beneficiary has predeceased you? In that case, the estate is named as the beneficiary of the account.

It is usually much better if you have a person indicated as the beneficiary rather than the estate, for the following reasons:

If a person is the beneficiary, they can receive the assets very quickly by completing a distribution form and providing a copy of the death certificate. When the estate is the beneficiary, you may tie up the assets in probate court for months, or even years.
A person can roll an inherited IRA into a Stretch IRA and keep the account tax-deferred. The beneficiary is required to continue taking Required Minimum Distributions, but even doing so, the IRA can last for many years. When a spouse is the beneficiary of an IRA, he or she can roll the assets into their own IRA and treat it as their own. By spreading distributions over many years, taxes may be lower than if you took a large distribution all in one year and are pushed into a higher tax bracket.
When the estate is the beneficiary, they do not have the option for a Stretch IRA. They can either distribute the IRA immediately or over 5 years. Either way, the estate will be paying taxes sooner than if the beneficiary was a person.
The tax rate on estates can be much higher than for individuals. An estate or trust will pay the maximum rate of 39.6% on income over $12,400 whereas a married couple would hit this tax rate only on taxable income that exceeds $466,950 (2016 rates).

For many individuals, a substantial portion of their estate may be in IRAs, retirement plans, life insurance and annuities, where the beneficiary designation is vitally important. In the last two months, the IRS has issued two Private Letter Rulings (PLR) specifically on beneficiary designations and the rights of surviving spouses. A PLR is official guidance from the IRS on how they interpret and enforce tax law, based on specific cases which are brought to the IRS.

In PLR 201618011, a spouse did not indicate any beneficiaries on her IRA. When she passed away, the absence of a beneficiary designation meant that the estate would be the beneficiary of the IRA. The husband was the sole beneficiary and executor of the estate under her will. The IRS ruled that in this scenario, the surviving spouse has the right to rollover the inherited IRA and treat it as his own, even though the decedent failed to designate a beneficiary. This exception is granted only for surviving spouses and does not apply to other beneficiaries, such as children.

On June 3, the IRS issued PLR 201623001, which is of particular interest to Texas residents as it deals with community property issues for married couples. (Texas is one of nine states with Community Property laws.) A man listed his son as the sole beneficiary of his three IRAs. He passed away and his wife claimed that she should be entitled to one-half of the IRA assets because they were community property of the marriage. The IRS ruled that Federal Law takes precedence over state law and rejected her claim.

Both of these rulings show how important it is to know your spouse’s beneficiary designations on all of their accounts. Even if you have a will that is up to date and perfectly legal, it won’t help you if you don’t indicate a beneficiary, or indicate the wrong person. Review your beneficiary designations every couple of years and especially if you have gotten married, divorced, or had births or deaths in your family.

Beneficiary designations are not exciting or complicated. However, a big part of financial planning is getting organized and taking care of these small details. If your beneficiary designations are wrong, it could have a major impact on your heirs and cost thousands in additional, unnecessary taxes.

Should You Get a New Car to Save Gas?

Posted On June 13, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

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I applaud frugality and will be the first to tell you that it doesn’t matter how much you make, but how much you spend. Wealth is created by the surplus between those two numbers. So, it would definitely make sense to get a more fuel efficient car, and save money at the gas pump, right? Let’s find out.

Cars are much more fuel efficient today. Electric cars and hybrids are at the forefront of this improvement, but so are diesel engines and small turbo engines. Many car makers now offer a 2.0 liter turbocharged four cylinder engine as their base engine. And this isn’t just for economy cars – the base engine for the BMW 5 series, Mercedes E Class, Jaguar XF, and other midsize luxury cars are all 2.0L turbos.

Coincidence? Not a chance! The world’s largest auto market – six years running – is China, at 23 million vehicles a year. To try to slow the growth of greenhouse gases, China imposes an excise tax on the sale of all cars, based on the size of the engine. At 2.0L, the tax is 5%, but if the car had a 2.1L engine, the tax would be 9%. For an engine over 4 liters, like many V-8s, the tax is 40%. This is a significant incentive for car makers to create small engines that offer more power and improve fuel efficiency.

Given the nice gains in fuel economy for today’s cars, does it make sense to trade in your current vehicle for a less thirsty model? Let’s run the numbers for a couple of different scenarios.

1) According to the US Department of Transportation, the average American driver logs 13,476 miles per year. Let’s consider a significant improvement in fuel economy, from 20 to 30 mpg.

At $2.25 a gallon for gas, the 20 mpg vehicle would consume $1,516.05 in gas per year. The 30 mpg vehicle would require $1,010.70 in fuel, a savings of $505.35. That sounds pretty good! Who wouldn’t like to save over $500 a year?

