775 Spartan Boulevard
Your debt-to-income ratio (DTI) is used by lenders to help determine if you can make the monthly payments required to pay back a loan on time. Generally, the lower your ratio, the better. A DTI that is too high can result in lenders denying credit or reducing the amount they are willing to lend.
Maintaining a lower DTI can put you in a better position to borrow money when you need it and avoid overextending yourself by taking on more debt than you can comfortably afford. That begins with understanding how your DTI is calculated.
To calculate your DTI, add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before taxes and other deductions. For example, if you pay $1500 a month for your mortgage, $100 a month for an auto loan and $400 a month for the rest of your debts, such as student loans and credit card debt, that brings your monthly debt payments to $2,000.
($1500 + $100 + $400 = $2,000.)
If your gross monthly income is $6,000, then your debt-to-income ratio is 33%.
($2,000 = 33% of $6,000.)1
While lender requirements may differ depending on the size, purpose and type of loan, the lower your DTI, the less risky you appear to lenders. According to Experian, one of the nation’s major credit bureaus, a general rule of thumb is to keep your DTI below 43%. However, if you’re seeking to qualify for a mortgage loan, many lenders prefer ratios below 36%.2
A low debt-to-income ratio can help you maintain the financial flexibility you need to pursue your goals at each stage of your life. If you’re looking for ways to lower your debt-to-income ratio and improve your overall financial health, consider the following:
1 “What is a debt-to-income ratio?” Consumer Protection Bureau, 8 June 2022. https://www.consumerfinance. gov/ask-cfpb/what-is-a-debt- to-income-ratio-en-1791/.2 “Debt-to-Income Ratio.” Experian, https://www.experian.com/ blogs/ask-experian/credit- education/debt-to-income- ratio/. Accessed 4 Nov. 2022.
This information was written by KRW Creative Concepts, a non-affiliate of the Broker/Dealer.
Let’s face it, life doesn’t always go as planned. Some circumstances are beyond your control, such as rising inflation, an economic downturn, or an unexpected job loss or health crisis. Without a disciplined strategy in place, these can quickly throw your plans off course. When that happens, getting back on track can be harder than expected. For example, if you have to dip into emergency savings to stay afloat between jobs, or to pay a large medical bill, it can take months or even years to build back savings. Similarly, if you panic and sell investments at the first hint of a market downturn, it could take a significant amount of time to make up the losses, especially if you wait until prices are rising again to buy back into the markets. By working together to pursue your financial goals, we can help you build wealth, manage various risks, and avoid costly mistakes along the way.
Below are five ways that together we help you remain on track toward your goals in any economic environment.
Serving as your financial steward or guide, we discuss your goals and desires, craft a plan to get there, and hold your feet to the fire to pursue the outcome you desire. The last part is critical because investor behavior, which is a key driver of financial outcomes, can often derail investors’ strategies. That’s because behavioral biases, such as fear, greed or loss aversion can cause people to make decisions that are not in their best interests. That can have long-term consequences, such as extending the amount of time it may take to reach certain goals or delaying retirement for several years. Providing the guidance you need may help to overcome these biases and remain on the path toward your long-term goals. In addition, with access to sophisticated software and tools, specific recommendations can support your goals and how your strategy may weather various conditions or circumstances, so you can make confident decisions about your future.
Knowledge provides a foundation for making confident decisions that support your goals and objectives. Whether you’re just getting started on your financial journey or are preparing for life in retirement, we work together to educate you on important financial concepts, best practices and new opportunities that may be appropriate for you.
Think of me as a coach who not only helps you focus on the big picture but hone your financial skills over time. This may include guidance for improving budget management, organizing your finances, protecting income sources, managing debt or defining your legacy.
You may need help coordinating advice you receive from your accounting, tax, and legal professionals. This is an important part of a comprehensive approach to financial well-being where investment, tax, retirement and estate planning strategies are carefully coordinated and fully aligned with your goals and time frame.
It’s impossible to know if you’re on track toward accomplishing all of your goals unless you’re able to measure your progress. That’s why we will establish benchmarks to determine if you’re on track as you pursue the full range of short and long-term goals you have established. This proactive approach can also help to determine when or if adjustments to your strategy need to be made to keep you on course.
If you would like to learn more about how we can work together to help you remain on track toward your goals during periods of uncertainty, let’s schedule a time to talk.
Whether you’re buying your first home, trading up or thinking about purchasing a second home or rental property, interest rates play a significant role in determining how much house you can afford. That’s because even a moderate increase in interest rates can drive mortgage rates up, which can add hundreds of dollars to monthly payments and thousands more in interest over the life of a loan.
Throughout much of this year, inflation has been a key driver behind rate increases. The average rate on a 30-year mortgage the week of August 29, 2002, was 5.84%, up from 5.63% the previous week, and 2.81% higher than the 52-week low of 3.03%.1
Understanding how much you can comfortably afford is critical for ensuring you can continue to enjoy the lifestyle you desire today and years from now. When weighing credit applications, lenders consider your debt-to-income (DTI) ratio in addition to your credit history. Many use the 28/36 rule which states that no more than 28% of gross monthly income should be spent on total housing expenses and no more than 36% on total debt service, which is defined as housing plus other debt, such as car loans and credit cards.2 However, the amount consumers may qualify to borrow—and what they can truly afford to pay each month—can vary greatly. Many borrowers experienced that during the overheated real estate market in 2020 and 2021. As demand for housing outstripped supply, limited inventory led to panic buying and bidding wars, with many buyers paying more than they originally intended. In fact, a survey of U.S. homeowners who bought homes during the past two years reported that 7 out of 10 experienced some level of buyer’s remorse, with 30% saying they spent too much money. According to the survey:3
If you’re in the market to buy a home, consider the four steps below to help get the biggest bang for your mortgage buck.
