‘Tis the Season to Be Thinking about Charitable Giving

With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help potentially increase your gift.

Example(s): Assume you want to make a charitable gift of $1,000. One way to potentially enhance the  gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.

For 99% of the population, this limitation is never a problem.

Nonetheless, for 2021 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don’t itemize deductions, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities (in addition to the standard deduction).

Make sure to retain proper substantiation of your charitable contribution. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit-card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. A copy of a canceled check is no longer enough to substantiate your deduction. If you make any non-cash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of a year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

For example, if you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.

If you want to “turbo-charge” your charitable deduction, consider donating appreciated securities (stocks, bonds, mutual funds, etc.) Not only do you get a deduction for full fair market value of the security, you also escape capital gain taxes on the appreciation you donated. If you want to donate securities that have gone down in value, it’s always better to sell them first, capture the capital loss, then donate the cash (there’s no inherent advantage in donating depreciated securities).

If you give more than $1,000 a year to charity, it may be time to consider a Donor Advised Fund (DAF). A DAF allows you to “bunch” your charitable deductions to allow you to itemize deductions when you might otherwise only qualify for the standard deduction. By funding the DAF with an amount large enough to put you over the standard deduction, you can make charitable “grants” over several years while getting a full deduction in the year that you fund the DAF. Keep in mind that money transferred into a DAF can never be removed, and the only beneficiaries of the DAF are qualified Section 501(c)(3) charities. You can set up a DAF with most major brokers at no cost, and some have no minimums. Talk to us if you’d like more information about setting one up.

A word of caution

Be sure to deal with recognized charities and be wary of charities with similar-sounding names. It is common for scam artists to impersonate charities using bogus websites, email, phone calls, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the “Tax Exempt Organization Search” tool. And never send cash; contribute by check or credit card and be wary of those asking for cash donations, unless perhaps they’re standing in front of a red kettle.

If you would like to review your current investment portfolio or discuss charitable giving or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

It’s Employer Open Enrollment Season: Making Benefit Choices That Work for You

Open enrollment is the window of time when employers introduce changes to their benefit offerings for the upcoming plan year. If you’re employed, this is your once-a-year chance to make important decisions that will affect your healthcare choices and your finances. This is the critical time to, at a minimum, consider whether changes in your benefit options are needed.

Even if you are satisfied with your current health plan, it may no longer be the most cost-effective option. Before you make any benefit elections, take plenty of time to review the information provided by your employer. You should also consider how your life has changed over the last year and any plans or potential developments for 2022.

Decipher Your Health Plan Options

The details matter when it comes to selecting a suitable health plan. One of your options could be a better fit for you (or your family) and might even help reduce your overall health-care costs. But you will have to look beyond the monthly premiums. Policies with lower premiums tend to have more restrictions or higher out-of-pocket costs (such as copays, coinsurance, and deductibles) when you do seek care for a health issue.

To help you weigh the tradeoffs, below is a comparison of the five main types of health plans. It should also help demystify some of the terminology and acronyms used so often across the health insurance landscape.

  • Health maintenance organization (HMO). Coverage is limited to care from physicians, other medical providers, and facilities within the HMO network (except in an emergency). You choose a primary-care physician (PCP) who will decide whether to approve or deny any request for a referral to a specialist.
  • Point of service (POS) plan. Out-of-network care is available, but you will pay more than you would for in-network services. As with an HMO, you must have a referral from a PCP to see a specialist. POS premiums tend to be a little bit higher than HMO premiums.
  • Exclusive provider organization (EPO). Services are covered only if you use medical providers and facilities in the plan’s network, but you do not need a referral to see a specialist. Premiums are typically higher than an HMO, but lower than a PPO.
  • Preferred provider organization (PPO). You have the freedom to see any health providers you choose without a referral, but there are financial incentives to seek care from PPO physicians and hospitals (a larger percentage of the cost will be covered by the plan). A PPO usually has a higher premium than an HMO, EPO, or POS plan and often has a deductible.

A deductible is the amount you must pay before insurance payments kick in. Preventive care (such as annual visits and recommended screenings) is typically covered free of charge, regardless of whether the deductible has been met.

  • High-deductible health plan (HDHP). In return for significantly lower premiums, you’ll pay more out-of-pocket for medical services until you reach the annual deductible. HDHP deductibles start at $1,400 for an individual and $2,800 for family coverage in 2022, and can be much higher. Care will be less expensive if you use providers in the plan’s network, and your upfront cost could be reduced through the insurer’s negotiated rate.

An HDHP is designed to be paired with a health savings account (HSA), to which your employer may contribute funds toward the deductible. You can also elect to contribute to your HSA through pre-tax payroll deductions or make tax-deductible contributions directly to the HSA provider, up to the annual limit ($3,650 for an individual or $7,300 for family coverage in 2022, plus $1,000 for those 55+).

HSA funds, including any earnings if the account has an investment option, can be withdrawn free of federal income tax and penalties if the money is spent on qualified health-care expenses. (Some states do not follow federal tax rules on HSAs.) Unspent balances can be retained in the account indefinitely and used to pay future medical expenses, whether you are enrolled in an HDHP or not. If you change employers or retire, the funds can be rolled over to a new HSA.

Three Steps to a Sound Decision

Start by adding up your total expenses (premiums, copays, coinsurance, deductibles) under each plan offered by your employer, based on last year’s usage. Your employer’s benefit materials may include an online calculator to help you compare plans by taking factors such as your chronic health conditions and regular medications into account.

If you are married, you may need to coordinate two sets of workplace benefits. Many companies apply a surcharge to encourage a worker’s spouse to use other available coverage, so look at the costs and benefits of having both of you on the same plan versus individual coverage from each employer. If you have children, compare what it would cost to cover them under each spouse’s plan.

Before enrolling in a plan, check to see if your preferred health-care providers are included in the network.

Tame Taxes with a Flexible Spending Account

If you elect to open an employer-provided health and/or dependent-care flexible spending account (FSA), the money you contribute via payroll deduction is not subject to federal income and Social Security taxes (nor generally to state and local income taxes). Using these tax-free dollars to pay for health-care costs not covered by insurance or for dependent-care expenses could save you about 30% or more, depending on your tax bracket.

