Friday, October 26, 2018

Donating Required Traditional IRA Distributions

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®













As many of you know, you are required to take taxable distributions from your Traditional IRA once you attain the age of 70½.  Those of you that have experienced this firsthand likely experienced a subsequent uptick in state and federal tax due.  However, as touched on in 2016, donating these required Traditional IRA distributions directly to a charity (otherwise known as a Qualified Charitable Distribution (or QCD) can help mitigate this uptick in taxation. 

Why revisit QCDs now?  

The Tax Cuts and Jobs Act (enacted late last year) made them more attractive.  The fact that taxpayers can take the greater of their itemized deductions or the standard deduction has not changed, but a near doubling of the standard deduction (along with the end of miscellaneous deductions and a new limit for state and local taxes of $10,000), means that more taxpayers will take the standard deduction in the future. 

How will more standard deduction taxpayers make QCDs more attractive?  

Charitable giving has been one of the more popular itemized deductions in the tax code.  Once Standard Deduction taxpayers realize there is no longer a material tax benefit from their itemized giving, they will look for alternatives.  

If you take the standard deduction and also happen to have a required Traditional IRA distribution, donating the required distribution (or any portion of it) directly to a charity (instead of writing a check yourself) effectively makes the contribution deductible again.

How do QCDs work again?  

Required Traditional IRA distributions, up to $100,000, can be given directly to a qualified charity without incurring any tax due.  It’s tax-free money to the charity and a non-taxable distribution for the taxpayer, yet still satisfies the taxpayer’s distribution requirement (or a portion of it). Although it’s not technically reported as a deduction, avoiding taxation on the required distribution is effectively the same thing.  

QCDs have been around since 2006 but they will be much more prevalent now.  For standard deduction taxpayers with required distributions from a Traditional IRA, it’s time to consider switching all charitable giving to direct gifts from a Traditional IRA.  

Dustin J. Smith, CFP®


The above explanation is summarized. It is not all inclusive. Please confirm all specifics with your tax professional. For a more detailed summary of the 2018 Tax Laws alluded to above take a look at this post from January.

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Friday, October 12, 2018

Perspective During "Turmoil"


Pathways Advisory Group, Inc.
      Evon Mendrin, CFP®













Well, that escalated quickly.

If you’ve been anywhere near the news this week, you’ve likely been made aware of the most recent “End of the World As We Know It.” Stocks had a rough day at the office, and globally we saw quite the decline. How bad was it? Well, if you do a quick Google search of “stocks” and “bloodbath”, you can find more articles than you’d like explaining how the sky is falling, such as:
  •          “Traders are betting that the global market bloodbath…”
  •          “Wall Street Bloodbath Paints Tech and Media Stocks Red”
  •          “Australian stock market plummets after bloodbath on Wall Street…” 
  •          And of course, to help you get through the chaos – “5 Ultra-Safe Stocks to Survive the Wall Street Bloodbath”
It’s times like these when writers dust off the thesaurus, as you can find a medley of doomsday words thrown about, like “plummeting,” “chaos,” “turmoil,” “turbulence.”

To add to it, the financial news is sure to inform us that the Dow Jones Industrial Average faced the third-worst points decline in history, having dropped about 832 points. It’s enough to convince you the end is here and there’s no going back. But what does that really mean? Are we really seeing such a historically devastating event?

When looked at through the proper historical perspective, we see that the day’s drop in the Dow Jones was hardly a devastating event. It’s easy to view dramatic events through a microscope, looking only through a narrow lens. But what if we change lenses, zooming out with for a wider perspective?

Let’s go one lens wider. 832 points may be the third-highest point drop, but as a percentage, it was only roughly 3.1%. That’s hardly historically devastating. For perspective, the 20th largest historical percentage drop in the Dow Jones was 7.07% (7/20/1933). The largest ever? 23.52% (12/12/1914). A 3% dip is a drop (no pun intended) in the bucket compared to that.

Data from us.spindices.com (10/11/2018)











Interestingly, that huge drop was only 16.8 points.  Using a points drop isn’t a helpful reference when the value of the Dow Jones is so much higher than the past. In 1980, the Dow as a whole was only worth around 850 points! The index is currently valued at around 25,000. As Dustin wrote about before, “the Dow just ain’t what it used to be.” Long-term, despite the headlines, the stock market continues its march.

What about the performance of stocks for the year? Through this lens, the Dow Jones Industrial Average is actually positive for this year – just over 3%year-to-date. So is the S&P 500, a popular measure of large-cap US stocks, gaining just over 4%. US stocks as a whole are positive for the year, as the Russell 3000 index is up about 3%. Sure takes the sting out of one day’s news. 