Monthly principal and interest payments seldom tell the full story where affordability is concerned. That’s because there are a number of considerations that don’t figure into your monthly mortgage payment, such as the cost of furnishings and appliances, or whether the home requires repairs before you can even move in. What about monthly utility bills? Will they be higher or lower than what you’re currently paying? Have you estimated costs for regular home maintenance, landscaping, house cleaning and more? Factoring the various costs of home ownership into your household budget can help you stay on track toward your financial goals while avoiding unnecessary debt, like relying on credit cards to pay for unexpected or unbudgeted expenses.
Comparing mortgage rates and lenders can result in significant savings, especially in a rising rate environment. Be sure to read the fine print and ask questions. While advertised rates may appear similar, each lender has its own fee schedule. When you’re ready to start gathering quotes, make sure to submit all of your lender inquiries during your “rate shopping window” to avoid a negative impact on your credit score. That’s typically a period of 14 to 45 days where the credit bureaus will treat multiple similar inquiries as one hard inquiry instead of multiple inquiries.4
Most lenders offer a variety of loan options and durations. Each type of loan will have a different impact on your budget. For example, with a fixed rate loan, your interest rate will remain the same for the duration of the loan, whether that’s 10, 15 or 30 years. Adjustable-rate mortgages generally offer lower introductory rates, but your payment may increase or decrease over time as interest rates rise or fall. Ask your lender to walk you through the pluses and minus of each of the loan options available to you, so you can make an informed decision based on what best fits your needs and budget.
While cash buyers have the most leverage when negotiating real estate, a cash purchase is not practical for most buyers. However, a lender prequalification letter can significantly increase your buying power in a competitive market by assuring sellers that you’re a serious buyer with the financial resources to move forward with a purchase. Generally, this document states the amount you are qualified to borrow based on the lender’s preliminary review of your finances—typically your income, debt, assets and credit history. Keep in mind, a prequalification letter is not a guarantee that your loan will be approved. Lenders reserve the right to deny a loan at any point in the application process based on new information or changes in an applicant’s income, financial circumstances, marital status, etc.
Ready to strategize on ways to finance your dream home? Call the office to schedule a time to talk.
1 ”Mortgage News – Rates Surge.” Bankrate, 7 Sept. 2014, www.bankrate.com/mortgages/analysis/2 ”Debt-to-Income Ratio.” Experian, www.experian.com/blogs/ask-experian/credit-education/debt-to-income-ratio/3 ”10 Homebuyers Regrets.” TheStreet, 26 Aug, 2022, www.thestreet.com/personal-finance/recent-us-homebuyers-have-regrets-heres-why4 ”Hard Inquiries – Credit Report” Equifax, www.equifax.com/personal/education/credit/report/understanding-hard-inquiries-on-your-credit-report/
In July, the Federal Reserve (the Fed) raised interest rates 0.75% for the second consecutive month to a target range of 2.25% - 2.50%.1 The central bank also signaled that future rate increases may be in store through the end of the year as part of its ongoing effort to curb inflation.
While rate hikes can take time to filter through the economy, one of the first places consumers feel the impact is on revolving credit card debt. That’s because credit card rates are tied to the prime rate. When the Fed raises its target rate, the prime rate goes up and variable interest rates generally follow, such as the annual percentage rates (APRs) credit card companies charge consumers for revolving debt. For example, less than a week after the Fed announced its most recent increase, more than a dozen major lenders increased their advertised APRs by the same amount, pushing the national average to 17.92% for new credit cards. However, rates can go as high as 25% or more, based on an individual’s credit rating and other factors.2
Credit card balances in the United States have also risen this year to more than $841 billion. Outstanding balances vary somewhat by age, with borrowers ages 41 to 56 having the highest average balances at $7,236, followed by baby boomers, ages 57-75, with an average balance of $6,230 as of June 30, 2022.3
When used judiciously, credit cards can be a useful tool for building your credit history and maintaining a strong credit score, which lenders use to help determine consumer creditworthiness. Your score influences your ability to qualify for credit and obtain competitive rates on mortgage, auto and other loans. Access to the best rates is important because the more you pay in interest, the less money you keep for yourself.
If you’re looking for ways to get out from under expensive credit card debt and free up more money to use toward savings and other important goals, consider the following:
Paying account balances in full each month is one of the best ways to increase your credit score over time while avoiding the high interest rates credit card companies typically charge on outstanding balances. But what if you’re not in a position to pay off a large balance in full?
Unexpected expenses, budget constraints, overspending and other circumstances can lead to higher balances than anticipated and the need to spread payments over time. However, this can become costly, especially if you’re only paying the required minimum due each month. For example, here’s how long it would take to pay off $7,000 worth of credit card debt at 16.28% interest:4
*Minimum payments are generally 1% of the outstanding balance but may vary based on individual credit card issuer terms and conditions and/or additional penalties and fees.
Balance transfers, which can help consumers save money and pay off high credit card balances faster, involve moving debt from a credit card with a high APR to a new card with a lower interest rate and, ideally, a 0% introductory rate. A 0% introductory period provides an opportunity to pay down debt more aggressively during this temporary break from interest charges. While balance transfers may help you save money, strict rules and guidelines apply, which may include stiff penalties and fees in the event of late or missed payments or other violations of account terms and conditions. So, make sure you read the small print before initiating a balance transfer.