The federal limit for contributions to a health FSA was $2,750 in 2021 and should be similar for 2022. Some employers set lower limits. (The official limit has not been announced by the IRS). You can use the funds for a broad range of qualified medical, dental, and vision expenses.

With a dependent-care FSA, you can set aside up to $5,000 a year (per household) to cover eligible child-care costs for qualifying children age 12 or younger. The tax savings could help offset some of the costs paid for a nanny, babysitter, day care, preschool, or day camp, but only if the services are used so you (or a spouse) can work.

One drawback of health and dependent-care FSAs is that they are typically subject to the use-it-or-lose-it rule, which requires you to spend everything in your account by the end of the calendar year or risk losing the money. Some employers allow certain amounts (up to $550) to be carried over to the following plan year or offer a grace period up to 2½ months. Still, you must estimate your expenses in advance, and your predictions could turn out to be way off base.

Legislation passed during the pandemic allows workers to carry over any unused FSA funds from 2021 into 2022, as long as the employer opts into this temporary change. If you have leftover money in an FSA, you should consider your account balance and your employer’s carryover policies when deciding on your contribution election for 2022.

Take Advantage of Valuable Perks

A change in the tax code enacted at the end of 2020 made it possible for employers to offer student debt assistance as a tax-free employee benefit through 2025, spurring more companies to add it to their menu of benefit options. A 2021 survey found that 17% of employers now offer student debt assistance, and 31% are planning to do so in the future. Many employers target a student debt assistance benefit of $100 per month, which doesn’t sound like much, but it adds up.(1) For example, an employee with $31,000 in student loans who is paying them off over 10 years at a 6% interest rate would save about $3,000 in interest and get out of debt 2½ years faster.

Many employers provide access to voluntary benefits such as dental coverage, vision coverage, disability insurance, life insurance, and long-term care insurance. Even if your employer doesn’t contribute toward the premium cost, you may be able to pay premiums conveniently through payroll deduction. Your employer may also offer discounts on health-related products and services, such as fitness equipment or gym memberships, and other wellness incentives, like a monetary reward for completing a health assessment.

If you have an opportunity to change your life insurance, disability insurance or other perks, you may want to talk to us about how much coverage you need. Don’t miss this annual chance to review your coverage and possibly elect higher coverage.

If you would like to review your current investment portfolio or discuss employer benefit options and enrollment, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

(1) CNBC, September 28, 2021

Perhaps Your Last Chance before the Backdoor Closes

Among the many provisions in the multi-trillion-dollar legislative package being debated in Congress, is a provision that would eliminate a strategy that allows high-income investors to pursue tax-free retirement income: the so-called “back-door Roth IRA”. The next few months may present the last chance to take advantage of this opportunity.

Roth IRA Background

Since its introduction in 1997, the Roth IRA has become an attractive investment vehicle due to the potential to build a sizable, tax-free nest egg. Although contributions to a Roth IRA are not tax deductible, any earnings in the account grow tax-free as long as future distributions are qualified. A qualified distribution is one made after the Roth account has been held for five years and after the account holder reaches age 59½, becomes disabled, dies, or uses the funds for the purchase of a first home ($10,000 lifetime limit) or for qualified higher education expenses.

Unlike other retirement savings accounts, original owners of Roth IRAs are not subject to required minimum distributions at age 72 — another potentially tax-beneficial perk that makes Roth IRAs appealing in estate planning strategies (but beneficiaries are subject to distribution rules.)

However, as initially passed, the 1997 legislation rendered it impossible for high-income taxpayers to enjoy Roth IRAs. Individuals and married taxpayers whose income exceeded certain thresholds could neither contribute to a Roth IRA nor convert traditional IRA assets to a Roth IRA.

A Loophole Emerges

Nearly 10 years after the Roth’s introduction, the Tax Increase Prevention and Reconciliation Act of 2005 ushered in a change that relaxed the conversion rules beginning in 2010; that is, as of that year, the income limits for a Roth conversion were eliminated, which meant that anyone could convert traditional IRA assets to a Roth IRA (of course, a conversion results in a tax obligation on deductible contributions and earnings that have previously accrued in the traditional IRA.)

One perhaps unintended consequence of this change was the emergence of a new strategy that has been heavily utilized ever since: High-income individuals could make full, annual, nondeductible contributions to a traditional IRA and convert those contribution dollars to a Roth. If the account holders had no other IRAs (see note below) and the conversion was executed quickly enough so that no earnings were able to accrue, the transaction could potentially be a tax-free way for otherwise ineligible taxpayers to fund a Roth IRA. This move became known as the “back-door Roth IRA”.

Employees working for companies which had retirement plans that allowed post-tax contributions into their 401(k)’s, along with “in-service distributions”, could replicate the back-door strategy in a potentially much bigger way, which became known as the “mega-back-door Roth IRA”

Note: When calculating a tax obligation on a Roth conversion, investors have to aggregate all of their IRAs, including SEP and SIMPLE IRAs, before determining the amount. For example, say an investor has $100,000 in several different traditional IRAs, 80% of which is attributed to deductible contributions and earnings. If that investor chose to convert any traditional IRA assets — even recent after-tax contributions — to a Roth IRA, 80% of the converted funds would be taxable. This is known as the “pro-rata rule.”

Current Roth IRA Income Limits

For 2021, you can generally contribute up to $6,000 to an IRA (traditional, Roth, or a combination of both); $7,000 if you’ll be age 50 or older by December 31. However, your ability to make contributions to a Roth IRA is limited or eliminated if your modified adjusted gross income, or MAGI, falls within or exceeds the parameters shown below.

If your federal filing status is:Your 2021 Roth IRA contribution is reduced if your MAGI is:You can’t contribute to a Roth IRA for 2021 if your MAGI is:
Single or head of householdMore than $125,000 but less than $140,000$140,000 or more
Married filing jointly or qualifying widow(er)More than $198,000 but less than $208,000$208,000 or more
Married filing separatelyLess than $10,000$10,000 or more

Note that your contributions generally can’t exceed your earned income for the year (special rules apply to spousal Roth IRAs).

Now or Never … Maybe

While no one knows for sure what may come of the legislative debates, the current proposal would prohibit the conversion of nondeductible contributions from a traditional IRA (or 401(k)) after December 31, 2021. If you expect your MAGI to exceed this year’s thresholds and you’d like to fund a Roth IRA for 2021, the next few months may be your last chance to use the back-door strategy.

