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C.H. Robinson

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Money left in a 529 Plan? Good (options) for you!

Written by Bruce Primeau, CPA, CFP®, PFS on .

So you did a great job of saving for college for your child and they are finally graduating—yay! In fact, you did such a good job that maybe you saved too much. What can you do about it? Here are some options for you to consider:

  • Change the Account Beneficiary: You can change the account's beneficiary to someone else. Your options include other children, nieces, nephews, a grandchild or even you or your spouse, should you choose to take some classes at an eligible institution.
  • Pursuing an Advanced Degree: These funds are also available if your child decides to continue with their education, which may include a master's degree or perhaps law school or medical school.
  • Penalty-Free Withdrawals: Did your child choose to attend a U.S. service academy? Or, perhaps they received some unanticipated merit or athletic scholarships. If this is the case, you are allowed to withdraw dollars, in the year the scholarship was granted (or during his / her attendance at a service academy) up to the amount of the scholarship. The beauty of this option is you can withdraw the funds without paying the 10% federal penalty. Unfortunately, you will still need to pay the taxes on the earnings portion of the withdrawal, but you do avoid the penalty.
  • Non-Qualified Withdrawals: This is the last option, should one of the above options not prove to work for your circumstances. Funds withdrawn from a 529 plan account that are not specifically used for qualified education expenses are subject to both income taxes and tax penalties. Federal tax and penalty do not apply to the original principal contributions; however, they do apply to the earnings on those contributions.

If you think you will find yourself in the circumstances outlined above, talk to your SWA advisor immediately regarding which may be the best option(s) for you to consider.

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Live Like You're Retired

Written by Bruce Primeau on .

I'd say once or twice a week I get the question "How much money do I need to retire?" My response is typically, "Well, it depends." The "magic" amount of retirement dollars that each person / couple needs really depends on a few basic factors:

• How soon before you plan to retire?
• How long are you going to live (do you have longevity in your genes)?
• How much do you plan to spend in retirement?

If you can just answer those three questions, we can likely get you a pretty good answer. It's the third question that typically stumps new clients because they usually haven't had to keep track of their spending for many years so they really don't have a good idea as to what they are currently spending, let alone what they will spend in retirement. Here's a simple exercise to determine what you are spending now, after taxes.

• Start with gross income from all sources (wages, business income, rental property income, etc.)
• Subtract taxes paid (federal, state, FICA and Medicare)
• Subtract what you are currently saving (kid's college, retirement accounts, taxable account, etc.)
• This should leave you with an approximate total of what you are spending.

This method obviously takes a look at current spending at a very high level. To get a more in-depth itemization of what you are spending your money on, you may want to utilize a software that can break it down for you. Mint.com and Quicken are two such programs that some of our clients currently use, but there are several others to choose from as well.

The bottom line is this – to get a better feeling for what retirement spending is going to be for you, we would advise you to start living like you are in retirement now. After 4 – 6 months of taking this project seriously, you should have a pretty good feel for how much cash flow you're going to need and hence, when you can retire.

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Charitable Giving: Overcoming the hurdles from the December 2017 tax law changes

Written by Becky Botzet, CFP®, EA on .

There has been a lot of confusion with the new tax laws as to whether you are able to deduct your charitable giving in 2018 and going forward. The Tax Cuts and Jobs Act did not eliminate the tax deduction for charitable gifts, but some of the rules have changed.

The new Federal tax laws have increased the standard deductions ($12,000 for singles and $24,000 for married filing jointly), capped the amount of state taxes you are able to deduct, and eliminated other deductions. This is causing many taxpayers to no longer itemize their deductions. Since charitable contributions are only deductible as itemized deductions, many taxpayers will no longer receive any tax benefit at the federal level, while others may see a reduced tax benefit. Keep in mind that many states still allow for these deductions (including the state of Minnesota), so there may still be some amount of tax savings there.

But all is not lost! While it is more difficult than before to capture tax benefits for charitable giving, SWA is working on several strategies with clients in order to maintain some of the tax benefits.

  • Bunching a few years of contributions into a single year to drive your itemized deductions above the standard deduction amount in that year, then reducing contributions in the following year(s) and using the standard deduction in those years.
  • One tool that works well with this strategy is a Donor Advised Fund.
  • Donating appreciated stock may make sense with a bunching strategy because, as we've seen recently, some days in the market are good for gifting at a high price while others are not.
  • If you are age 70.5 or older, consider donating part or all your required minimum distribution (RMD) from an IRA directly to a charity. This can be very effective because it directly reduces the amount of taxable income you report, instead of having to rely on an itemized charitable deduction.

Regardless of your situation, we continue to recommend you keep good records of your donations throughout the year. See the next page for some tips for deducting charitable gifts.

If you would like help reviewing the best strategy for your specific situation, please reach out to your Summit Wealth Advocates' Advisor.

Tips for tracking your Charitable Gifting

  • Make sure the organization you are giving to is qualified. There is a tool on the IRS website to search for your organization ( https://apps.irs.gov/app/eos/ ).
  • If you receive any financial benefit from your contributions, such as merchandise, tickets to a ball game or other goods and services then you can deduct only the amount that exceeds the fair market value of the benefit received.
  • Donations of stocks or other non-cash property are usually valued at their fair market value of the property (generally, the price at which the property would be sold for).
  • For all cash, check or other monetary gifts, regardless of the amount, you must maintain a bank record, payroll deduction record, or written communication from the organization containing:

 The name of the organization
 The date of the contribution
 The amount of the contribution

  • To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing:

 The amount of the donation and a description of any property contributed
 Whether the organization provided any goods or services in exchange for the gift.