If you prefer to remain with your current provider for the cardholder benefits or rewards, consider asking for a lower interest rate. Before contacting the issuer, take time to review the APR and account holder terms and conditions on your current account, your credit score and payment history, and competitor offers. This information can be useful for stating your case when seeking a lower rate.
If you have multiple credit card balances, it may make sense to consolidate debt through a lower-interest personal loan. This can help reduce costs while streamlining debt management. To qualify for the most favorable terms and rates, your credit score will need to be in the “good” to “excellent” range.
Finally, while it may seem prudent to close accounts that you have paid off and no longer use, doing so can cause your credit score to drop. That’s because closing accounts increases your credit utilization ratio, which is the amount of revolving credit you're currently using divided by the total amount of revolving credit available to you. Instead of closing the account, consider placing the card in a secure location where you don’t have ready access to it and remove it from your digital wallet. For more information about managing your credit score, visit myFICO.com.
To learn more about these and other financial management strategies, call the office to schedule time to talk.
1 https://www.cetera.com/sites/default/files/2022-08/CIM%20MonthlyRecap_JULY%202022_.pdf2 Creditcards.com; Average credit card interest rates: Week of August 3, 2022.3 https://www.bankrate.com/finance/credit-cards/states-with-most-credit-card-debt/4 https://www.nerdwallet.com/article/finance/money-and-mindset
What's Your Personal Inflation Rate?
The annual inflation rate for the United States was 8.6% for the 12 months ended May 2022, marking the largest annual increase since December 1981.1 While there are different ways to measure inflation, the most commonly used index for households is the Consumer Price Index (CPI) tracked by the U.S. Bureau of Labor Statistics. However, the impact of inflation on your household budget could be significantly higher or lower than the CPI, based on your spending habits and other factors.
Below, you’ll learn why inflation impacts individuals and households differently and how to calculate your personal rate of inflation.
Everyone’s spending is different, which means no two individuals or families will experience inflation in the same way. For example, if you own a home and have a fixed-rate mortgage, you may feel no impact as a result of rising housing costs. However, if you rent, or are in the process of purchasing a new home, your experience may be very different.
Variables that determine how inflation may impact your budget include:
Keep in mind, inflation impacts both discretionary and non-discretionary items in your budget. Non-discretionary expenses are your essential expenses, such as food, housing, clothing, childcare, healthcare and transportation. Increases in these expenses can adversely impact your finances or your lifestyle if you’re unable to adjust discretionary spending to compensate for rising costs. Discretionary spending refers to expenses you could live without if you had to, or that you can adjust as needed. These may include dining and entertainment, leisure travel, streaming apps or club memberships. Personal priorities and circumstances will dictate which expenses you and your family consider essential.
It’s important to remember that the inflation rate measured by CPI is an average of the price increases for a certain basket of goods and services tracked. It doesn’t mean that the prices for all consumer goods and services increased by that amount over a given period of time. For example, while the inflation rate in May was 8.6%, gas prices were up 48.7% for the same period. It’s also common to see broad differences within a single category, such as food. While food prices rose roughly 12% overall, eggs rose 32.2%, milk was up almost 16% and fresh vegetables were up 6.4%. Some of the largest increases (unadjusted for seasonal changes) were in the following areas:2
The formula below provides an easy way to determine the impact of inflation on your spending. First, you’ll need to capture some data on your current expenses, as well as last year’s spending. That’s easy to do if you use a budget to track expenses. If you don’t have a budget in place, gather current and prior year bank, credit card and other financial statements for this month and the same month a year ago. Using the formula below, add up your spending for the same month in 2022 and 2021. Then subtract last year’s spending from this year’s spending for the same month. Divide the difference by the amount of the 2021 monthly expense. Multiply the result by 100 to get your personal inflation rate.
For example, if you spent $5,300 in July 2022 and $5,000 in July 2021, your personal inflation rate is 6%:
($5,300 - $5,000) ÷ $5,000 = 0.06% 100 x 0.06% = 6%
Keep in mind that this formula focuses on year-over-year differences in spending, but any increase or decrease in income over the past 12 months will also affect your results by lowering or raising your rate accordingly. As you review your spending, you may notice that certain categories remain unchanged from one year to the next, such as fixed rate mortgage or car payments. Other spending may be subject to seasonal variations, such as summer vacation travel, back to school shopping or end of year holiday spending. As a result, comparing your spending over a six or twelve-month period may provide a more accurate look at how inflation is impacting your household and if opportunities exist to reduce or reprioritize spending.
Whether your personal rate of inflation is higher or lower than the national average, a budget is one of the best tools for managing your finances, so you can move closer to your financial goals in any economic environment. Need help getting started? Consider downloading one of the many budgeting apps available through the App Store or Google Play, or from your bank or credit union. Many of these tools are free, so you don’t have to worry about adding another expense to your monthly budget.
To learn more about planning for a confident financial future, call the office to schedule time to talk.
1 https://www.bls.gov/news.release/pdf/cpi.pdf 2 Ibid.
Researchers at the Global Financial Literacy Excellence Center at George Washington University and the FINRA Investor Education Foundation found that 60% of study participants feel anxious when thinking about their finances and 50% say they're stressed about them.1 Major financial triggers cited by participants include:
Recent economic challenges, including inflation, rising interest rates and ongoing market volatility, have added to the stress many people are experiencing. However, there are practical ways to help cope with and overcome these obstacles. That begins with understanding the causes and symptoms of financial anxiety.