With the widest lens of historical perspective, we also see a decline like this is actually typical. Par for the course. Over the last 38 years, the S&P 500 has had positive returns in 29 years (76%). However, we see an average decline within each year of 13.8%. If we go back to 1946, we see similar results. That kind of drop, historically, is typical within any given year, and doesn’t tell us much about how the year will end. 

It’s amazing what perspective can do when faced with one day’s dramatic event. Taking a step back gives us the opportunity to evaluate what’s really going on and not overreact. Where do stocks go from here? Impossible to say. Trying to predict where the stock market goes in the short-term is a fool’s errand. Should we rush to action? Despite the “chaos” you see, nope. Try to tune out the noise, keep a long-term perspective, and continue with the long-term investment plan you’ve had all along.

Note: All returns data is as of writing, 10/11/2018. The data very likely may have changed as of the time you read this

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Friday, September 28, 2018

Credit Freezes Are Now Free!

Pathways Advisory Group









Just over a year ago, Equifax experienced a data breach affecting the private information of over 140 million people.  In a blog post responding to the breach, we highlighted a few ways to protect yourself from potential use of your information. One of the most useful methods is placing a freeze on your credit. A freeze restricts access to your credit file, minimizing the risk of new credit being established with your identity. One of the drawbacks of a freeze, however, was the fee required to not only initially apply the freeze but also each time you lifted and reapplied it.

One year later, thanks to a new federal law, we have a remedy for that pesky fee. Starting September 21st, credit freezes (and unfreezes) are now free of cost! You can now apply or lift a freeze with all three of the nationwide credit reporting agencies – Equifax, Experian, and TransUnion without the unnecessary charges . This can be done by mail, by phone, or online. Once established, a freeze can be lifted entirely, for a period of time, or to provide access to a specific entity.

In addition, if you’ve applied a fraud alert to your credit file, they are now extended to one year instead of 90 days. They are still free, and victims of identity theft can still get an extended alert for seven years.

With all of the risks we seem to face when it comes to protecting our identity, it’s good to know one helpful tool was made a lot easier to use.  


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Friday, August 10, 2018

Keeping Clients' Rebates and Knowing Your Advisor


 
Pathways Advisory Group, Inc.
Jeff Karst, CFP®












A news story earlier this year brought to light that Wells Fargo was keeping mutual fund fee rebates rather than distributing those rebates back to the clients.  Well Fargo managed the investment portfolio for a pension fund.  Some of the mutual funds have a revenue sharing feature that would kick a rebate back to Wells Fargo.  Those rebates were supposed to go back to the pension fund but Wells Fargo kept them.

The story might cause some people to wonder if they’re missing out on their own fee rebates. 

This is yet another story highlighting the importance of knowing about the advisors you hire. Pathways is a fee-only investment advisor and financial planning firm.  We are paid solely by our clients.  We do not receive kick-backs, rebates, etc. from any of the mutual funds that we use or from our primary custodian, Charles Schwab.

We primarily (almost exclusively) use the mutual fund company Dimensional Fund Advisors (DFA).  It is simply a match-up in investment philosophy and beliefs.  We believe they do an excellent job of applying academic research to real-world investing in a cost-effective manner.

What can you do to protect yourself and have a better understanding of your advisors? Asking your current or prospective advisors the following questions might be a good way to start:
  • How do you get paid? Only by your clients, or is there compensation from third-parties? The advisor should be able to answer clearly and with full disclosure.

  • Do you act as a fiduciary? Meaning, are you required by law to put the interests of your clients above your own?

  • Do you have a certification or designation, such as the CFP® certification, that holds you to high ethical and competency standards?

You might also find the Searching For an Advisor page on our website helpful. We wish the best for your financial planning through the rest of 2018 and beyond!

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Monday, May 21, 2018

Tax Form 5498

Have you received a tax form in the mail recently? If you did just receive a 2017 IRS Tax Form 5498, don't panic. Form 5498 is generated by investment custodians every May for Traditional IRAs, Roth IRAs or Educational Savings Accounts with activity during the previous tax year and usually does not lead to an amended tax filing.

Tax Form 5498 is informational. The IRS reconciles this activity with your Tax Return. If you received this form, ask yourself: Did I contribute to a Roth or Traditional IRA last year? Did I roll money into an IRA last year? Did I contribute or initiate activity out of an Educational Savings Account last year? Did I convert IRA money to a Roth IRA last year? If any of this activity applies to you, you received Form 5498.

Contribution information is typically requested on an accountant's questionnaire. IRA rollovers and conversions generate a 1099-R. Either way, your accountant should already be aware of the activity. Then what should I do with my copy? In most cases, simply add it to your freshly started tax folder for 2018. As your accountant reviews next year's tax file, he or she can confirm that the activity was addressed.