You can make 2021 IRA contributions up until April 15, 2022, but if the legislation is enacted, a Roth conversion involving nondeductible contributions would have to be executed by December 31, 2021.

Keep in mind that a separate five-year rule applies to the principal amount of each Roth IRA conversion you make, unless an exception applies.

In addition to eliminating the conversion of nondeductible contributions from traditional IRAs to Roth IRAs, the proposed legislation includes a similar prohibition on the conversion of after-tax 401(k) contributions (so-called mega-back-door Roth conversions), as well as other retirement-related provisions affecting those with large account balances ($10 million and higher) and high incomes (more than $400,000 for single taxpayers and more than $450,000 for joint filers).

Don’t wait until the last minute to make these contributions or conversions. Brokerage firms are extremely busy during the last half of December, and will be especially so if tax legislation is passed this year. Now is the time to be thinking about doing this if it fits within your financial plan.

If you would like to review your current investment portfolio or discuss your Roth IRA options, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Tax Proposals in Congress Not as Bad as Feared

The latest tax bill advanced in Congress is notable in its absence of provisions that were expected to be “game changers” (see below). And that’s a good thing for taxpayers.

On Saturday, September 25, 2021, the Congressional House Budget Committee voted to advance a $3.5 trillion spending package to the House floor for debate. The House Ways and Means Committee and the Joint Committee on Taxation had previously released summaries of proposed tax changes intended to help fund the spending package. Many of these provisions focus specifically on businesses and high-income households.

Expect these proposals to be modified; some will likely be removed and others added as the legislative process continues. As we monitor progression through the legislative process though, here are some highlights from the previously released proposed provisions worth noting.

Corporate Income Tax Rate Increase

Corporations would be subject to a graduated tax rate structure, with a higher top rate.

Currently, a flat 20% rate applies to corporate taxable income. The proposed legislation would impose a top tax rate of 26.5% on corporate taxable income above $5 million. Specifically:

  • A 16% rate would apply to the first $400,000 of corporate taxable income
  • A 21% rate on remaining taxable income up to $5 million
  • The 26.5% rate would apply to taxable income over $5 million, and corporations making more than $10 million in taxable income would have the benefit of the lower tax rates phased out.

Personal service corporations (professionals providing services as a regular sub-chapter C Corporation, not an S Corporation) would pay tax on their entire taxable income at 26.5%.

Tax Increases for High-Income Individuals

Top individual income tax rate. The proposed legislation would increase the existing top marginal income tax rate of 37% to 39.6% effective in tax years starting on or after January 1, 2022, and apply it to taxable income over $450,000 for married individuals filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married individuals filing separate returns. (These income thresholds are lower than the current top rate thresholds.)

Top capital gains tax rate. The top long-term capital gains tax rate would be raised from 20% to 25% under the proposed legislation; this increased tax rate would generally be effective for sales after September 13, 2021. In addition, the taxable income thresholds for the 25% capital gains tax bracket would be made the same as for the 39.6% regular income tax bracket (see above) starting in 2022.

New 3% surtax on income. A new 3% surtax is proposed on modified adjusted gross income over $5 million ($2.5 million for a married individual filing separately).

3.8% net investment income tax expanded. Currently, there is a 3.8% net investment income tax on high-income individuals. This tax would be expanded to cover certain other income derived in the ordinary course of a trade or business for single taxpayers with taxable income greater than $400,000 ($500,000 for joint filers). This would generally affect certain income of S corporation shareholders, partners, and limited liability company (LLC) members that is currently not subject to the net investment income tax.

New qualified business income deduction limit. A deduction is currently available for up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified real estate investment trust dividends and qualified publicly traded partnership income. The proposed legislation would limit the maximum allowable deduction at $500,000 for a joint return, $400,000 for a single return, and $250,000 for a separate return.

Retirement Plans Provisions Affecting High-Income Individuals

New limit on contributions to Roth and traditional IRAs. The proposed legislation would prohibit those with total IRA and defined contribution retirement plan accounts exceeding $10 million from making any additional contributions to Roth and traditional IRAs. The limit would apply to single taxpayers and married taxpayers filing separately with taxable income over $400,000,  $450,000 for married taxpayers filing jointly, and $425,000 for heads of household.

New required minimum distributions for large aggregate retirement accounts.

  • These rules would apply to high-income individuals (same income limits as described above), regardless of age.
  • The proposed legislation would require that individuals with total retirement account balances (traditional IRAs, Roth IRAs, employer-sponsored retirement plans) exceeding $20 million distribute funds from Roth accounts (100% of Roth retirement funds or, if less, by the amount total retirement account balances exceed $20 million).
  • To the extent that the combined balance in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $10 million, distributions equal to 50% of the excess must be made.
  • The 10% early-distribution penalty tax would not apply to distributions required because of the $10 million or $20 million limits.

Roth conversions limited. In general, taxpayers can currently convert all or a portion of a non-Roth IRA or defined contribution plan account into a Roth IRA or defined contribution plan account without regard to the amount of their taxable income. The proposed legislation would prohibit Roth conversions for single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. [It appears that this proposal would not be effective until 2032.]

Roth conversions not allowed for distributions that include nondeductible contributions. Taxpayers who are unable to make contributions to a Roth IRA can currently make “back-door” contributions by making nondeductible contributions to a traditional IRA and then shortly afterward convert the nondeductible contribution from the traditional IRA to a Roth IRA. It is proposed that amounts held in a non-Roth IRA or defined contribution account cannot be converted to a Roth IRA or designated Roth account if any portion of the distribution being converted consists of after-tax or nondeductible contributions.

Estates and Trusts

  • For estate and gift taxes (and the generation-skipping transfer tax), the current basic exclusion amount (and GST tax exemption) of $11.7 million would be cut by about one-half under the proposal.
  • The proposal would generally include grantor trusts in the grantor’s estate for estate tax purposes; tax rules relating to the sale of appreciated property to a grantor trust would also be modified to provide for taxation of gain.
  • Current valuation rules that generally allow substantial discounts for transfer tax purposes for an interest in a closely held business entity, such as an interest in a family limited partnership, would be modified to disallow any such discount for transfers of non-business assets.

