Category Archives: Financial Planning

Align Your Financial Life with the Dreams You Want to Protect

“Let your dream devour your life, not your life devour your dream.”
~ Antoine de Saint-Exupéry

Now that many people have the gift of flexibility and can work from anywhere, what they find this has turned into is they work from everywhere. “I’d like to go on a vacation that isn’t consumed by my work.” Sound familiar? If so, you are in good company.

This “flip side of the coin” phenomenon, where getting what we thought we wanted brings us something we don’t like at all, is one of the challenging parts of planning for an ideal life. How do we anticipate the unintended consequences and how do we stay awake to the dreams when it is so much easier to take an alternate route, to go to sleep on them instead?

Sometimes the reason this is easier can be blamed on what Jerry Seinfeld calls “Tomorrow Guy.” We stay up late because Today Guy wants to watch the TV show or finish the book and figures it’s Tomorrow Guy’s problem when we have to wake up and go to work.

This plays out in everyday decisions that affect our long-term health and wealth like increasing the cost of our entertainment subscription instead of the amount we defer to our 401k, or eating the bowl of ice cream instead of taking a walk after dinner.

When we experience thoughts and feelings that tell us something isn’t right we are in an uncomfortable place. It’s the chasm between where we are and where we want to be. When it comes to money choices, the bridge across it is recognizing that there are two sides to money, and they don’t work the way we think they do.

We think the remedy out of our uncertainty and discomfort will be found in rational solutions and we ask ourselves technical questions. How can I pay less in taxes, what are the best investments to maximize return, how much and where should I save?

What most people don’t do is look at the personal side of mon-ey. And what’s unfortunate about that is that while both sides of money are equally important and complex, it’s the personal side that drives decision-making.

It’s the side that needs to have the conversation with Today Guy.

As a fiduciary, what I love most about the work I do, what I call Financial Life Planning, is helping people clarify what financial problems they want to solve and building solutions on the foundation we create first, which is to make vivid what is essential to have in a fulfilled life.

Fee-only financial planners offer a structured dialogue to organize their clients’ thinking about living well and connecting their ideas to their money. This is one of the things that makes the experience of working with a fee-only planner feel unique.

Many of my fee-only colleagues hear things like, “I had no idea someone like you existed,” or “You do things really differently,” when they start working with new clients. That’s because traditional financial advice often feels like the advisor doles out advice about the money, rather than putting the client’s life at the center of the planning. 

The advisor often takes over responsibility, instead of empowering the person. You. This is the essence of the difference be-tween the traditional approach and what financial life planners do. 

George Kinder, founder of the Kinder Institute which grants the RLP® designation, recalls his work as an accountant and financial planner in The Seven Stages of Money Maturity. He writes: “To become who we most truly are, we must be free first to dream, then to translate that dream into the practicalities that might allow it to be accomplished. Only then . . . should we consider compromises as we attach dollar signs—reality’s most potently sobering symbol—to the dream. Right there, where dream and dollar cross, the surface and the soul connect.”

And that’s very different.

Source: Miriam Whiteley, CFP®, RLP®, CeFT®
Eugene, OR

More Than Your Fair Share

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Gregory v. Helvering, 293 U.S, 465 (1935), a landmark decision by the United States Supreme Court, set rigid standards and also acknowledged that the tax law allows various deductions, credits, and allowances for use by a taxpayer. This form of “tax avoidance” is legal and supportive of the Congressional intent to encourage particular economic behaviors by the taxpayer, for example, owning a home. However, these “incentives” are difficult to find within the U.S. Tax Code, which is not your cozy, fireside reading material.  

The difficulty of interpreting and applying the U.S. Tax Code drives many taxpayers to seek assistance preparing and filing their tax returns. The best tax preparers will ask you to complete a questionnaire and then utilize tax forms, statements, receipts, and miscellaneous documents to enter data into their tax software. After a rigorous review process, the final tax return is ready for signature and filing. Mission accomplished, and although you are one of the 99.9% of U.S. taxpayers who believe they pay too much in tax, you are ready to move on.

1. Understanding the U.S. Tax Code – Duh! This goes without saying. It is critical to know what is allowed, what is not allowed, and what is subject to interpretation – the famous “grey area.” Tax preparers often steer clients away from a tax-saving strategy because of a potential “Red Flag,” supposedly drawing IRS attention. Tax planning eliminates “Red Flags” by establishing a position allowed by the tax code or advising the client to take specific actions that allow the strategy.