The above explanation is summarized and generic. Please consult your tax professional with any specific questions.

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Thursday, May 3, 2018

Is Your Knowledge Expiring?

Pathways Advisory Group, Inc.
      Evon Mendrin, CFP®













How much of what you read today will you still care about a year from now?

I was lucky enough to stumble upon a blog post by Morgan Housel of Collaborative Fund that proposed that very question.  In the post, “Expiring vs. Long-Term Knowledge,” he challenges us to consider: what is the quality of all the stuff we read, and how much does it really benefit us?

With access to the internet, television, and radio, we are flooded with information. Media content is chopped down into bite-sized portions so we can consume more and more. Newsfeeds constantly update us on every bit of information, on any topic we want. How much of that content will you care about years from now?

Citing an observation by MIT’s endowment fund, Housel describes two types of knowledge: expiring knowledge, which has no long-term value, and long-term knowledge, which is valuable over time. He lays out the differences:

“Expiring knowledge catches more attention than it should, for two reasons. One, there’s a lot of it, eager to buzz our short attention spans. Two, we chase it down, anxious to squeeze out insight before it loses relevance.

Long-term knowledge is harder to notice because it’s buried in books rather than blasted in headlines. But its benefit is huge. It’s not just that long-term knowledge rarely expires, letting you accumulate it over time. It’s that compounds over time. Expiring knowledge tells you what happened; long-term knowledge tells you why something happened and is likely to happen again. That “why” can translate and interact with stuff you know about other topics, which is where the compounding comes in.”

There’s an abundance of expiring knowledge! I count four applications on my cell phone alone dedicated to giving me short-term, mostly useless content. What does this information really teach that I can use far into the future? Sadly, not much.

Contrast that to the truly useful information buried in books, research papers, journals, and podcasts. Consider some of the greatest books to have been written – knowledge to have stood the test of time. Consider Benjamin Graham’s The Intelligent Investor (originally written in 1934), Nick Murray’s SimpleWealth, Inevitable Wealth (Published 1999), Dale Carnegie’s How to Win Friends and Influence People(1936), Robert B. Cialdini’s Influence (1984) and Michael Gerber’s The E-Myth (1986).

The advice and knowledge within these books are still as relevant today as they were when first published – and those are on business and finance alone! Not to mention subjects such as history, construction, engineering, automobiles, music, faith, art, and science.

Many of us may not remember the newspaper articles we read in 2011, but – like Housel, we may remember details of great books we read in 2011 and how it affected our thinking.

Even some of the greatest entrepreneurs of our time attribute their success to reading good content. Warren Buffett once remarked, “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

As Housel writes, it’s not just that long-term knowledge rarely expires, but that it compounds! It begins to spread into other areas in your life! Skills you learn from one piece of writing can carry over to other hobbies or work. Long-term knowledge gives you the deeper why’s, what’s and how’s. It helps to sort through the expiring stuff, to know what to pay attention to and what to ignore.  In the same way, relying on short-term knowledge for decision making can compound in your life as well.

Investing is a great example – the hottest market headlines are always fighting for attention, and yesterday’s headlines are forgotten. Even data from companies – such as quarterly earnings, performance, expenses, and cash flow – expire in short-term value once the next quarter comes.

These bits of information compete against long-term research and discipline. How easy it is to make quick, emotional decisions from an article we’ve read – forgetting about the long-term plans we’ve established.

So, what are we to do? Housel writes:

“I try to ask when I’m reading: Will I care about this a year from now? Ten years from now? Eighty years from now?

It’s fine if the answer is ‘no,’ even a lot of the time. But if you’re honest with yourself you may begin to steer toward the enduring bits of knowledge.”

As for me, I think I’ll go ahead and blow the dust off the stack of books I’ve been neglecting. News on the latest Donald Trump tweets will have to wait.

-Written by Evon Mendrin from our June 2017 Client Newsletter Article.

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Friday, April 6, 2018

Now and Then Story – Does It Sound Familiar?

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®













We are in the peace-of-mind business.  This is one of the reasons we focus more heavily on knowledge and expectations than short-term results.  We would all like returns to be predictable and consistent, but this expectation is unrealistic and unfounded.  The actual results tell a much different story. 

Big Bang Theory Executive producer Dave Goetsch realized this through his own investing experience. He felt true stress and anxiety during the Great Recession, but understanding and accepting the unpredictable nature of markets completely changed the way he viewed recent results.  

Long-term optimism doesn’t have to depend on short-term results.  Hopefully, you can relate to the peace-of-mind he shared in a recent Now and Then story. You can read his story by clicking here or by using the link below. Enjoy and have a great weekend!

Dustin J. Smith, CFP®

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