There’s no question that worrying about having enough money to make ends meet each month, pay for an unanticipated expense, or save for retirement can lead to tension and anxiety. Market and economic conditions can also play a role, especially if you’re concerned about fluctuations in the value of your investment portfolio during periods of increased market volatility, or whether you’ll outlive your income in retirement. Financial stress can manifest in different ways, such as obsessive saving or spending behaviors, addiction to work or emotional decision-making. These unhealthy behaviors compound stress, which can impact your physical and mental well-being, resulting in conditions such as insomnia, fatigue, muscle aches, depression and more. While it’s common to experience some level of financial anxiety during your lifetime, especially when faced with circumstances beyond your control, chronic financial stress is harmful and can adversely impact your health, relationships and even your job performance.
Have you ever thought, “If only I had a little extra money each month, all of my worries would go away”? While more money seems like the simple answer for resolving financial stress, it’s often insufficient because it doesn’t deal with the underlying cause of your anxiety. For example, if you grew up in an environment where money was scarce or your family experienced a significant loss in income or assets that impacted your lifestyle, you may harbor fears about never having enough. As a result, no matter how much you make, you’ll never feel confident about your financial circumstances until you deal with that underlying fear.
No matter the source of your financial anxiety, there are steps you can take now to not only help you cope with, but overcome, any challenges you face. To put yourself on a fast track toward conquering the financial stressors in your life, consider the following steps:
To learn more about preparing for a confident financial future, call the office to schedule time to talk.
1 https://gflec.org/wp-content/uploads/2021/04/Anxiety-and-Stress-Report-GFLEC-FINRA-FINAL.pdf?x85507 2 https://www.hrblock.com/tax-center/income/retirement-income/how-roth-ira-contributions-are-taxed/
Please note that neither Cetera nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.
Some IRA's have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Distributions from traditional IRA's and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty
The Consumer Price Index, which tracks changes in the prices of certain goods and services and is often used to measure inflation, showed a slight drop in April. That’s notable because it marked the first decrease in the inflation rate, on an annualized basis, in six months. Nonetheless, the U.S. Bureau of Labor Statistics reports that prices continue to climb for just about everything your family purchases on a regular basis, including food, gas, clothing, utilities, transportation, dining and entertainment.1 Whether you’re seeking ways to stretch your current budget, or save for retirement, a new house, or a vacation, you need a plan—and everyone in your household who’s affected should be involved. That includes kids and grandparents if you live in a multigenerational household. So, how do you get started?
Whether you’re single, married or somewhere in between, think about what matters most to you and your family when it comes to your money. Are you comfortable with your current saving and spending habits? Where can you cut back on spending to help pay for current expenses or save more for longer-term goals? If you’re saving for a new home or car, how soon do you hope to reach that goal? What are your goals when it comes to retirement? Is charitable giving important to you? How do you feel about debt?
If you have a spouse or partner, it’s important that you present a united front before sharing financial goals with other family members. Often, partners have different attitudes about money, based on upbringing, cultural differences or competing financial goals. Maybe you grew up in a household where it was taboo to talk about money, or one where discussions frequently centered around money. Either way, recognizing these differences and finding common ground is the first step toward getting everyone on the same page.
If you don’t already have a financial strategy that clearly outlines your goals and priorities, schedule time to meet with a financial professional to put one in place. A strategy will not only help you remain on track as you pursue competing objectives, but it will hold you accountable to your goals. Keep in mind, the more specific your goals, the better your chances of achieving them. For example, a goal to “save more” is too subjective and won’t hold you accountable. Committing to save $200 each month in an emergency fund is a more attainable objective, due to its clarity.
A budget is an important part of any financial strategy since it provides a clear picture of your cash flow—what’s coming into your household versus what’s going out. It helps to optimize savings and spending to remain on track toward your goals. Choose one of the dozens of free apps available online or through a financial institution you may already work with to help take the complexity out of budgeting. Many allow you to aggregate data from accounts at different financial institutions, providing real-time account values. To stay on track, review your budget at least once a month and keep an eye out for any spending trends that need to be addressed or reined in.
4. Take the conversation to the next levelOnce you have a strategy and a budget you agree on, schedule time to share this information with other members of your household at a time when everyone’s relaxed and not rushing to make a meal, get out the door, finish homework or complete chores. To gain buy-in from family members, ask for ideas on ways to save money or work together to pursue specific financial goals. This reinforces the concept that this is a family effort and their opinions matter.
It’s important to delegate tasks to different family members, based on their age, capabilities and interests. Think about ways everyone can chip in. Considering turning family pizza night into a competition for the best home-made recipe once or twice a month, in place of carry-out or delivery. Do you have space for a vegetable garden? Even small children can help plant and maintain a garden, which can save money on store-bought produce. Think about whether there are tasks or chores that you currently pay for, such as household cleaning, dog walking or landscaping. How much could you save if everyone pitched in to share these responsibilities instead.
6. Reward contributionsThere are many ways to reward family members for their contributions, such as a special night out for you and your partner when you hit an important goal, or a trip to a favorite park for young children who complete all their chores. Grocery shopping can be a great way to help young children learn important lessons about the value of money while choosing their own reward. Begin by assigning each child a snack budget and help them shop for their favorites. If they come in under budget, give them a say in how to use the savings. Will they donate the extra money to a community food bank, roll it over to next week’s
Did you know that 80% of News Year’s resolutions fail by mid-February?1 Interestingly, most people do not fall short of their goals due to a lack of motivation or because their goals are too ambitious. Instead, it’s because they don’t have a plan for how to get back on track if they veer off course.