Notable Absence of Certain Provisions

As mentioned above, what was just as notable is that many feared changes to longtime rules were not included in the proposal:

  • No increases to the current estate and gift tax marginal rates
  • No changes to the current step up basis regime at death
  • No limitations on like-kind exchanges
  • No required realization of gain on gifts or at death
  • No required realization of gain on assets held in trust, partnership or non-corporate entity after being held in trust for 90 years
  • The top capital gains rate for high-income taxpayers going up to “only” 25% instead of the expected 39.6%

Of course, things are quite fluid and much will change before the ultimate passage of the final tax bill. We’re following developments closely and will post and send updates as things approach passage.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Protecting Your Digital Information & Yourself from Ransomware

In a meeting with President Joe Biden last week, business leaders from major technology and insurance firms committed billions of dollars to beefing up cybersecurity defenses desperately needed after several high profile hacks into major infrastructure and technology platforms this year. This is long overdue given the lax approach taken over the past several years by most major firms.

On May 7, 2021, the Colonial Pipeline, which carries almost half of the East Coast’s fuel supply from Texas to New Jersey, shut down operations in response to a ransomware attack. A ransomware attack is where a hacker latches on to your computer or network, locks you out and threatens to delete or make your data public if you don’t pay a ransom (see below). Colonial paid a $4.4 million ransom not long after discovering the attack, and the pipeline was reopened within a week. While there was enough stored fuel to weather the outage, panic buying caused gasoline shortages on the East Coast and pushed the national average price of gasoline over $3.00 per gallon for the first time since 2014.(1)

Ransomware is not new, but the Colonial Pipeline incident demonstrated the risk to critical infrastructure and elicited strong response from the federal government. Remarkably, the Department of Justice recovered most of the ransom, and the syndicate behind the attack, known as DarkSide, announced it was shutting down operations.(2)

The Department of Homeland Security issued new regulations requiring owners and operators of critical pipelines to report cybersecurity threats within 12 hours of discovery, and to review cybersecurity practices and report the results within 30 days.(3) On a broader level, the incident increased focus on government initiatives to strengthen the nation’s cybersecurity and create a global coalition to hold countries that shelter cyber criminals accountable.(4)

Malicious Code

Ransomware is malicious code (malware) that infects the victim’s computer system, allowing the perpetrator to lock the files and demand a ransom in return for a digital key to restore access. Some attackers may also threaten to reveal sensitive data. There were an estimated 305 million ransomware attacks globally in 2020, a 62% increase over 2019. More than 200 million of them were in the United States.(5)

The recent surge in high-profile ransomware attacks represents a shift by cyber-criminal syndicates from stealing data from “data-rich” targets such as retailers, insurers, and financial companies to locking data of businesses and other organizations that are essential to public welfare. A week after the Colonial Pipeline attack, JBS USA Holdings, which processes one-fifth of the U.S. meat supply, paid an $11 million ransom. (6) Health-care systems, which spend relatively little on cybersecurity, are a prime target, jeopardizing patient care.(7) Other common targets include state and local governments, school systems, and private companies of all sizes.(8)

Ransomware gangs, mostly located in Russia and other Eastern European countries, typically set ransom demands in relation to their perception of the victim’s ability to pay, and high-dollar attacks may be resolved through negotiations by a middleman and a cyber insurance company. Although the FBI discourages ransom payments, essential businesses and organizations may not have time to reconstruct their computer systems, and reconstruction can be more expensive than paying the ransom.(9)

Protecting Your Data

While major ransomware syndicates focus on more lucrative targets, plenty of cyber-criminals prey on individual consumers, whether locking data for ransom, gaining access to financial accounts, or stealing and selling personal information.

Most people don’t know that before becoming a full time financial planner, I spent about twelve years working for major consulting firms helping with deployment of software, hardware and networking equipment, so I know a few things about data security (where do you think the “geek” came from in my moniker?)

Here are some tips to help make your data more secure: (10)

Use strong passwords and protect them. An analysis of the Colonial Pipeline attack revealed that the attackers gained access through a leaked password to an old account with remote server access.(11) Strong passwords are your first line of defense. Use at least 8 to 12 characters with a mix of upper- and lower-case letters, numbers, and symbols. Longer and more complex passwords are better. Do not use personal information or dictionary words and use different passwords for different web sites.

One technique is to use a passphrase that you can remember and adapt. For example, Jack and Jill went up the hill to fetch a pail of water could be J&jwuth!!2faPow (please don’t use this example as your password!). Though it’s tempting to reuse a strong password, it is safer to use different passwords for different accounts. Consider a password manager program that generates random passwords, which you can access through a strong master password. My personal favorite that I’ve been using for over 15 years is RoboForm, but most well-known password managers do a good job (if you click on the link and subscribe to RoboForm, we’ll both get an extra six months added to our subscriptions). Whatever you do, don’t share or write down your passwords.

There are no easy answers. Be careful when establishing security questions that can be used for password recovery. It may be better to use fictional answers that you can remember. If a criminal can guess your answer through available information (such as an online profile), he or she can reset your password and gain access to your account.

Take two steps. Two-step authentication, typically a text or email code sent to your mobile device, provides a second line of defense even if a hacker has access to your password. If your device is lost or stolen, immediately call your carrier and lock or wipe your device before they can hijack your accounts. Most devices can be wiped remotely or be set to automatically erase themselves after a set number of failed attempts.

Think before you click. Ransomware and other malicious code are often transferred to the infected computer through a “phishing” email that tricks the reader into clicking on a link. Data thieves have become adept at creating fake e-mails that look 100% legitimate, so you must be vigilant.

If you hover with your mouse over most internet links, you’ll see exactly where they’ll take you, and it’s not necessarily the site that’s displayed in the text. Never click on a link in an email or text (or a photo) unless you know the sender, are expecting it, and have a clear idea where the link will take you. Even then, you can’t be sure your friend’s or relative’s e-mail account has not been hacked and a seemingly innocent attachment or link is laced with malware.

Install security software. Install antivirus/anti-malware software, a firewall, and an email filter — and keep them updated. Old outdated antivirus software won’t stop new viruses. If your computer, laptop or other devices don’t have extra security software, you shouldn’t be online. Period. And no, in my opinion, Microsoft Defender is not sufficient to protect your PC. The old thought that Apple Mac devices are safe from vulnerability is no longer true; though safer than PC’s, they are prime targets for malicious attacks as well.