The problem is how much did it cost to save that $505? If you spent $25,000, it would take you 50 years to make back your “investment” in the new car. The gas savings is a 2% return on your money. In terms of opportunity cost, it seems like a very poor return to spend that money rather than keeping it invested. If you could make just 6% on your $25,000, you’d receive $1,500 in annual gains. With compounding at 6%, your $25,000 would become $50,000 in 12 years, $100,000 in 24 years, and $200,000 in 36 years.

So while it is alluring to “save” $500 a year on gas, you are likely to be better off by keeping your current vehicle and keeping your cash invested. Most people don’t think this way, because they don’t pay cash for their cars. If you start to pay cash for your cars, as I do, it will definitely change your perspective. However, don’t think that just because you take a loan or lease a vehicle that this math doesn’t apply to you. Instead of having an opportunity cost on your cash, you are paying interest on a loan or a lease. Either way, there is a decrease in the future value of your wealth, and whether we look at opportunity cost or interest expense, the decrease in wealth is going to be larger than just the $25,000 price tag on the car.

People are not logical about their car purchases. Cars may be a necessity for most of us, but they are a poor use of money. Most vehicles lose 50% of their value in the first five years. People decide they want a new car and then create a rationalization as to why they “need” it. It’s okay to buy nice stuff you want, especially if you have met your savings and investing goals. But let’s not fool ourselves into thinking that spending $25,000 on a new car is a way to “save money”.

Let’s consider a more extreme example of high mpg, using actual car models:
2) What if you drive a lot of miles, say 20,000 highway miles per year. And let’s say you are thinking about trading in your 2011 Toyota Camry for a hybrid, a 2016 Toyota Prius.

The Prius is estimated to get 50 mpg on the highway, versus 33 for the 2011 Camry. At $2.25 for gas, the cost savings is only $463.64 a year. Surprised it isn’t more? Our intuition fools us here – even though the difference in fuel economy is 17 mpg and we are driving more miles than in example #1, the actual cost saving is less. The difference in fuel consumption in this example is 206 gallons: 606 gallons for the Camry versus 400 gallons for the new Prius.

For a base 2011 Camry in clean condition and 100,000 miles (20,000 per year for 5 years), your trade in value would be only $5,744 according to Edmunds.com. For the 2016 base Prius, the MSRP is $25,095. Is it worth spending $19,351 (plus tax) to save $463 a year? No, it is not!

My recommendation: if you are genuinely interested in maximizing the utility of your hard earned dollars, drive your current car into the ground. If you have a 2011 Toyota with 100,000 miles, you’ve already experienced most of the car’s depreciation. Try to keep it for another 100,000 miles. Keeping one car for 200,000 miles will save you a ton of money versus having two cars for 100,000 miles, or worse, four cars for their first 50,000 miles.

The fuel economy question is a distraction. Looking at the total cost of a new vehicle, depreciation is your largest expense. Don’t get a new car to try to save money at the pump. Get a new car – or better yet a used car – when your current car is all used up. When it is time to get your next vehicle, by all means, consider fuel economy along with the other costs of ownership. Until you have to get another vehicle, it is likely going to be more cost effective to stick with your current car, even if it means spending more money at the pump.

Is This Amazing Technology A Danger To Your Career?

Posted On June 6, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

Last October, electric car maker Tesla introduced self-driving features into its cars overnight, with a software update installed via wifi. In January, General Motors invested $500 million into car-service Lyft with plans to begin testing driver-less car services for actual customers in one year. Google, Apple, Ford, Toyota and others are racing to produce self-driving cars and we are very, very close to seeing this incredible technology become a reality. Could your next car be an Apple iCar?

Technological change is nothing new, but we may be on the verge of seeing the rate of change increase dramatically, with significant implications for individuals and the economy as a whole. Some of these changes are fairly easy to predict, but there will be secondary and tertiary impacts which will be much more difficult to imagine. And while the changes will be net positive for society, cost savings often come about when jobs which are no long necessary become eliminated.

Self-driving cars will be much safer, virtually eliminating accidents from distracted driving, driver error, fatigue, or drunk driving. Driver-less trucks and taxis will gradually replace drivers, reducing transportation costs. Families will no longer need two, three, or four cars, and many will forgo car ownership altogether, being able to summon a vehicle for the relatively few minutes a day they require transportation. Your newborn child or grandchild may never even have a driver’s license!

Speeding tickets and traffic infractions will decline, creating budget gaps for cities who previously enjoyed significant revenue. Warren Buffett called self-driving cars a “real threat to insurers” like GEICO, which derive substantial revenue from car insurance. As insurance premiums fall for safer driver-less cars, you can expect that premiums for the remaining human drivers will skyrocket as they will quickly become the high risk vehicles on the road.