Whether you’re seeking to rein in spending, pay down debt, increase retirement savings or pursue other important financial objectives this year, consider the five steps below to help ensure you have a plan that’s actionable and attainable. That can go a long way toward staying the course as you pursue the financial and lifestyle goals that are most important to you and your family.
Like most things in life, the more specific your goals, the better your chances of achieving them. For example, a goal to “save more” may be too subjective to hold you accountable and keep you motivated. On the other hand, committing to set aside 5% of your income in an emergency fund may be a more attainable objective, due to its clarity.
For a goal to be meaningful and worth pursuing, it must be relevant to you. That begins with understanding the “why” behind each of your goals. Why do you want to increase savings? Are you saving for the down payment on a home, to boost emergency savings, increase retirement savings, or other reasons? When goals are relevant to your lifestyle wants, they take on greater meaning and urgency. As you think about your goals, envision achieving your desired outcomes. For example, what will it feel like when you purchase your first home or move your family to a larger home? Focusing on the positive outcomes that a particular behavior, such as saving, can have on your life and your financial circumstances can make it easier to stay on track toward your goals.
The more realistic your goals, the more the confident you will feel about accomplishing them. Often, that requires breaking large goals into smaller, more manageable steps so you’re not setting yourself up for failure. For example, if you’ve put off saving for retirement and are eligible to participate in your employer’s retirement plan, take the opportunity to join now, even if you can only contribute a small amount each pay period. As soon as you’re able, increase your contributions to ensure you’re benefiting from any employer matching contributions. Consider increasing your plan contributions annually, until you’re making the maximum allowable contribution. If you’re age 50 or over, you can also make annual catch-up contributions, which are beneficial as you approach retirement. Being able to check off small goals along the path to accomplishing a larger goal can be satisfying and motivating.
Once you’ve established goals that are specific, relevant and realistic, you need to establish a time frame for achieving each of your goals. Again, keeping it real is important here. Doing something “as soon as possible” is too vague and won’t hold you accountable. You also don’t want to set deadlines that are too ambitious that could set you up for failure. Maintaining a budget, which tracks your monthly income and spending, is a great tool for determining reasonable deadlines and time frames associated with each of your goals, from saving more, to paying down debt and making a plan for how you will carry out your legacy.
Your budget can also help you track progress toward your goals, which is critical for staying on course. Tracking progress begins with ensuring each goal is measurable. A goal to “save more for retirement” is hard to quantify and is not time sensitive, making it difficult to measure in any meaningful way. Whereas “increasing plan contributions by 2% annually to capture your plan’s full match within three years” is specific, actionable, timely and measurable.
Finally, take the time to celebrate the small milestones reached along the way. They pave the way to the big wins in life and will inspire you to continually set and pursue new goals with confidence.
To learn more about putting a plan in place for your future, call the office to schedule time to talk.
The Internal Revenue Service (IRS) expects this tax season to be another challenging one for the agency and taxpayers alike. The agency finds itself struggling with a growing workload due to budget cuts, a growing backlog of unprocessed returns and federal stimulus measures that were introduced last year. This comes on the heels of what the National Taxpayer Advocate’s 2021 Annual Report called “the most challenging year ever for taxpayers.” The report acknowledged that “there is no way to sugarcoat the year 2021 in tax administration: From the perspective of tens of millions of taxpayers, it was horrendous.”
During the 2021 tax filing season, the IRS answered only one out of every nine calls, and processing delays left the IRS with more than 10 million unprocessed returns as of January 2022, a number that continues to grow.1 While the IRS plans to hire 10,000 employees to address the backlog and assist with processing new returns, it will take time to onboard and train new employees.2 As a result, many taxpayers can expect longer processing times and delays in receiving refunds in the weeks and months ahead.
Despite having a few extra days to file returns this year—they’re not due until April 18, 2022—taxpayers may not want to wait until the last minute. The information below addresses factors that can delay the processing of your return, steps you can take now to head off tax filing headaches, and where to get help if you need it, including how to track a refund.
The IRS says taxpayers who mail a paper return this year or those who responded to an IRS inquiry about their 2020 return should expect delays. In addition, the IRS says that certain tax returns simply take longer to process than others, including when a return:
In addition, the IRS says it’s taking more than 21 days (and up to 90 to 120 days) to issue refunds for tax returns with the Recovery Rebate Credit, Earned Income Tax Credit and Additional Child Tax Credit.3
In addition to filing your return as early as possible, the IRS recommends the following steps for taxpayers seeking to avoid processing delays or to speed up an anticipated refund:
Check your numbers. Mistakes are a leading cause of delays in processing taxpayer returns.
Looking for assistance or the status of your refund? Tax forms, instructions and other resources to help taxpayers prepare and file their returns are available at IRS.gov. Taxpayers can also download the IRS2Go mobile app on Google Play, the Apple Store or Amazon. Available in English and Spanish, the free mobile app makes it easy to check your refund status, make a payment, find free tax preparation assistance, or sign up for helpful tax tips. If the mobile app’s not your thing, you can also track your refund status using the online search tool Where's My Refund? at IRS.gov/refunds. According to IRS, you should only call them with questions if it's been 21 days or more since you e-filed your return or if Where's My Refund? directs you to contact them.
Keep in mind, if you are expecting a refund this year, it may be time to revisit your withholding. Ideally, you want to make sure that your money is available to you throughout the year, not parked with the IRS. While many people choose to use a tax refund to pay down debt or increase savings, having that money working for you throughout the year may help head off debt in the first place by bolstering emergency or other savings. Be sure to talk to a professional tax advisor if you have questions about your taxes or withholding.