2. Continuing Tax Education – Unfortunately, the tax code is subject to change. And change it does, often dramatically. It is crucial to be aware of proposed tax changes, their effects, and steps to take advantage of the change.

3. Avoiding Expensive Mistakes – There are two types of errors that proper tax planning can help avoid. The first mistake most people think about is “doing something wrong.” If the first mistake is “doing something wrong,” the second and more impactful mistake is “not doing something right.” An adage says, “There is nothing more expensive in life than a missed opportunity.” The primary purpose of tax planning is to be thoughtful in seizing all legitimate tax avoidance opportunities.

4. Tailoring Individual Strategy – Tax planning is most effective when done in conjunction with achieving your goals. Rather than first thinking of a tax angle, think of a life angle and then find the tax strategy to make it work. In our line of work, we advise clients, “Do not let the tax tail wag the dog!”

5. Helping Others – There are powerful tax incentives for those of us who attain great joy in helping others. Tax law is very favorable to those willing to donate to charitable causes. Likewise, less publicized techniques can help family members in a tax-advantaged way, such as providing low-interest rate loans, hiring family members, tax-free gifting, and caregiver stipends.

6. Eliminating Surprises – When appropriately done, tax planning provides the roadmap for actions needed to avoid taxes. Remember, it’s legal to do so! The steps need to be executed in the current tax year to impact the return you file next April 15th. Alliance of Comprehensive Planners members all integrate tax-focused planning with comprehensive financial planning and investment management. Being able to see the whole picture, solve for competing priorities, make informed short-term and long-term decisions, and have clients engaged in the process is a game-changer. Proper tax planning avoids the anxiety of not knowing how much tax you might owe come next April and the possibility of having a tax due without the funds to pay.

Source: Frank Corrado, CFP®, CPA, RLP, Holmdel, NJ

Give back, get back: Being a mentor in retirement

Retirement can be a difficult transition.  We go from work where we used years of experience, wisdom, and our creativity in solving problems and making a difference to suddenly not always feeling that we are actively using our experience and skills.

There are a variety of ways to stay engaged in retirement, and mentoring is one of my favorites. 

Mentoring can be a fulfilling way for retirees to make the most of their professional or non-professional skills, give back, and stay active. Mentoring activities can range from helping youth do homework to helping junior executives run their businesses to many other possibilities.   

Tips for Being a Mentor in Retirement

Here are four tips that can help both mentor and mentee get the most out of the relationship (as a mentor, you may also receive specific guidelines from the mentoring organization).

1. Tie to Your Values and Skills
One of the wonderful things about retirement is that you have the opportunity to participate in activities that tie to your values and passions. Choosing your volunteer activities—including being a mentor—should not be any different. What are the causes that are important to you?  What kind of people do you want to engage with and help?  Bringing passion to a mentoring relationship will undoubtedly allow you to make an even bigger impact on the mentee.

Similarly, you should ask yourself what special skills or knowledge you may be able to pass down to others. Successful communities find ways to pass knowledge from one generation to the next, and your insight and wisdom can be invaluable. However, don’t make the mistake of thinking you need to know everything or that you cannot learn new skills or knowledge to use in such a relationship. Sometimes, being a successful mentor can consist of just being there with words of encouragement. 

2. Set Expectations
If your mentoring organization has rules and expectations, you will obviously want to make sure you can meet those expectations. Share those expectations with the mentee, when appropriate. If you are not in a formal organization, setting expectations with the mentee is critical for both of you to get the most out of the experience.

Setting the schedule is important and may include stating when and where will you meet. Who will be responsible for scheduling?  How long do both of you expect the relationship to last?  Setting a timeframe will allow both of you to be more focused while providing a clear end date (if needed).

Of course, you will want to establish the purpose of the mentorship. What are the goals at the end of the day? What is the mentee looking to learn or accomplish?

You will also want to understand the boundaries of communication and whether any work will be put in between the meetings.  Is the mentee going to have benchmarks to meet, and how will those be tracked? Without such expectations, either or both of the parties may get frustrated, and the potential benefits of the mentor relationship may not be fully realized.