There are so many positives about driver-less cars that will make our lives better. However, if you are a truck driver, own an auto body shop, work for an insurance company or emergency room, you should expect less demand for your services, reduced revenue, and loss of jobs across your industry. For those individuals, the driver-less car will have the same effect as Henry Ford’s Model T had on carriage makers and buggy whip manufacturers a hundred years ago.

Innovation is great for society and the economy, but can come at a high cost for those individuals who get left behind. Last month, I wrote about the benefits of working until age 70. The greatest challenge for many people will not be their ability or willingness to work until 70, but just keeping their job for that long.

Last year, I met an individual who lost his job of 30 years at age 57 when his employer closed. He wanted to keep working and was not prepared, financially or emotionally, for retirement. However, his skill set was decades out of date. He wanted to hold out for his old salary and was unwilling to relocate or consider jobs that were not near. He looked for a job for three years before officially declaring himself retired at age 60. Now, he has no choice but to start Social Security at age 62 and lock-in a greatly reduced benefit. His retirement will be quite tight, which wouldn’t have been the case had he been able to work and save for another 8-10 years as he had originally planned.

To work to age 70, most folks will have several different careers and will need to continually educate themselves and possibly even retrain entirely if their profession is going to be impacted by innovations such as the driver-less car. Education will become life-long, instead of something which is completed and left behind in your early twenties. There is no doubt that it is a challenge to be a job seeker in your 50’s or 60’s, which is why the best thing for those at risk of job loss is to keep your skills and certifications fresh and to change jobs before you find yourself unemployed.

The two most valuable companies in the world today are Apple and Google, each with a valuation of roughly $500 Billion. That shows the remarkable economic opportunity behind innovation. And Google created that value in less than 18 years! As investors, it’s easy to recognize the growth achieved from new technology. For the sake of your individual financial plan, however, you first need to make sure that you will have an income to save and invest! Consider what are the risks to your career before those risks become a reality.

The Saver’s Tax Credit

Posted On May 30, 2016 By Admin In Retirement Planning, Uncategorized / 1 Comment

Since most employers today no longer provide defined benefit pension plans for their employees, the burden of retirement saving has shifted to the employee. Not surprisingly, saving for retirement is a pretty low priority for the many Americans who are focused on how they are going to pay this month’s bills.

Understanding Taxes in Early Retirement (Updated for 2026)

Posted On May 23, 2016 By Scott Stratton, CFP(R), CFA In Tax Strategies / 1 Comment

Many people expect their taxes to drop significantly once they retire. After all, earned income often disappears. In practice, however, retirement does not automatically lead to a lower tax bill.

For many retirees, taxes remain higher than expected — and in some cases increase — because income continues to come from multiple taxable sources, including retirement accounts, Social Security, pensions, and investments. This guide explains why that happens, outlines key tax rules relevant to early retirement, and highlights common areas that often surprise retirees.

For additional context, see Tax Planning for Retirees and Retirement Income Planning.

Retirement Does Not Eliminate Taxable Income

While retirement may end wages or salary, it does not eliminate taxable income. Common sources of income in retirement include:

Withdrawals from traditional IRAs and 401(k)s
Pension income
A taxable portion of Social Security benefits
Interest, dividends, and capital gains from investments
Rental or other passive income, if applicable

Each of these sources may be taxed differently, but together they often keep retirees in similar tax brackets to their working years — particularly once required minimum distributions begin.

How Social Security Is Taxed

Social Security benefits may be partially taxable depending on your combined income, which is calculated as:

Adjusted gross income + nontaxable interest + 50% of Social Security benefits

Once combined income exceeds certain thresholds, up to 50% or 85% of Social Security benefits may be included in taxable income. These thresholds are not indexed for inflation, which means more retirees are subject to Social Security taxation over time. The income thresholds are: Single $25,000=50% of benefits are taxable and $34,000=85%. For Married Couples, it is $32,000=50% and $44,000=$85%. All of my clients are seeing 85% of their SS benefits as taxable.

2026 Federal Income Tax Brackets

For the 2026 tax year (returns filed in 2027), ordinary income is taxed using the following federal brackets:

Tax Rate	Single Filers	Married Filing Jointly
10%	Up to $12,400	Up to $24,800
12%	$12,401 – $50,400	$24,801 – $100,800
22%	$50,401 – $105,700	$100,801 – $211,400
24%	$105,701 – $201,775	$211,401 – $403,550
32%	$201,776 – $256,225	$403,551 – $512,450
35%	$256,226 – $640,600	$512,451 – $768,750
37%	Over $640,600	Over $768,750

These brackets apply to ordinary income, including most retirement account withdrawals and pension income.