To learn how a tax-efficient investment strategy can help you plan for a confident future, call the office to schedule time to talk.
1 https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2022/01/ARC21_Full-Report.pdf 2 https://thehill.com/policy/finance/596856-irs-to-hire-10000-in-attempt-to-cut-tax-returns-backlog 3 https://www.irs.gov/refunds
Please note that neither Cetera nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney
Americans left their jobs at an alarming rate last year. According to the U.S. Bureau of Labor Statistics, a total of 68.9 million workers resigned, were laid off or discharged in 2021,1 including more than 47 million who left voluntarily in what came to be known as the Great Resignation.2 The good news is that the majority of those who left a job remained in the workforce. In fact, 75.3 million workers were hired last year for a net employment gain of 6.4 million in what some economists are calling the “Great Upgrade.” While many workers left the labor market to care for children or elderly relatives during the pandemic, millions left their former jobs for better pay, benefits, working conditions and job quality.3 However, it appears that the “Big Quit” may not be over yet. According to a recent survey of American workers, roughly one quarter of respondents say they intend to change jobs in 2022, possibly setting the stage for yet another year of turmoil in the labor market.4
If you’re among the millions of Americans who recently changed jobs or are thinking about doing so in the months ahead, it’s important to understand how a move could impact your retirement plan benefits. For example, if you leave a job before your 401(k) is fully vested, you may forfeit the unvested portion of your account. Vesting refers to the amount of employer matching contributions that employees are entitled to keep, based on the plan’s vesting schedule. Eventually, you’ll also need to decide what to do with your old 401(k). Generally, you can choose one of four options:
If you’re happy with the plan’s investment options and fees, you can leave your retirement account where it is and continue to benefit from tax-deferred earnings growth as long as the account balance remains at or above that employer’s required minimum balance—usually $5,000. You will be limited to the plan’s investment options and will not be eligible to take a loan against your old 401(k) plan. If you have an outstanding 401(k) loan, your old employer may require the loan to be repaid within a stated time period after you terminate your employment. If you fail to pay back a 401(k) loan, it's considered to be a distribution and may be subject to taxes and penalties. A potential downside to leaving assets at a former employer is that the account may fall off your radar. You may forget to check on it regularly or take steps to ensure your investment allocation continues to align with your needs, risk tolerance or changing priorities. Your allocation refers to how account assets are invested across individual investments and asset classes, such as stocks, bonds and cash.
If your new employer offers a plan and accepts rollovers, you can roll the account assets from your old plan directly into your new employer’s plan. This option enables you to consolidate your 401(k) assets in a single account and continue to enjoy the benefits of tax-deferred growth as you build your retirement savings. However, you will be limited to the investment choices offered by the plan and subject to the new plan’s fee schedule and provisions, including those governing loans and any matching contributions. A financial professional can help you make an informed decision by providing a side-by-side comparison of the investments and fees associated with both plans. Another benefit of keeping assets in a 401(k) at a new or former employer is that retirement accounts set up under the Employee Retirement Income Security Act (ERISA) of 1974 are generally protected from seizure by creditors.5
Another option is to roll account assets into a new or existing traditional IRA through a trustee-to-trustee transfer or “IRA rollover.” Your account assets will continue to benefit from tax-deferred earnings growth, and you can make contributions to your IRA, subject to the annual contribution limits ($6,000 for 2022 and an additional $1,000 in catch-up contributions, if you are age 50 or over). However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work.6 A traditional IRA may also offer certain investment choices that are not available in your former employer’s plan or in your new 401(k) plan. Keep in mind, IRAs do not have a loan feature and do not provide the same level of creditor protection as 401(k)s.
Due to the significant penalties associated with early withdrawals from qualified retirement plans, it can be costly to take a cash distribution if you are under age 59 ½. That’s because the Internal Revenue Service considers it an early distribution, meaning you could owe the 10% early withdrawal penalty in addition to any federal, state and local taxes owed, which can add up fast. Another significant cost associated with cash distributions at any age is opportunity cost. For example, if you took $10,000 out of your 401(k) instead of rolling it over into an account earning 8% annually on a tax-deferred basis, your retirement fund could end up more than $100,000 short after 30 years.7 That could have an impact on your retirement timeline, resulting in retiring later than originally planned or falling short of your retirement income goals. Keep in mind, if you take a cash distribution and then decide to roll it over into another retirement plan, you only have 60 days from the date you received the distribution to complete the rollover before owing taxes and penalties.
The information above is not a complete list of the rules, restrictions and penalties associated with each of these choices. It’s important to discuss all of your options with your plan provider, as well as your tax and financial professionals to determine the right course of action for you. Remember, the choices you make today can impact your finances for decades to come.
To learn more about planning for a confident retirement, call the office to schedule time to talk.
1 https://www.bls.gov/news.release/jolts.nr0.htm 2 https://www.uschamber.com/workforce/understanding-americas-labor-shortage-the-most-impacted-industries 3https://rooseveltinstitute.org/2022/02/04/%E2%80%8B%E2%80%8Bthe-labor-leverage-ratio-a-new-measure-that-signals-a-worker-driven-recovery/ 4 https://www.resumebuilder.com/1-in-4-workers-plan-on-quitting-in-2022-as-great-resignation-continues/ 5 https://www.equifax.com/personal/education/life-stages/creditors-protected-retirement-accounts/ 6https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits 7 https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-rollovers
Over the past two years, individuals and entire communities have faced unprecedented challenges brought on by the COVID-19 pandemic, extreme weather events, natural disasters and other circumstances. Uncertainty about inflation, rising interest rates, supply chain disruptions and the recent surge in coronavirus cases continue to influence the global markets and economy. While there’s no question that change and uncertainty can be unnerving, there are steps you can take to help replace concern with confidence as you pursue your important life goals. That begins with anchoring yourself in a plan.