3. Develop a Personal Relationship
Whether you are mentoring a youth or someone in mid-career, trust is important.  As a mentor, you should be willing to break the ice and open up about your family, career, and hobbies. Try to find a connection while also celebrating differences.

You will want take notes (mentally, if not written) so that you can recall some of these personal items later. The more mentees believe that you are personally concerned about them, the more they will put into the mentee relationship and be attentive to your feedback.

4. Be Honest, Encouraging, and Thought-provoking
You will want to find the delicate balance between providing constructive feedback and providing encouragement. In many mentor relationships, you may not necessarily want to provide conclusive statements or answers to all the questions. A large part of learning in any environment is learning how to think. Having a dialogue with mentees as they find the solution will not only help them improve their critical thinking skills, but it will also elevate their confidence for problem solving.

Where to Find Opportunities to Become a Mentor

  • Your existing community, formal and informal:  church, school (elementary to high school), neighbors, family
  • Previous workplaces (whether through that employer or former co-workers)
  • Industry associations
  • Formal youth organizations such as Big Brothers Big Sisters, YMCA, Boys & Girls Clubs, etc
  • Your alma mater

The possibilities are endless.  What is available in your area? Where do you most want to make an impact? 

Source: Steve Martin, CFP®, CPA, JD
Nashville, TN

Cultivating Simplicity

Because we are often consumed with the busyness of daily life, most of us give little thought to the bigger questions of where we are going in life and how we will get there. We let others around us set our goals for us because that is how life starts out in childhood. With the coming of adulthood, we are supposedly prepared to know what we want and to think for ourselves about how we will obtain it. However, human nature complicates this in various ways.

For most of us, our lives go through predictable stages.

We all need food, shelter, and clothing. Living in a developed society, it is necessary to become educated in a specialized skill while we learn about the broader world and its context. We do what are supposed to do. There is also the element of risk. Bad things happen, so there is the tension of living for today vs. living for some unknown future. Our time is limited. Despite it all, we yearn to make something more of life. We are caught up in the business of life, with the idea of earning, having, and achieving, and we begin to look for shortcuts to success.

It is this impulse that can make a person look for clever solutions to things like weight loss or investment returns, fad diets, and complex multi-factor theoretical models. It can ultimately lead to fraud and disaster. Thankfully, most of us can resist those wrong turns, though we might still search for shortcuts. We listen attentively to those who tell us there is a better, easier way. Sometimes, there are better ways. More often, the right path is often simplest, yet not the easiest. Diet, exercise, and saving are never popular, but they always work.

We can become confused about what we want or need because we listen too much to those around us. How do we cut through the clutter of life to focus on what we really want, what is most important, and the best way to get it?


Simplicity may not be the easy way to live, but you can be more happy, more focused, and waste less energy.

Here are some ways to simplify life:

  • Set goals for a shorter time period (e.g., a week instead of a year). Keep the long term goals but simplify them by paying the most attention to the next step. Break big goals into smaller, more manageable goals.
  • Set fewer goals. Limit yourself to work on a few at a time, no more than six.
  • When you are working, work on one thing at a time.
  • Have a written plan. Write things down, whether it is on paper or your phone. This is equally true of a grocery list as well as your life plans. If your plan is written, you can check it and change it. If it is only in your mind, you can avoid thinking about it, or doing anything about it. Plans change, and when they do, next steps change.
  • Cut down on screen time. This may seem impossible. If so, consider taking a block of time off each week. Call it a “digital fast.” That includes social media and old-fashioned TV.
  • Pay bills and make savings deposits automatically wherever possible. Limit the number of accounts you use to pay bills. Make a single annual payment instead of monthly payments.
  • Own fewer investments and have fewer accounts. Just make sure they are the right ones for you.
  • Say “no” whenever possible. Make choices to slow down. It is not always possible, but it will never happen unless we ask the question, “do I really need to do this? What is it leading me to?”
  • Consider your circle of influence—the things you can actually control—vs. your circle of concern. Everyone is concerned about big events outside our control (think COVID-19). While there are some things we can do (wash hands, wear masks, social distance) whether any one of us ultimately gets sick is largely beyond our complete control.
  • Declutter or downsize. Ask yourself: would I buy this again? Would I keep it if I were moving to a new place?

At first, knowing what goals to choose will be hard for most people. It is an iterative process. We must begin with teaching ourselves to listen to the world around us. Only then can we start thinking accurately about what we want for ourselves.