Standard Deduction and Age-Based Increases

For 2026, the standard deduction is:

$16,100 for single filers
$32,200 for married filing jointly

Taxpayers age 65 or older receive an additional standard deduction:

Single filers: +$2,050
Married filing jointly: +$1,650 per spouse

In addition, a temporary senior bonus deduction of up to $6,000 applies for taxpayers age 65 and older, subject to income phaseouts.

These deductions can reduce taxable income, but for many retirees they do not fully offset income from retirement account withdrawals, Social Security taxation, or required minimum distributions.

Net Investment Income Tax (NIIT)

Retirees with higher income may also be subject to the Net Investment Income Tax, an additional 3.8% surtax on certain investment income once modified adjusted gross income exceeds:

$200,000 for single filers
$250,000 for married filing jointly

Investment income subject to NIIT may include interest, dividends, capital gains, rental income, and other passive income. NIIT does not apply to IRA distributions. Because these thresholds are not indexed for inflation, more retirees encounter NIIT over time, even without a significant increase in lifestyle spending.

Required Minimum Distributions and Reduced Flexibility

Under current law, required minimum distributions (RMDs) generally begin at age 73, with the starting age rising to 75 for future retirees who were born in 1960 and later.

Once RMDs begin:

Annual withdrawals are mandatory
The distribution amount is added to taxable income
Retirees have limited ability to reduce or defer the income

As a result, many retirees find that once RMDs start, they have far less control over their tax bill from year to year — particularly when RMDs interact with Social Security taxation, NIIT, and Medicare surcharges.

Can You Reduce Required Minimum Distributions?

IRMAA and Medicare Premium Surcharges

Another common surprise in retirement is IRMAA — the Income-Related Monthly Adjustment Amount.

IRMAA is a surcharge added to Medicare Part B and Part D premiums when income exceeds certain thresholds. Importantly, IRMAA is based on income from two years prior, not current-year income.

This means that a year with higher income — such as large IRA withdrawals or Roth conversions — can result in higher Medicare premiums later, even if income declines afterward. Many retirees first encounter IRMAA only after it has already been triggered. See 2026 IRMAA Information here.

Why Taxes Often Stay Higher Than Expected

Although employment income may stop, many retirees continue to pay taxes on:

Retirement account withdrawals
Pension income
Taxable Social Security benefits
Investment income
Net Investment Income Tax
Medicare premium surcharges

Once required distributions and Medicare thresholds are involved, tax outcomes are often driven more by rules than by discretionary spending choices.

Putting the Pieces Together

Retirement tax planning often involves coordinating multiple moving parts, including income timing, withdrawal sources, and age-based rules. While deductions and credits may help, they do not eliminate the underlying complexity.

For a broader view of how taxes fit into retirement decisions, see Tax Planning for Retirees and Retirement Income Planning.

If you would like to discuss how these considerations apply to your situation, you may request an introductory conversation here:
Request an Introductory Conversation

Avoiding Capital Gains in Real Estate

Posted On May 16, 2016 By Admin In Uncategorized /

I’ve gotten a number of questions about Capital Gains and Real Estate recently, so I thought it was time for a post. While many home sellers do not have to pay any tax on the sale of their home, for others, capital gains taxes can be significant, even hundreds of thousands of dollars. Here are five ways to reduce capital gains when you sell real estate.

Funding Your Retirement With Dividends

Posted On May 2, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Much has been studied, analyzed, and written about the “safe withdrawal rate” from a retirement portfolio, but unfortunately, there is no withdrawal rate that is guaranteed to work in all circumstances. The interest rates on bonds remains so low today that a portfolio of 60% equities and 40% bonds is almost certainly going to lag its historical return over the next decade. That’s a real danger to anyone who is basing their retirement withdrawals on past performance.

Are Investment Advisory Fees Tax Deductible?

Posted On April 25, 2016 By Admin In Financial Planning / 1 Comment

It surprises me how few questions I receive about the tax deductibility of Investment Advisory fees. I hope that your CPA asks this question as they prepare your tax return, but I fear that some people miss this potential tax deduction. As with many tax rules, this one has quite a number of caveats. Here are three things you need to know:

1. First, we need to distinguish between Investment Advisory Fees (also called Investment Management Fees), Financial Planning Fees, and Commissions. Only Investment Advisory Fees are tax deductible. If you are a client, note that the fees charged by Good Life Wealth Management are Investment Advisory Fees.

Boost Confidence, Improve Your Finances

Posted On April 18, 2016 By Admin In Behavioral Finance /

Which comes first, confidence or success? I believe that in most facets of life, confidence is a prerequisite for success. This is true whether you are a business executive, athlete, musician, teacher, or any other profession. Of course, there is a virtuous cycle where success reinforces confidence, but it has to begin with confidence in the first place.