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C.H. Robinson

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Apply Now for Financial Aid for Post-Secondary School in 2019-2020

Written by Jon Govin on .

If you have children in or going to post-secondary school for the 2019-2020 school year, now is the time to file your Free Application for Federal Student Aid, more commonly referred to as the FAFSA. The filing period begins October 1 each year of the year prior to attending college.

Why complete the form, let alone early? In order to gain access to federal financial aid the student and parents need to complete and submit the FAFSA. And, some schools set priority deadlines for financial aid, first-come, first-served. Some parents ask if it is necessary "to go through the hassle" if they don't expect financial aid because of their high income or assets. The short answer is absolutely, YES, regardless of income or financial assets. Remember, federal financial aid includes federal student loans, which are generally available to anyone. And, while you may not need it now, you never know what the future may hold.

I am no fan to more paperwork, but honestly, this form is not all that complicated and takes far less time than you think. I find the most complicated part to be remembering the password that I only use once per year. The form has been streamlined, and if you file online you can connect to the IRS to pull in your tax return information. And now there is even a phone app called myStudentAid. There are plenty of help buttons in the online FAFSA to explain the questions, or contact your SWA Advisor for assistance.


Maximizing Tax Savings for Charitable Contributions

Written by Bruce Primeau on .

Well, Congress took their best shot at tax simplification for 2018 and, by doing so, has changed the way many people will make charitable contributions moving forward. For some, itemizing deductions will no longer be necessary as it will be difficult for them to come up with more deductions that the standard deduction amount affords them. For others that have total itemized deductions close to the standard deduction amount, a new opportunity exists. The opportunity I am referring to is bunching multiple year's charitable contributions into one year. Let me show you what I mean:

  • We have a married couple that typically gives about $5,000 to various charities each year. They usually itemize deductions each year, but in 2018 their total itemized deductions will total only $23,000. So, the standard deduction would be their obvious choice each year moving forward. For the next 3 years, their total deductions against ordinary income look like this:
    • 2018: Standard deduction - $24,000
    • 2019: Standard deduction - $24,000
    • 2020: Standard deduction - $24,000
    • Three year total deductions = $72,000
  • If, instead the couple accelerated their $5,000 annual cash charitable contributions into 2018 using a Donor Advised Fund (DAF), their total deductions against ordinary income would look like this:
    • 2018: Itemized deductions - $33,000
    • 2019: Standard deduction - $24,000
    • 2020: Standard deduction - $24,000
    • Three year total deductions = $81,000

By contributing 3 years' worth of charitable contributions ($15,000) to a DAF in 2018, they get the charitable contribution deduction in 2018, despite the fact that they may give that $15,000 away over the next several years (no requirement to give those funds away in 2018). In total, they receive $9,000 more of tax deductions over the next 3 years, which, at a combined federal and state tax rate of 30%, they would save about $2,700 of tax. Not a bad strategy, given the fact that the client is merely accelerating the cash gifts to the DAF.

Another excellent strategy involving a DAF is to contribute $15,000 of appreciated securities instead of cash. The donor receives the same tax deduction and pays no tax on the $15,000 of appreciated securities they donate. This can be a great diversification technique that can save tax dollars in more than one manner (capital gains tax as well as ordinary income tax).

Please let us know if you have any questions regarding this strategy or if you feel it is one you may want to consider.


Can We Predict the Future? Not in a Million Years!

Written by Matt Wright on .

Deep down, most of us realize we can't reliably predict future events with much accuracy. But the potential rewards of being right are so tempting that business leaders and investors spend enormous amounts of time and effort trying to get an edge over everyone else, despite the odds. While some people, through luck or skill, will find success doing this, it seems unlikely to us that there is a positive payback in aggregate.

Many investment managers engage in portfolio strategies based on their own or others predictions, but SWA does not. Below, we outline two circumstances over the past decade that have had momentous economic significance while being anticipated by virtually no one. It leaves us wondering why others haven't learned from these lessons.

This Interest Doesn't Rate!

Economists discuss many things, but throughout history the idea of a negative interest rate has been a rare topic. Switzerland utilized negative rates in the 1970s as a measure to control its currency value, but outside of that it has been unheard of. Not only that, but up until about 2008 the idea of negative rates was widely considered implausible, notwithstanding isolated cases like Switzerland.

The Global Financial Crisis brought many shocks to the global economy and in its aftermath interest rates throughout much of the world declined sharply. By 2016, there were over a dozen countries that had issued trillions of dollars in government bonds with negative yields. Investors were knowingly locking money into an investment that would pay them back less than they put in – even now it still sounds crazy! Nonetheless, what seemed impossible just a few years earlier is now so common that economists have had to rethink the very concept of the interest rate.

When Oil Hit the Wrong Peak!

Geologist M. King Hubbert proposed his peak oil theory in the mid-1950s. The general idea was that oil production in the U.S. would peak in the late 1960s and then decline rapidly. Other countries would see similar patterns at different times and indeed, the world as a whole must experience the same thing at some point. For a global economy heavily dependent on petroleum, some forecasters foresaw economic disaster as oil prices would soar as supply fell off.

The trouble, as always, is getting the timing right. A little over a decade ago, it appeared that global oil production may finally be reaching its peak. In addition, with China's massive construction spree gobbling up commodities in the early 2000s, demand for oil was growing stronger. The conditions appeared to be in place for a huge spike in oil prices, potentially devastating the global economy.