Source: Michael Garber, CFP®, San Jose, CA

3 Quarter Market Review

This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.

Consider Roth Conversions

The SECURE Act significantly reduced the benefits of an inherited traditional or Roth IRA, by requiring the non-qualified heir (typically anyone other than the spouse) to take the full amount out of the account within ten years of receipt.  Interestingly, that provision makes it somewhat more beneficial for some people to make Roth conversions today.

Chances are you know the difference between a traditional IRA and a Roth; the gist of it is that contributions to a traditional IRA are tax-exempt, but when the money is taken out of a traditional IRA in retirement, it is taxed at the retiree’s current tax rate.  In contrast, contributions to a Roth are not tax-exempt, but the money comes out tax-free.  If you convert from traditional to Roth, then you have to pay ordinary income taxes on the money that is shifted over at ordinary income rates, as the price for getting tax-free distributions in the future.

In general, you don’t want to convert assets from a traditional IRA to a Roth IRA unless you can pay those taxes with outside funds; otherwise you’re reducing the money that can accrue tax-free until the money is needed.  The traditional calculation is that the conversion only makes sense if the person’s tax rate today is lower than the future tax rate—and if you have a crystal ball which tells you what future tax rates will be, we would like to have a conversation about it.  But some bets are better than others.  The years between when a person leaves work and age 72 (when that person has to take required minimum distributions out of the traditional IRA) can be ideal for a conversion.  The tax rate during those years when no employment income is earned can be low, and partial conversions up to certain tax brackets can be very attractive.  This reduces the required minimum distributions (RMDs)

So what’s the additional argument for a Roth conversion post-SECURE Act?  Some people don’t need their IRA assets to pay for retirement.  So they take the lowest amount possible—the RMD—out each year, maintaining a balance, which they will leave to their heirs.  The additional benefits accrue to the heirs, particularly if the heirs would inherit the account during their peak earning years.

Under SECURE, 1f the Roth IRA account is inherited, it still has to be liquidated within ten years of receipt—just like the traditional IRA.  But the Roth beneficiaries face a simpler set of choices regarding the payment of taxes.  If they inherit a traditional IRA, they have to decide whether to take the money out all at once at the end of 10 years, and risk having a huge tax bill because the distribution puts them in the highest tax bracket, or take the money out gradually and forego years of tax-free compounding.  If the new owners of the account is in their prime earning years, then they may already be in a high tax bracket and be pushed higher no matter what they do.  A big part of the bequest would be lost to taxes. 

The Roth IRA beneficiary, meanwhile, has the luxury of allowing the full 10 years of compounding to proceed without any tax consequences to worry about.  He or she is never pushed into a higher bracket during peak earning years.  A Roth conversion by the parents is thus a way to transfer more assets to the heirs.

Everybody considering a Roth conversion should talk with a professional to get a full analysis of the potential benefits and drawbacks—understanding, of course, that this analysis requires modeling the unknown future tax code and income levels of potential heirs.  Paying taxes now for benefits in the future could be a great strategy under a variety of circumstances which are, alas, still essentially unknowable.

2020 Second Quarter Investment Market Report

This year, investors have been treated to a rare real-world lesson in the mathematics of investing—namely, the fact that after a market decline, it takes a greater market recovery to get back to even.  The first quarter saw a frightening downturn that delivered 20% losses across the U.S. and developed foreign markets.  Then we experienced a breathtaking 20% gain in the second quarter, the fourth-best quarterly rise since 1950.  Work out the mathematics, and virtually all indices are still showing a loss for the year.

You can see this dynamic everywhere you look.  The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—fell 20.70% in the first three months of the year, then gained 22.69% in the ensuing quarter.  By the mathematics of the market, investors in the index are still down 2.88% so far this year.  The comparable Russell 3000 index is down 3.48% in the first half of 2020. 

Looking at large cap stocks, the Wilshire U.S. Large Cap index lost 19.88% in the first quarter, gained 21.64% in the second, and is still down 2.29% for the first half of the year.  The Russell 1000 large-cap index now stands at a 2.81% loss, while the widely-quoted S&P 500 index of large company stocks gained 19.95% in the second quarter after a 20% drop in the first quarter–and is now down 4.04% for calendar 2020.