Back up your data. Back up regularly to an external hard drive. For added security, disconnect the drive from your computer between backups. Backing up to an online service is a great idea, but your backup might also be infected or affected by malware or ransomware. Only an offline backup, when disconnected at the time of infection, is safe. Never attach the external drive to restore data until you’re sure the threat or malware is 100% removed and the device is safe.

Keep your system up-to-date. Use the most recent operating system that can run on your computer and download security updates. Most ransomware attacks target vulnerable operating systems and applications. Fortunately, for better or worse, Microsoft Windows has made is nearly impossible to avoid installing periodic security patches.

Avoid Public Networks for Sensitive or Financial Transactions. Using public Wi-Fi networks is a prime gateway for malware and ransomware attacks. Networks with names like “Free Public WiFi” are meant to lure you in and install Trojan horses onto your device. If you have to type in a password to access an online resource, then you probably don’t want to do this on a public network (or at least use a password manager to log you in so your keystrokes aren’t tracked). Virtual private network software/services are also a help here.

Secure your entry points. This month alone, my home network router blocked over 4 million port scans and thwarted 75 live threats. If you don’t know what this means, then you need a home network security geek or the help of your internet service provider to help you beef up the security of your home network.

Your home network router/switch probably came with a factory set password which is widely known and easily accessed. Changing the default device password is the easiest way to reduce your vulnerability to an outside attack. Most modern day routers come with more user friendly instructions and software on how to disable your guest network and beef up home security. There’s no need to broadcast your WiFi network name to your neighbors, so that should be turned off, or you might as well call your home WiFi network “HACKERSWELCOME”.

If you see a notice on your computer that you have been infected by a virus or that your data is being held for ransom, it’s more likely to be a fake pop-up window than an actual attack. These pop-ups typically have a phone number to call for “technical support” or to make a payment. Do not call the number and do not click on the window or any links. Instead, try exiting your browser and restarting your computer. If you continue to receive a notice or your data is really locked, contact a legitimate technical support provider, but definitely not the one listed in the pop-up window.

For more information and other tips, visit the Cybersecurity & Infrastructure Security Agency website at us-cert.cisa.gov/ncas/tips.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

(1) (2) (11) Vox, June 8, 2021

(3) U.S. Department of Homeland Security, May 27, 2021

(4) The Washington Post, June 4, 2021

(5) 2021 SonicWall Cyber Threat Report

(6) The Wall Street Journal, June 9, 2021

(7) Fortune, December 5, 2020

(8) Institute for Security and Technology, 2021

(9) The New Yorker, June 7, 2021

(10) Cybersecurity & Infrastructure Security Agency, 2021

Tax Deadline Extended Amid Tax Changes in American Rescue Plan

2020 Individual Income Tax Return Deadline Extended

The Treasury Department and the IRS have extended the federal income tax filing due date for individuals for the 2020 tax year from April 15 to May 17. Although this relief applies to any balance due with the return, this relief does not apply to 2021 estimated income tax payments that are due on April 15, 2021. These payments are oddly still due on April 15, 2021. The IRS will provide formal guidance in the coming days.

The federal tax filing deadline postponement to May 17, 2021 is of no help to self-employed people and others who don’t receive a steady source of income because it only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax. Given that the first quarterly 2021 estimated income payment due date is April 15, and knowing that it often is based on a prior year return, not extending that deadline as well, is an empty gesture by the IRS for these folks. The American Institute of CPA’s has appealed to the IRS to act swiftly to remedy this and extend the deadline for all returns and estimates until June 15, 2021. I concur with this appeal.

Taxpayers also will need to file income tax returns in 42 states plus the District of Columbia. State filing and payment deadlines vary and are not always the same as the federal filing deadline. Nonetheless, many states will conform with and follow the new IRS deadline. The IRS urges taxpayers to check with their state tax agencies for those details.

American Rescue Plan of 2021

On Thursday, March 11, 2021, the American Rescue Plan Act of 2021 (ARPA 2021) was signed into law. This is a $1.9 trillion emergency relief package that includes payments to individuals and funding for federal programs, vaccines and testing, state and local governments, and schools. It is intended to assist individuals and businesses during the ongoing coronavirus pandemic and accompanying economic crisis.  Major relief provisions are summarized here, including some tax provisions.

Recovery rebates (stimulus checks)

Many individuals will receive another direct payment from the federal government. Technically a 2021 refundable income tax credit, the rebate amount will be calculated based on 2019 tax returns filed (or on 2020 tax returns if filed and processed by the IRS at the time of determination) and sent automatically via check, direct deposit, or debit card to qualifying individuals. To qualify for a payment, individuals generally must have a Social Security number and must not qualify as the dependent of another individual.

The amount of the recovery rebate is $1,400 ($2,800 if married filing a joint return) plus $1,400 for each dependent. Recovery rebates start to phase out for those with an adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). Recovery rebates are completely phased out for those with an AGI of $80,000 ($160,000 if married filing a joint return, $120,000 for those filing as head of household).

Unemployment provisions

The legislation extends unemployment benefit assistance:

  • An additional $300 weekly benefit to those collecting unemployment benefits, through September 6, 2021
  • An additional 29-week extension of federally funded unemployment benefits for individuals who exhaust their state unemployment benefits
  • Targeted federal reimbursement of state unemployment compensation designed to eliminate state one-week delays in providing benefits (allowing individuals to receive a maximum 79 weeks of benefits)
  • Unemployment benefits through September 6, 2021, for many who would not otherwise qualify, including independent contractors and part-time workers

For 2020, the legislation also makes the first $10,200 (per spouse for joint returns) of unemployment benefits nontaxable if the taxpayer’s modified adjusted gross income is less than $150,000. If a 2020 tax return has already been filed, an amended return may be needed. The IRS urges patience on filing amended returns until they issue additional guidance.

Business relief

  • The employee retention tax credit has been extended through December 31, 2021. It is available to employers that were significantly impacted by the crisis and is applied to offset Social Security payroll taxes. As in the previous extension, the credit is increased to 70% of qualified wages, up to a certain maximum per quarter.
  • The employer tax credits for providing emergency sick and family leave have been extended through September 30, 2021.
  • Eligible small businesses can receive targeted economic injury disaster loan advances from the Small Business Administration. The advances are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.
  • Eligible restaurants can receive restaurant revitalization grants from the Small Business Administration. The grants are not included in taxable income. Furthermore, no deduction or basis increase is denied, and no tax attribute is reduced by reason of the exclusion from income.