In just a few years' time, the story has been completely flipped on its head. First, the Global Financial Crisis and the resulting slow economic growth rates throughout much of the world has put a dent in demand. In addition, a divergence in oil consumption began around the same time, caused by a slow but steady shift to alternative fuels. Developed economies such as the U.S., Eurozone, and Japan have actually seen net oil consumption flatten in recent years, while developing economies continue to increase consumption. However, the trend towards alternative energy is expected to continue to accelerate and eventually reduce demand across the globe. Forecasters are now, in fact, talking about peak oil demand possibly peaking at some point in the coming decades. This notion was not anticipated by the peak oil production theories.

Even Hubbert's original idea has run into trouble. His prediction of U.S. oil's peak and decline was reasonably accurate from around 1970 up to about 2010. But then an astonishing change swept in, causing U.S. oil production to surge past the levels last seen almost 50 years ago. Due to improved technology and techniques, the U.S. shale oil industry was transformed from a relatively minor source of oil a decade ago to a massive contributor to global oil production today.

Of course, we can't really fault Hubbert for not seeing this coming back in 1956, but that's kind of our point! Even modern oil industry experts didn't see it coming until it had pretty much arrived. This oil has literally been sitting in the ground for millions of years, but the ability to determine how readily we can get it out of the ground and how much of it we want to use can shift dramatically in a short time. The peak oil theory was busted on both the supply and demand side in the past decade - remember that the next time you see a talking head on a business channel confidently predict next year's oil price!
It's hard to understate the immense changes in economic thought we've seen in just the past decade. Since almost no one saw these changes coming then, why would we have any confidence that anyone will get it right this time?

If you've come to realize the folly of investing based on predictions but need help getting on a more rational path, contact us today.


Individual 401(k) or SEP IRA

Written by Becky Botzet on .

Selecting the right retirement plan as a self-employed person (or a married couple as business owners) can be confusing and differences between options can sometimes be overlooked.

The SEP IRA and Individual 401(k) are the two most common retirement plans chosen by successful self-employed individuals due to their high contribution limits and flexible annual contributions. However, there are key differences that should be considered.

The Individual 401(k) and the SEP IRA have comparable maximum limits. Due to the way the contribution is calculated, a self-employed individual may be able to contribute more into an Individual 401(k) versus a SEP IRA at the same income level; therefore, maximizing retirement contributions and valuable tax deductions.

Here's how the calculation works. In 2018, participants in an Individual 401(k) can contribute up to 100% of the first $18,500 ($24,500 if age 50 or older) of W-2 compensation or net self-employment income for a sole proprietorship. In addition, a profit sharing contribution can be made up to 25% of W-2 wages or 20% of net self-employment income. The contribution limit calculation in an Individual 401(k) is important because it allows you to potentially save more than a SEP IRA at the same income level. The maximum is $55,000 ($61,000 if age 50 or older due to a "catch-up" provision.)

The SEP IRA allows self-employed individuals to contribute up to 25% of their W-2 earnings or 20% of net self-employment income up to the SEP IRA contribution limit. The maximum is $55,000 for 2018.

You should also consider whether you want the option of borrowing against your retirement plan by using your retirement plan's balance as collateral. IRS rules do not permit a loan in a SEP IRA, but an Individual 401(k) loan of up to half of the plan's value up to a $50,000 maximum is allowed.

Finally, Individual 401(k) balances do not count towards your IRA balances when you are making Roth Conversions, whereas SEP IRAs do. You are allowed to make non-deductible IRA contributions each year ($5,500 in 2018, plus $1,000 catch up if age 50 or older). If you do not have a balance in an IRA, you are able to convert the contribution tax free to a Roth IRA. Individual 401(k) plans work well with this back-door Roth strategy.

Although Individual 401(k) accounts have greater administrative responsibilities than a SEP, in many cases if you are self-employed and do not plan on adding employees, the Individual 401(k) is a much better option than the SEP IRA.


Have You Saved Enough to Retire?

Written by Bruce Primeau on .

I recently read an article entitled, "U.S. Workers Still Lag In Retirement Savings, But Execs See Hope," in Financial Advisor Magazine and I want to share some of the points they provided. According to an Insured Retirement Institute study of 806 people between the ages of 55 and 71:

  • 42% of those surveyed have no retirement savings
  • Of those that have some retirement savings, 38% have less than $100,000 saved
  • Only 38% of those surveyed have even calculated what they will need to retire
  • Less than 20% of those surveyed feel very confident that they can retire securely while 30% say they are not at all confident they can ever retire
  • According to Tim Seifert, Vice President and head of annuity sales at Lincoln Financial Group, 75% of people who turn age 65 this year will be alive at age 90 and nearly 50% will be alive at age 95

The above statistics are very concerning to me since most people are not saving adequately for what could be a 30+ year retirement time horizon. This also explains why many people reaching age 65 are continuing to work, at least part-time, simply because they cannot afford to retire. While I realize the title of the article finishes with "Execs See Hope," I guess I am not seeing where that hope may be coming from. The statistics outlined above clearly paint a dim picture and, in many cases, may mean that many of the children of those baby boomers may become financially responsible for their parents.

I guess the one statistic that stands out most to me is that only 38% of those surveyed have even calculated what it will take for them to retire. That means that 62% are either "winging it" or are just planning to work for the foreseeable future – neither of which is a good solution.
If you find some of the statistics outlined above concerning, or you or someone you know is part of the 62% "winging it," feel free to reach out or pass along our contact information.

Bruce Primeau – This email address is being protected from spambots. You need JavaScript enabled to view it. 612-987-9112
Becky Botzet – This email address is being protected from spambots. You need JavaScript enabled to view it. 763-639-3425
Jon Govin – This email address is being protected from spambots. You need JavaScript enabled to view it. 763-355-5873

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

This email address is being protected from spambots. You need JavaScript enabled to view it.