  • If your total deduction for all noncash contributions for the year is over $500, you will need to complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
  • Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

Note: Always seek the advice of a tax professional to confirm how a charitable gifting strategy will impact your personal taxes.

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Don't Know What You've Got Until It's Gone

Written by Matt Wright, CFA® on .

Asset custody is one of those topics that the typical investor doesn't give much attention. Most of us are more interested in the rate of return on our investments than some out of sight/out of mind back office activities. Yet, it's critically important to understand who is actually responsible for the safekeeping of your assets. After all, it doesn't do you much good to have a great return on an asset, only to have the asset itself disappear due to fraud or negligence.

The cryptocurrency world has provided many examples in recent years of why this is a legitimate area of interest. The latest major example is QuadrigaCX, a Canadian cryptocurrency broker who recently reported that its CEO died on a trip to India and supposedly he was the only one with the password to access approximately $145 million of client cryptocurrencies! If they are unable to crack the password, those assets will have literally disappeared. We'll note that some are speculating that there is fraud going on here and not just an unfortunate series of events, but either way it points to a failure by the company's clients to consider the importance of custody and, if it's not fraudulent, a colossal failure by the company to protect its clients.

Some of the most basic requirements of a good custody arrangement are missing here, such as the custodian being an independent third party that is subject to external audits and regulation. Compare this to your a typical employer retirement plan [e.g., 401(k), 403(b)]. A regulated third party is generally responsible to maintain custody and account for those assets. If instead, your employer said they'd stick your money in an account and let you know how much it's worth, how would you know for sure whether the money was really there? Not having an independent third party has been a key issue in some of the largest frauds of all time, including Bernie Madoff's decades-long Ponzi scheme.

The same custody issues apply when working with a financial advisor. SWA, for example, manages accounts for clients at Schwab. If you want to make a deposit to your account, the money is sent directly to Schwab, not to SWA (although we can assist clients with depositing checks and transferring from bank accounts). You always have the ability to go to Schwab directly to verify amounts, transact, or withdraw from your accounts if you chose to do so.

As always, we need to share some disclaimers. Having a third party custodian as we've described does not guarantee that your assets will never be lost or stolen, but we believe the risk is greatly reduced compared to the alternative. It also says nothing about whether your investments themselves gain or lose money and does not protect you from market losses.

The bottom line is if you have assets or are considering investing in something that does not have a third-party custodian (which could include certain partnership investments), think carefully about whether you can verify proof of ownership and accessibility to the assets. Consider whether a potentially higher return is worth the risk of the loss of the asset itself.

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Do Your Financial Advisor's Incentives Align With Yours?

Written by By Matt Wright, CFA® on .

A few weeks ago my son was in need of some Cub Scout gear, so I stopped at a local Scout Shop. Our den leader had told me the few specific items that we needed and that everything else was optional. Nonetheless, the Scout Shop employee made a good effort to sell me items that we didn't need. He even pointed out that the amount I was spending was way less than I would spend on sports equipment later on, implying that justifies spending more money when I don't need to. That might work on some people, but I'm guessing not many financial advisors fall for this!

The experience reminded me that every type of business, even a non-profit, has a conflict of interest with its customers. Ideally, a transaction is beneficial for both the business and the customer, but an adversarial tension exists nonetheless.

As with any industry, financial advisors have conflicts, too, but you may not be aware of how different business structures can impact the alignment of interests with an advisor and you, the client. Summit Wealth Advocates, for example, is a fee-only advisor. This means that all of our compensation comes directly from our clients. We are not paid by outside companies to sell their products or services or provide referrals to them. As a result, when we make financial recommendations to clients, we do so as if we are sitting on the same side of the table as them.

This is not the case for all financial advisors, many of whom still operate on more of a traditional sales model where they are paid commissions from the company selling a product, a cost the client doesn't see directly. This business model has typically provided the salesperson a commission. The conflict with this business model is that the salesperson may have an incentive to replace a client's old products with new ones over time in order to generate new commissions.

Some recent moves in the mutual fund industry highlight one way that these conflicts still exist. Responding to regulatory changes, several major firms have announced that some "C class" mutual fund shares held for a specific period (e.g., 10 years) will be converted going forward to "A class" shares. The C class and A class shares of a particular fund represent the same underlying investments – the only difference is how the commissions are paid to the salesperson. Mutual fund A shares generally pay more up front with less on an ongoing basis (e.g. 5.75% up front and 0.25% each year), while C shares may pay nothing up front but more on an annual basis (e.g. 1.0% each year.

Consider a financial advisor with a large portion of his or her income coming from C share mutual funds sold at varying times in the past. As a hypothetical, he/she may be receiving compensation of 1.0% each year from the fund companies. However, as time goes by, portions of this 1.0% income stream will be converted to a 0.25% income stream. That loss of income to the advisor is a cost savings to the client, which seems great at first glance. But look at the incentive problem this just created for the advisor! Will they sit idly by and watch their income decline? Or might some be tempted to convince clients to swap into new products that will get them back to a higher income stream? Will the new products actually be more suitable for the clients both for investment and tax purposes?

Do you really want to be in a position of having to question the motivation of why your advisor is making a recommendation? At SWA, we don't want our clients or ourselves to be in that position, which is why we believe a transparent method of compensation is in everyone's best interest.

North Metro: 763.355.5873
227 East River Parkway
Champlin, MN 55316-5873

South Metro: 612.987.9112
5871 Crossandra Street SE
Prior Lake, MN 55372-3337

West Metro: 763.639.3425
322 Greenhill Lane
Long Lake, MN 55356

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