Below are five ways planning can help you remain on track toward accomplishing the things that are most important to you and your family at every stage of life. A financial plan can help to:
Without clearly defined goals, you’re basically on a journey without a destination—any road will take you there, or nowhere at all. That’s why the first step in the planning process is to identify and prioritize your goals. What do you want to accomplish, and when?
Keep in mind, each of your goals will have its own time frame. Replacing your existing car or saving for a down payment on a home are generally short-term objectives. Goals like saving for retirement or a child’s college education may have a longer time horizon, depending on your age and circumstances. Once your goals are documented, a personalized strategy can be developed to help you move closer to them.
Think of your investment strategy as the engine driving your plan. To stay on track, it’s critical that your strategy is aligned with your goals, time frame and risk tolerance. For example, a strategy that is too aggressive as you approach retirement may not provide enough time to make up for any losses incurred as a result of market volatility. An approach that is too conservative also poses risk, such as the inability to keep pace with inflation over time. The planning process helps to ensure your exposure to market and investment risk is appropriately aligned with your goals, time frame and personal risk tolerance
The planning process maps out a strategy to not only pursue each of your goals but to measure progress against them. Using sophisticated planning software, your strategy is stress tested under a wide variety of financial and economic market conditions, including some of the most extreme circumstances, to help determine the probability of accomplishing each of your goals. This not only helps to identify any areas that may require an adjustment but inspires confidence that your strategy can weather change over time.
It’s important to understand that poor or misinformed decisions can quickly derail even the best-laid plans. We saw that early in the pandemic in 2020, when fear drove many investors to engage in panic selling as the S&P 500 Index fell 34% from the peak on February 19 to the bottom on March 23.1 That not only resulted in investors realizing losses but led many to miss out on the market’s subsequent rebound in the weeks and months that followed.
Without a disciplined plan and investment strategy in place, behavioral biases, such as fear, greed or loss aversion can cause investors to make decisions that are not in their best interests. These decisions can have long-term consequences, such as extending the amount of time it may take to reach certain goals or delaying retirement. A well-constructed plan can help investors overcome these biases and remain on the path toward their long-term goals
Keep in mind, your plan is not simply a snapshot in time. It evolves to accommodate expected and unexpected events, some of which may be outside of your control, such as a market or economic downturn. What if you decide to marry or divorce, change fields mid-career or retire earlier than planned? It’s much easier to accommodate these life changes when you have a flexible framework in place to build upon. Meeting regularly with the financial professionals you rely on for guidance is also a critical part of ensuring that your plan remains up-to-date and reflects today’s needs and tomorrow’s aspirations.
While the winds of change will continue to blow, anchoring yourself in a plan can put you in a better position to withstand any storms that may come your way. To learn more about the benefits of planning, contact the office to schedule time to talk.
According to the National Retail Federation, this year’s holiday spending is expected to shatter previous records despite supply chain bottlenecks1 and the steepest 12-month increase in inflation in more than 30 years.2 That’s because many Americans—who have accumulated more than $4 trillion in savings since the start of the pandemic—are ready to spend this holiday season.3
While consumers have already spent an estimated $8.9 billion on Black Friday, that fell slightly short of the $9 trillion spent in 2020. However, shoppers spent far more between November 1 and 28, than in previous years, in an attempt to get ahead of potential inventory shortages and shipping delays.4
This year also promises to be one of the most expensive holiday shopping seasons. As a result, many people are finding that their budgets aren't stretching as far as they had expected. With less inventory to meet demand, retailers aren’t offering the same steep discounts many shoppers have become accustomed to in recent years. Even with discounts, it’s estimated that shoppers will pay 9% more this year for the same goods.5
While that can make it challenging to keep holiday spending in check, there are steps you can take to help manage spending, beginning with the four tips below.
A budget is a great tool to track spending; however, people often forget to include certain holiday expense categories, beyond the purchasing of gifts. These include travel, hosting gatherings, seasonal decorations, special holiday meals, and tips for service providers like your dog groomer, hair stylist, or the kid who mows your lawn. To ensure your budget captures all of your holiday expenses, begin by listing each area of spending and set a dollar limit for each.
No matter how much you plan to spend this holiday season, shopping for the best deals is always a smart move. A number of online tools, websites, and apps are available to help you find discounts and bargains on a wide range of items. Free services, such as Groupon, offer discounts on travel, activities, goods, and services. Others, like Rakuten, offer cash back on the purchases you make at thousands of stores, including many that you may already patronize. Browser extensions like Honey and Popcart can save you time and money by searching the internet for price comparisons, alerting you to price drops, and automatically applying coupons and promotional codes at checkout. If you’re planning to travel to see family and friends over the holidays, or escape to a resort for some rest and relaxation, travel comparison sites can help you save on airfare, hotel packages, rental cars, and more.
If you’re concerned about getting carried away by the season of giving, and overspending as a result, consider paying holiday expenses with cash instead of credit cards this year. Paying with cash—such as bank debit cards or prepaid gift cards—can help curb impulse spending. If you do use credit cards, do so judiciously and make sure you’re using your holiday spending budget to track each purchase. That way, there are no “surprises” when you receive your post-holiday credit card bill.