Meanwhile, the Russell Midcap Index is down 11.21% in the first half of 2020.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies were hit with a very significant 31.40% decline in the first quarter, and then recovered 25.63% in the second.  The index is down 13.82% for the year.  The comparable Russell 2000 Small-Cap Index is down 12.98% so far this year.  The technology-heavy Nasdaq Composite Index recovered from its -13.10% first quarter return to post a 31.61% gain in the second quarter.  The index is one of the few unadulterated bright spots for the first half of 2020, up 10.05% for the year.

International investors experienced the same lurching investment ride as U.S. stock holders, but with a shallower recovery.  The broad-based EAFE index of companies in developed foreign economies lost 23.43% in the first quarter, then gained back 14.17% in the second quarter.  Add it up, and the index is returning negative 12.59% so far this year.  In aggregate, European stocks gained 14.33% in the second quarter, but because they were down 24.81% in the first part of the year, they’re still sitting on a 14.03% loss for the first half of the year.  EAFE’s Far East Index meanwhile, gained 10.82% in the second quarter, but for the year it’s in losing territory, down 9.29%.  Emerging market stocks of less developed countries, as represented by the EAFE EM index, gained 17.27% in the most recent quarter, making up some of the 23.87% losses in the first three months of the year.  The index is down 10.73% for the year.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a 25.63% decline during the year’s first quarter, and then saw a nice 10.56% rebound in the second.  Real estate investors are still down 17.77% for the year.  The S&P GSCI index, which measures commodities returns, gained 27.37% in the second quarter, recovering some of the 42.34% 1st quarter loss.  The index now posts a 25.39% loss for the year.

In the bond markets, rates continue to drag on at historic lows.  Coupon rates on 10-year Treasury bonds stand at an astonishing 0.68%, while 3-month, 6-month and 12-month bonds are still sporting coupon rates of 0%.  Five-year municipal bonds are yielding, on average, 0.46% a year, while 30-year munis are yielding 1.70% on average.

The market declined precipitously in March when people realized how much potential economic damage the COVID-19 virus, social distancing and the closing of many businesses could inflict on the U.S. economy.  Then the market experienced one of the best quarters on record amid widespread optimism that some are calling euphoria. 

Does that mean that the recent market gains represent a bubble?  The evidence suggests that it does; the real question is how out-of-line stock prices are from reasonable norms.  When you read about hairdressers day trading on Reddit, you know that at least some stocks are being bid up without too much concern about underlying valuations.  But when you look at the accompanying chart showing Price/Earnings ratios going back to 1880, you see that the market today is still priced below previous peaks.

Does any of this mean that a severe market downturn is coming, or that stocks still have room to appreciate?  That is a far more difficult question, for several reasons.  First, does anybody know how well companies are managing to keep up their operations when their workers are doing their tasks at their kitchen tables?  In other words, do we really know how much productivity and economic value is being lost during the pandemic?  This is uncharted territory for businesses and companies alike, but you could make the case that public companies (we’re not talking about bars and restaurants) are just marginally less valuable now than they were at the start of the year, that the damage will be minimal and life will go on in the corporate world when everybody finally gets back in the office.. It’s also possible that they’ve suffered huge damage to their bottom lines and viability and current prices are unsustainable.  You can have your opinions, but nobody really knows.

The other factor is the Federal Reserve Board, which appears to view itself as a fiscal backstop not only for the economy, but also for the markets.  Try to imagine a hypothetical investor who has unlimited money in the bank, who decides that stocks are not going to go down and companies will have money in the bank even if they don’t earn it through operations.  Would that investor ultimately have her way with stock prices?  You have just imagined the reality that is the Fed.  What we don’t know is how long and hard the Fed will fight to prevent a severe market downturn before, say, the November elections.

What are the facts on the ground?  June hiring data showed a sharp reversal from May’s 2.7 million job losses.  The ADP National Employment Report showed that more than 3.3 million workers were hired in the private sector in June.  In addition, the most recent manufacturing indices were stronger than expected.  But a total of 17 U.S. states have now paused their phased reopening programs due to the coronavirus, as the number of new daily cases rose 12.5%.  Some hospitals in Texas, Florida, Arizona and California are reportedly reaching capacity.  Then again, some news outlets report optimism that Pfizer–a component of the Dow Jones Industrial Averages and the S&P 500–had reported encouraging trial results of an experimental coronavirus vaccine, even though it’s unlikely that a vaccine will be available this year.