Housing relief

  • The legislation allocates additional funds to state and local governments to provide emergency rental and utility assistance through December 31, 2021.
  • The legislation allocates funds to help homeowners with mortgage payments and utility bills.
  • The legislation also allocates funds to help the homeless.

Health insurance relief

  • For those who lost a job and qualify for health insurance under the federal COBRA continuation coverage program, the federal government will generally pay the entire COBRA premium for health insurance from April 1, 2021, through September 30, 2021.
  • For 2021, if a taxpayer receives unemployment compensation, the taxpayer is treated as an applicable taxpayer for purposes of the premium tax credit, and the household income of the taxpayer is favorably treated for purposes of determining the amount of the credit.
  • Persons who bought their own health insurance through a government exchange may qualify for a lower cost through December 31, 2022.

Student loan tax relief

For student loans forgiven or cancelled between January 1, 2021, and December 31, 2025, discharged amounts are not included in taxable income.

Child tax credit

  • For 2021, the credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 for qualifying children under age 6), subject to phaseout based on modified adjusted gross income. The legislation also makes 17-year-olds eligible as qualifying children in 2021.
  • For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.
  • The Treasury Department is expected to send out periodic advance payments (to be worked out by the Treasury) for up to one-half of the credit during 2021.

Child and dependent care tax credit

  • For 2021, the legislation increases the maximum credit up to $4,000 for one qualifying individual and up to $8,000 for two or more (based on an increased applicable percentage of 50% of costs paid and increased dollar limits).
  • Most taxpayers will not have the applicable percentage reduced (can be reduced from 50% to 20% if AGI exceeds a substantially increased $125,000) in 2021. However, the applicable percentage can now also be reduced from 20% down to 0% if the taxpayer’s AGI exceeds $400,000 in 2021.
  • For most individuals, the credit is fully refundable for 2021 if it exceeds tax liability.

Earned income tax credit

For 2021 only:

  • The legislation generally increases the credit available for individuals with no qualifying children (bringing it closer to the amounts for individuals with one, two, or three or more children which were already much higher).
  • For individuals with no qualifying children, the minimum age at which the credit can be claimed is generally lowered from 25 to 19 (24 for certain full-time students) and the maximum age limit of 64 is eliminated (there are no similar age limits for individuals with qualifying children).
  • To determine the credit amount, taxpayers can elect to use their 2019 earned income if it is more than their 2021 earned income.

For 2021 and later years:

  • Taxpayers otherwise eligible for the credit except that their children do not have Social Security numbers (and were previously prohibited from claiming any credit) can now claim the credit for individuals with no qualifying children.
  • The credit is now available to certain separated spouses who do not file a joint tax return.
  • The level of investment income at which a taxpayer is disqualified from claiming the credit is  increased from $3,650 (as previously indexed for 2021) to $10,000 in 2021 (indexed for inflation in future years).

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Should You Hit the Pause Button on Filing Your 2020 Tax Returns?

Note: Since the original publication of this article, the IRS announced that the federal income tax filing due date for individuals for the 2020 tax year is automatically extended until May 17, 2021.

As you likely know, President Joe Biden signed his sweeping $1.9 trillion Covid-19 economic relief package into law on Thursday afternoon March 11, 2021. Included in this package were several tax provisions that increase child tax credits and exempt certain 2020 unemployment benefits from taxation for lower income taxpayers.

Passing retroactive tax legislation just five weeks before the regular 1040 tax deadline of April 15, 2021, is virtually unprecedented, and has left the IRS and tax preparation software vendors scrambling to update calculations, guidance, tax forms, publications and program logic.

Add to the foregoing the IRS’ backlog of taxpayer correspondence and flood of erroneous taxpayer notices and you can understand that this has prompted the American Association of CPA’s to urge the IRS to extend the tax deadline for filing and payment until June 15, 2021, or at least provide guidance to taxpayers on their thinking about whether they are considering extending the tax deadline.

I was notified today that my own tax preparation vendor, Thomson Reuters, “highly recommends that no returns be filed at this time” due to the preliminary draft nature of several forms (which are based on 2019 forms and not yet approved for filing by the IRS) and the last minute passage of tax legislation. Make no mistake, updating the form calculations and logic is no small feat, especially considering that the IRS has issued scant guidance given that the legislation is still a “newborn”.

I imagine that things will look better in a couple of weeks, but if you’re anxious to file your returns in hopes of receiving a higher stimulus check, I can only advise you to cool your heels and, if applicable, save yourself a fee to have an amended return prepared. Eventually, you’ll receive every penny of stimulus you’re entitled to, albeit perhaps on next year’s tax return. Given that stimulus payments are due to start arriving this weekend, rushing to file your return will have virtually no effect on the amount of the stimulus check you’ll receive over the next month.

If you filed your return early, only your tax preparer can advise you if you’ll need to amend that return to take into account the most recent tax changes. If you have a very simple return (Form W-2 and no deductions), my guess is that you’re OK. If you received unemployment compensation in 2020, then you may need to file an amended return to claim a refund of overpaid taxes.

My standard advice to clients is not to file prior to March 15 each year (because of last minute issuance and changes to 1099s), and it appears that will now extend until at least March 31. I highly recommend that you do the same.

If you would like to review your current investment portfolio or discuss your 2020 tax return, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Making Your Money Last In Retirement

Quick Questions: How much can you safely withdraw each year from your retirement portfolio without the risk of running out of money before you run out of life? How much should you withdraw if you don’t want to leave too much money behind when you die?

If you’re as perplexed about answering these questions as many financial planners are, then this article will help update you on the latest research in this area of retirement planning. Saving for retirement is not easy, but using your retirement savings wisely can be just as challenging. Withdraw too much and you run the risk of running out of money. Withdraw too little and you may miss out on a more comfortable retirement lifestyle.