As more people take advantage of the ease and convenience of ecommerce for their holiday shopping, package theft—often called “porch piracy”—is also on the rise. In most cases, there is no recourse for packages that are stolen upon delivery, other than filing a police report. Fortunately, there are a number of ways to protect your purchases if you know you won’t be home to receive them. All major shippers now offer the ability to opt in to receive tracking information via text and email notifications, including the United States Postal Service. If you know you won’t be home to receive a package, consider asking a neighbor or friend to retrieve it and hold it for you, or consider shipping to an alternate address, such as your workplace. In many cases, packages shipped by United Parcel Service (UPS) can be delivered to a UPS store near you. Similarly, shipments from Amazon can be delivered to one of their secure lockers where you can retrieve your packages on your schedule.
To learn more about establishing a budget or getting a jump on adopting sound financial habits for the new year, contact the office to schedule time to talk.
1 https://nrf.com/media-center/press-releases/nrf-predicts-highest-holiday-retail-sales-record 2 https://www.bls.gov/news.release/cpi.nr0.htm 3 https://www.cnbc.com/2021/08/03/most-of-americas-extra-pandemic-savings-are-going-to-the-wealthy-.html 4 https://www.nytimes.com/2021/11/29/business/black-friday-sales.html 5 https://www.cnbc.com/2021/11/26/holiday-shopping-2021-sticker-shock-could-change-retailers-approach-to-sales.html
This information was written by KRW Creative Concepts, a non-affiliate of the broker-dealer.
One of the greatest myths about tax planning is that it’s only for the wealthy. Yet, nothing could be further from the truth. If you earn income, the goal is to keep as much of your money working for you, no matter your income level. That requires having a plan in place for how you will manage taxes on your various sources of income, such as workplace earnings and investments. That’s among many reasons why tax planning is an integral part of a comprehensive financial plan designed to help you meet multiple goals and priorities, while keeping more of what you earn.
Below are four strategies to consider to help with your tax planning before year end. Be sure to meet with your professional tax advisor before putting these or other strategies in place.
Maximizing contributions to the qualified retirement plans you are eligible to participate in—such as a 401(k), 403(b), individual retirement account (IRA), or SEP IRA—is one of the smartest ways to help reduce taxable income while building wealth. Retirement plan contributions can be made on a pre-tax (traditional) or after-tax (Roth) basis. Pre-tax contributions can reduce the amount of your taxable income by the amount of your contribution, up to the plan’s annual limit. Those age 50 and older are also eligible to make catch-up contributions.
Roth contributions are made on an after-tax basis, which means you can’t deduct contributions. However, earnings compound on a tax-deferred basis. Qualified withdrawals from a Roth are generally income tax-free, whereas withdrawals from a traditional IRA are taxed as ordinary income in retirement.
For most employer plans, December 31 is the last day you can make contributions for the current tax year. For IRAs and certain plans for self-employed business owners, you have until April 15, 2022, to make 2021 contributions
If you expect to be in a lower tax bracket this year than in the future, you may want to think about initiating a Roth conversion. A Roth conversion takes place when you roll over assets from an existing traditional IRA or qualified employer plan into a Roth plan. Partial conversions are also permitted. The amount converted is included in your gross income and taxes are owed on the assets in the year they are converted. While there is no limit on the amount of assets you can convert in 2021, Congress is considering proposals that may seek to impose future income limits on Roth conversions, so be sure to discuss your plans with your tax advisor before taking action.
For taxpayers planning to itemize their deductions, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 increased the deductible limit for cash gifts to qualified charitable organizations from 60% of adjusted gross income (AGI) to 100% of AGI. This was extended for 2021.
The CARES Act also allowed taxpayers claiming the standard deduction to deduct up to $300 of cash donations to qualified charities in 2020. This was not only extended for 2021, but the maximum deduction was increased to $600 for married couples filing jointly. Before you donate, make sure the charity you’re considering is a qualified charity that is eligible to receive tax-deductible contributions. Cash donations must be made by December 31, 2021, to qualify under these special provisions.1
Last year, many investors took the opportunity to harvest investment losses, following the significant stock market drop in March 2020. However, with markets surging throughout most of 2021, fewer investors may have an opportunity to harvest losses this year. Tax-loss harvesting occurs when you sell portfolio holdings that are trading below your purchase price to lock in the tax loss. Applying losses against gains can help to lower your investment tax burden. However, you also have to apply the right types of losses against gains. Short-term losses are associated with assets held for a period of less than 12 months, while long-term losses pertain to assets sold after being owned for 12 months or more. This is important because short-term capital gains are generally taxed at a higher federal income tax rate than long-term capital gains.2
Investors also need to be cognizant of the wash-sale rule, which states that if you sell a security at a loss and then purchase a “substantially identical” security within 30 days prior to or after the sale, the loss is disallowed for income tax purposes.3 Tax-loss harvesting can be complex for investors to do on their own, which is another good reason to consider professional portfolio management.
To learn more about tax-smart investment strategies, contact the office to schedule time to talk.
1 https://www.irs.gov/newsroom/expanded-tax-benefits-help-individuals-and-businesses-give-to-charity-during-2021-deductions-up-to-600-available-for-cash-donations-by-non-itemizers 2 https://www.investopedia.com/terms/t/taxgainlossharvesting.asp 3 https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales
This information was written by KRW Creative Concepts, a non-affiliate of the broker-dealer.
This communication is designed to provide accurate and authoritative information on the subjects covered. It is not however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional retirement account to a Roth retirement account is a taxable event. A Roth account offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth account must be in place for at least five tax years, and the distribution must take place after age 59½, or due to death or disability. Depending on state law, Roth accounts distributions may be subject to state taxes
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.