The conclusion of these analyses is always and forever the same: we honestly don’t know where the markets are going next, and we know with some certainty that trying to predict the market has, in the past, been a fool’s errand.  The most prudent strategy seems to be to play defense without abandoning the potential upside of equities until we know how the pandemic and its economic consequences play out.  That strategy would have underperformed in the past three months, and would have outperformed in the previous three. 

Coronavirus Aid, Relief, and Economic Security (CARES) Act — Summary


$1,200 for individuals; $2,400 for married couples + $500 per child under 17

Phase-out based on income (AGI) on 2019 tax return; if 2019 tax return has not been filed, based on AGI on 2018 tax return

  • $150,000 for married filing jointly (phase-out to $0 at $198,000)
  • $75,000 for individuals (phase-out to $0 at $99,000)
  • To be paid “as soon as possible,” but not likely before May
  • Social Security recipients to where they get SS checks
  • Direct deposit to wherever taxpayer received 2018/2019 refund
  • Otherwise sent to last known address on file

If underpayment of rebate based on 2020 income/tax return, additional rebate paid next year. If overpayment, no adjustment on “excess” payment.


  • Allows withdrawals from IRA’s or employer retirement plans up to $100,000 in 2020 if experiencing adverse financial consequences of COVID-19
  • Exempt from 10% early withdrawal penalty
  • Not subject to mandatory tax withholding
  • Eligible to be repaid over 3 years
  • Withdrawals are taxable; income can be spread over 3 years

Loans from employer-sponsored retirement plans expanded

  • Maximum loan increased from $50,000 to $100,000
  • Repayments delayed for up to one year

Mandatory RMD’s suspended for 2020

  • Applies to IRA, 401(k), 403(b), Inherited IRA
  • RMD’s may be able to be “returned” : If RMD already taken within 60 days, RMD can be “returned”; If RMD taken beyond 60 days, RMD can be “returned” if individual can show negative impact from COVID-19; “Return” option not available for beneficiaries of Inherited IRA’s who have already taken their RMD in 2020


Eligibility extended beyond W-2 employees to self-employed and contractors and people who have been furloughed

Elimination of 1-week waiting period

Regular” state unemployment benefit increased by $600/week for up to 4 months; paid by Federal government ($425 in DC pending)

Extension of benefits for additional 13 weeks


No payments required until September 30, 2020; no interest during the interim
Must be proactive to stop payments; not automatic
Employers can exclude student loan repayments from compensation


Definition of medical expenses expanded for HSA’s and FSA’s —

  • Includes over-the-counter medication
  • Includes menstrual care products

Medicare beneficiaries eligible for COVID-19 vaccine (when available) at no cost

Telehealth services may be temporarily covered by an HSA-eligible HDHP before a participant has met their deductible


There is a new “above-the-line” deduction for up to $300 of qualified charitable deductions (for taxpayers who do not itemize)


There are a variety of provisions in the CARES Act pertaining to small business, but this summary focuses on those provisions that will have a direct impact on individuals.

Earned Income Confusion

If you were voting for the most misunderstood part of the U.S. tax code, a strong candidate would be the Earned Income Tax Credit. The EITC (as professionals call it) represents a refundable federal income tax credit for low- to moderate-income workers.

Since it was installed in the tax code way back in 1975, it has helped offset the burden of Social Security taxes on people for whom the payroll taxes are most (or all) of their tax bite, and it also provides an incentive to work. Taxpayers who are eligible to claim the EITC may be entitled to a refund from the government even if they would otherwise owe no federal taxes.

Sounds pretty straightforward, right?  But there’s a swirl of misinformation around the EITC. You might have heard that the EITC is a welfare system for people who don’t work, but in fact only people with earned income are eligible for the credit—and passive income like interest and dividends doesn’t count.

Have you heard that only families with children qualify?  Not true. The amount of your tax credit is dependent on your income and the number of your “qualifying” children. Natural or adopted children under age 19, or under age 24 and a full-time student, qualify.

Nor, as some have alleged, can undocumented aliens qualify for the credit. You must be a U.S. citizen with a valid Social Security number or a resident alien for the entire year to claim the EITC.