For more than 25 years, the most common guideline has been the “4% rule,” which suggests that a yearly withdrawal equal to 4% of the initial portfolio value, with annual increases for inflation, is sustainable over a 30-year retirement. This guideline can be helpful in projecting a savings goal and providing a realistic picture of the annual income your savings might provide. For example, a $1 million portfolio could provide $40,000 of income in the first year, with inflation-adjusted withdrawals in succeeding years.

The 4% rule has stimulated a great deal of discussion over the years, with some experts saying that 4% is too low, and others saying it’s too high. The most recent analysis comes from the man who studied it, financial professional William Bengen (widely considered in the financial planning profession as the “father of the safe withdrawal rate”), who believes the rule has been misunderstood and offers new insights based on new research.

Original Research

Bengen first published his findings in 1994, based on analyzing data for retirements beginning in 51 different years, from 1926 to 1976. He considered a hypothetical, conservative portfolio comprised of 50% large-cap stocks and 50% intermediate-term Treasury bonds held in a tax-advantaged account and rebalanced annually. A 4% inflation-adjusted withdrawal was the highest sustainable rate in the worst-case scenario — retirement in October 1968, the beginning of a bear market, and a long period of high inflation. All other retirement years had higher sustainable rates, some as high as 10% or more (1).

Of course, no one can predict the future, which is why Bengen suggested that the worst-case scenario as a sustainable rate. He later adjusted it slightly upward to 4.5%, based on a more diverse portfolio comprised of 30% large-cap stocks, 20% small-cap stocks, and 50% intermediate-term Treasuries (2).

New Research

In October 2020, Bengen published new research that attempts to project a sustainable withdrawal rate based on two key factors at the time of retirement: stock market valuation and inflation (the annual change in the Consumer Price Index). In theory, when the market is expensive, it has less potential to grow, and sustaining increased withdrawals over time may be more difficult. On the other hand, lower inflation means lower inflation-adjusted withdrawals, allowing for a higher initial rate. For example, a $40,000 first-year withdrawal becomes an $84,000 withdrawal after 20 years with a 4% annual inflation increase, but just $58,000 with a 2% annual increase.

To measure market valuation, Bengen used the Shiller CAPE, a cyclically adjusted price-earnings ratio for the S&P 500 index developed by Nobel laureate Robert Shiller. The price-earnings (P/E) ratio of a stock is the share price divided by its earnings per share for the previous 12 months. For example, if a stock is priced at $100 and the earnings per share is $4, the P/E ratio would be 25. The Shiller CAPE divides the total share price of stocks in the S&P 500 index by average inflation-adjusted earnings over 10 years.

5% rule?

Again using historical data — for retirement dates from 1926 to 1990 — Bengen found a clear correlation between market valuation and inflation at the time of retirement and the maximum sustainable withdrawal rate. Historically, rates ranged from as low as 4.5% to as high as 13%, but the scenarios that supported high rates were unusual, with very low market valuations and/or deflation rather than inflation (3).

For most of the last 25 years, the United States has experienced high market valuations, and inflation has been low since the Great Recession (4)(5). In a high-valuation, low-inflation scenario at the time of retirement, Bengen found that a 5% initial withdrawal rate was sustainable over 30 years (6). While not a big difference from the 4% rule, this suggests retirees could make larger initial withdrawals, particularly in a low-inflation environment.

One caveat is that current market valuation is extremely high: The S&P 500 index had a CAPE of 34.19 at the end of 2020, a level only reached (and exceeded) during the late-1990s dot-com boom and higher than any of the scenarios in Bengen’s research (7).  His range for a 5% withdrawal rate is a CAPE of 23 or higher, with inflation between 0% and 2.5% (8) (Inflation was 1.2% in November 2020 (9)). Bengen’s research suggests that if market valuation drops near the historical mean of 16.77, a withdrawal rate of 6% might be sustainable as long as inflation is 5% or lower. On the other hand, if valuation remains high and inflation surpasses 2.5%, the maximum sustainable rate might be 4.5% (10).

It’s important to keep in mind that these projections are based on historical scenarios and a hypothetical portfolio, and there is no guarantee that your portfolio will perform in a similar manner. Also remember that these calculations are based on annual inflation-adjusted withdrawals, and you might choose not to increase withdrawals in some years or use other criteria to make adjustments, such as market performance. For example, some retirees, in an effort to reduce withdrawals after a “down” year in the market, forego taking an inflation-based increase for the following year.

Although there is no assurance that working with a financial professional will improve your investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies, including your withdrawal strategy.

If you would like to review your current investment portfolio or discuss your current or upcoming withdrawal rate, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

(1)(2) Forbes Advisor, October 12, 2020
(3)(4)(6)(8,)(10) Financial Advisor, October 2020
(5)(9) U.S. Bureau of Labor Statistics, 2020
(7) multpl.com, December 31, 2020

Disclaimer: All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. Rebalancing involves selling some investments in order to buy others; selling investments in a taxable account could result in a tax liability.

The S&P 500 index is an unmanaged group of securities considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

GameStop-Shop, Chop or Slop?

By now, I’m sure you’ve heard or read about the whole GameStop stock market story in the news or online this past week.  I realize a lot of ink has already been spilled on this topic and I am not sure I can add much value or color to the discussion. Nonetheless, perhaps my added value can be to try and explain, in the simplest terms that I can muster, this craziness in the stock and derivatives market.

Let me say that the GameStop “short squeeze” debacle has had little effect on the individual investor, because we, and the majority of registered investment advisors I know, do not short-sell stocks in client portfolios. We typically only invest in blue-chip quality and solid value or growth companies, index funds, and actively managed funds. Short selling is more the domain of large hedge funds, who both buy stocks and sell stocks short. We also don’t invest in companies that were already circling the “bankruptcy drain” such as GameStop and AMC Theatres (GameStop stock traded as low as $2.57 last June).  

So what is short selling?
Short selling is betting that a stock price will go down instead of up (the exact opposite of what everyday stock investors do). To do this, traders ask their broker/dealer if they have any shares that can be borrowed from someone else’s owned shares in the broker’s inventory. If shares are available to borrow, you proceed to sell those shares (short) in the markets at their prevailing price, in hopes that their price/value goes down. Your objective is to subsequently buy them back at a lower price, and “re-pay” your borrowed shares.

Imagine this being done with millions of shares of GameStop, where so many people were already betting that the stock was going down, but instead, the stock went up these past few weeks, and went up a lot. In fact, as unbelievable as it is, more shares were sold short than the entire number of outstanding shares issued by the company (164% to be exact, so many out there were loaning shares they didn’t even have). If you’re short the shares, and they go up in price, you are said to be getting “squeezed”, and your only option is to buy back the shares at much higher prices before your broker/dealer decides that you can no longer afford to stay short, buys them back on your behalf, and charges your account for the losses (the difference between the price you sold them for and the price you paid to buy them back). Imagine selling your shares short for $65.00 per share on Friday, January 22, only to be forced to buy them back at $313 on Friday, January 29 (GameStop traded as high as $483 last week). That’s a loss of 4.8X your money (or if you were lucky and instead bought the shares, you made 4.8X your money).

What we saw this past week was a concerted effort by members of a Reddit subgroup known as Wall Street Bets (WSB) to force these short shareholders to “cover” their short positions. The whole rush to cover short shares is like tinder for a fire because the higher the shares go, the more the short shareholders have to pay to buy them back in a negative “feedback loop” for their positions. Momentum traders and other investors who see this kind of short squeeze also pile on to try and capture or “scalp” some profits.

While some large hedge fund who do/did hold short shares in client accounts lost a lot of money over the past few weeks, the majority of investment advisors and their clients were largely unaffected, other than the fact that these same hedge funds, in an attempt to ride out the short squeeze, used and sold other blue chip stocks (such as Microsoft, Apple, Johnson and Johnson) to cover their losses on the short sales. That’s why you saw the price of those stocks go down last week.

This kind of thing shall pass, and although this may be the first time you’ve heard about this type of “squeeze”, it has happened a lot in the past and will likely happen again. This type of activity tends to crop up when you have a lot of people receiving government checks who have nowhere to go and have nothing better to do (and therefore nothing to lose), so they might as well risk that money in the markets. The current COVID environment has created the perfect stock market storm. I believe that this is more media hype than substance, and will be out of the news cycle in a short time. Cries for regulating or investigating all of this are misplaced in my opinion.

In other words, it’s business as usual in the stock market, unless you owned or shorted the stocks of AMC Theatres, GameStop, Bed, Bath & Beyond, and a few others. As in other newsworthy stock markets “mania’s”, when the dust settles, the majority of the players will likely lose their money because risk management and profit protection isn’t a regular part of their stock trading discipline. If you’re a long term investor, you should grab some popcorn and enjoy the “show” from a distance, and resist the temptation to jump in and risk your hard earned money. Because when the music stops, I believe that GameStop shares will be back to trading in the low-double, if not single-digits once again.

If you would like to review your current investment portfolio or discuss short-selling, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

IRA and Retirement Plan Limits for 2021

As the year comes to and end, it is good to know the limits for 2021 contributions to IRA’s and employer retirement plans.  Many IRA and retirement plan limits are indexed for inflation each year. While some of the limits remain unchanged for 2021, other key numbers have increased.

IRA contribution limits

The maximum amount you can contribute to a traditional IRA or a Roth IRA in 2021 is $6,000 (or 100% of your earned income, if less), unchanged from 2020. The maximum catch-up contribution for those age 50 or older remains $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2021, but your total contributions cannot exceed these annual limits.

Income limits for deducting traditional IRA contributions

If you (or if you’re married, both you and your spouse) are not covered by an employer retirement plan, your contributions to a traditional IRA are generally fully tax deductible. If you’re married, filing jointly, and you’re not covered by an employer plan but your spouse is, your deduction is limited if your modified adjusted gross income (MAGI) is between $198,000 and $208,000 (up from $196,000 and $206,000 in 2020), and eliminated if your MAGI is $208,000 or more (up from $206,000 in 2020).

For those who are covered by an employer plan, deductibility depends on your income and filing status.

If your 2021 federal income tax  filing status is: Your IRA deduction is limited if your MAGI is  between: Your deduction is eliminated if your MAGI is:
Single or head of household $66,000 and $76,000 $76,000 or more
Married filing jointly or qualifying  widow(er) $105,000 and $125,000 (combined) $125,000 or more  (combined)
Married filing separately $0  and $10,000 $10,000 or more

If your filing status is single or head of household, you can fully deduct your IRA contribution up to $6,000 ($7,000 if you are age 50 or older) in 2021 if your MAGI is $66,000 or less (up from $65,000 in 2020). If you’re married and filing a joint return, you can fully deduct up to $6,000 ($7,000 if you are age 50 or older) if your MAGI is $105,000 or less (up from $104,000 in 2020).

Income limits for contributing to a Roth IRA

The income limits for determining how much you can contribute to a Roth IRA have also increased.

If your 2021 federal income tax  filing status is: Your Roth IRA contribution is limited if your MAGI  is: You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household More than $125,000 but less than $140,000 $140,000 or more
Married filing jointly or qualifying  widow(er) More than $198,000 but less than $208,000  (combined) $208,000 or more (combined)
Married filing separately More  than $0 but less than $10,000 $10,000 or more

If your filing status is single or head of household, you can contribute the full $6,000 ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $125,000 or less (up from $124,000 in 2020). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $198,000 or less (up from $196,000 in 2020). Again, contributions can’t exceed 100% of your earned income.

Employer retirement plan limits

Most of the significant employer retirement plan limits for 2021 remain unchanged from 2020. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan remains $19,500 in 2021. This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $6,500 to these plans in 2021. [Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.]

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) remains $13,500 in 2021, and the catch-up limit for those age 50 or older remains $3,000.

Plan type: Annual dollar limit: Catch-up limit:
401(k), 403(b), governmental 457(b),  Federal Thrift Plan $19,500 $6,500
SIMPLE  plans $13,500 $3,000

Note: Contributions can’t exceed 100% of your earned income.

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($19,500 in 2021 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan — a total of $39,000 in 2021 (plus any catch-up contributions).

The maximum amount that can be allocated to your account in a defined contribution plan [for example, a 401(k) plan or profit-sharing plan] in 2021 is $58,000 (up from $57,000 in 2020) plus age 50 or older catch-up contributions. This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2021 is $290,000 (up from $285,000 in 2020), and the dollar threshold for determining highly compensated employees (when 2021 is the look-back year) remains $130,000 (unchanged from 2020).

If you would like to review your current investment portfolio or discuss 2021 IRA contributions, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

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