It’s not always easy to know whether any particular person qualifies for the credit. If you have more than $3,500 of investment income in the tax year, you don’t qualify. You don’t qualify if your taxable income is over $55,952, or if you are reporting foreign earned income. Special rules apply to members of the military, members of the clergy, anyone receiving disability benefits and people impacted by disasters.  You don’t qualify unless you file a tax return, even if you don’t otherwise owe federal taxes. 

But many do qualify, and the EITC can be a welcome relief for people who are just barely making it financially. Last year, 25 million taxpayers received over $61 billion in tax credits under the EITC program, for an average of $2,504 in tax relief. The tax credit may be misunderstood, but it also seems to somehow be working.

Staying on Track: The Five Technical Principles of Financial Success

When it comes to your financial future, there are things you cannot control such as the stock market, the economy, or major world events. To increase your odds of financial success, I believe it is more important to focus on the things you can control. My Five-by-Five formula for reaching your financial goals includes five behavioral and five technical principles you can control. Today we’ll look at the five technical principles.

Have the Proper Asset Allocation
Asset allocation pertains to how your portfolio is divided among asset classes, i.e. equities (stocks) and interest earning (cash and bonds). I believe having an appropriate asset allocation can help people control their emotions during the ups and downs of the markets. For example, assume someone has 80% of their portfolio invested in equities but is unable to sleep at night, constantly worries about their investments, and then sells when the market goes down 20%.

This person has likely exceeded their risk tolerance. By selling every time the market goes down 20%, this person is sabotaging their financial plan. Having plenty of cash available to see you through downturns in the markets and for emergencies is also key to long-term success.

Be Properly Diversified Within Asset Classes
Within each of the asset classes, it is important to diversify among different types of investments. For example, I believe the equity portion of the portfolio should be divided among US-based small capitalization, mid capitalization, and large capitalization stocks, as well as international stocks from developed countries and international stocks from emerging market countries. I believe the interest-earning portion of the portfolio should be divided among cash (and cash equivalents), treasury bonds, and corporate bonds.

At any one time, nobody knows which investments are going to do well or struggle economically. Instead of guessing which type will do well, I believe it is better to diversify across many different types of investments. This spreads the risk around. At different times, different investments in the diversified portfolio will be doing better or worse than other investments.

Rebalance Periodically
Over time, a portfolio will drift from its original asset allocation. When this happens,  adjustments need to be made to get it back in alignment. For example, assume an investor starts out with an asset allocation of 60% equities and 40% interest-earning assets. Also, assume that the equity markets do well over time and this investor’s asset allocation drifts to 80% equities and 20% interest-earning because stock prices increased in value while bonds went down in value.

To get back to the original asset  allocation, some equities could be sold and the proceeds added to the interest-earning part of the portfolio. Why is it important to rebalance? Asset allocation drift changes the risk and as a result, the portfolio may no longer align with the investor’s risk tolerance or risk capacity.

Be Tax Aware and Tax Efficient
When I meet with prospective clients the first time, I ask them to bring their last three years’ tax returns to the meeting. I do this for several reasons. Not only do I learn more about them both personally and financially, but sometimes I find an opportunity to help them correct  an error in their tax return that will save them money.

Often, when I meet a new prospect I learn that they experienced an unexpected tax surprise in a recent year and paid a large tax bill to the IRS. This happens when  someone is not aware of their tax situation until it is time to file a return. I believe it is important to proactively manage the tax bill and avoid unexpected surprises.

I tell my clients that almost every financial decision they make has an impact on their taxes. When drawing money out of an IRA, selling investments in a brokerage account, buying or selling a house or other asset, it is important to know the effect on taxes. Proper planning can help identify opportunities to legally reduce or eliminate taxes.

Keep Expenses Low
In general, I believe in investing in low-cost passive index mutual funds and ETFs. Historical data shows that over long periods of time, actively managed funds do not consistently outperform the benchmarks they are trying to beat. Index mutual funds and ETFs generally cost less than actively managed funds.

As an example of the cost savings that can be achieved, if $500,000 were invested in a portfolio of actively managed mutual funds with an average expense ratio of 1%, the annual expenses on the portfolio would be $5,000. If $500,000 were invested in index mutual funds with an average annual expenses would only be $500. Over time, these savings add up.

Source: Steven Clark, CPA, EA Coconut Creek, FL