The earlier you start pursuing financial goals, the better your outcome may be.
 
As a young investor, you have a powerful ally on your side: time. When you start investing in your twenties or thirties for retirement, you can put it to work for you.  
    
The effect of compounding is huge. Many people underestimate it, so it is worth illustrating. Let's take a look using a hypothetical 5% rate of return.
  
How does it work?  A simplified example goes like this: Let's take a look using a hypothetical 5% rate of return. After a year, you earn 5% interest, or $5. Another year, another 5%, which adds $5.25 this time. In the third year, your 5% interest earned amounts to $5.51, bringing your balance to $115.76. The more money you deposit, the greater that 5% returns. So, if you were to deposit $100 every month into that same account, you’d make a hypothetical $836.63 in compound interest from $6,100 in deposits over five years. That compounding continues, even if you stop making deposits. All you really need to do is let that money stay put.1
  
The earlier you start, the greater the compounding potential. If you start saving and investing for retirement in your twenties, you may gain an advantage over someone who waits to save and invest until his or her thirties.   
   
Even if you start early & then stop, you may out-save those who begin later. What if you contribute $5,000 to a retirement account yearly starting at age 25 and then stop at age 35 – no new money going into the account for the next 30 years. That is hardly ideal. Yet, should it happen, you still might come out ahead of someone who begins saving for retirement later. 
  
Are you wary of investing? If you were born in the late eighties to early nineties, you are old enough to remember the market volatility in the early 2000s and the credit crisis of 2007-09. Recent events, in the wake of the coronavirus, might bring back memories of that time. All this may have given you a negative view of equities, shaped during your formative years; these events are clear examples of how risk plays a part in this type of investment.
 
The reality, though, is that many people preparing for retirement need to build wealth in a way that has the potential to outpace inflation. You will retire on the compounded earnings those invested assets are positioned to achieve.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
    
Citations.
1 - thebalance.com/compound-interest-4061154 [12/6/19]

Focusing on Your Strategy During Turbulent Times.
 
​Investors are people, and people are often impatient. No one likes to wait in line or wait longer than they have to for something, especially today when so much is just a click or two away.
 
This impatience also manifests itself in the financial markets. When stocks slip, for example, some investors grow uneasy. Their impulse is to sell, get out, and get back in later. If they give in to that impulse, they may effectively pay a price.
 
Across the 30 years ended December 31, 2018, the Standard & Poor’s 500 posted averaged annual return of 10.0%. During the same period, the average mutual fund stock investor realized a yearly return of just 4.1%. Why the difference? It could partly stem from impatience.1
 
It’s important to remember that past performance does not guarantee future results. The return and principal value of stock prices will fluctuate over time as market conditions change. And shares, when sold, may be worth more or less than their original cost.
 
Investors can worry too much. In the long run, an investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites each day.
 
Too many investors make quick, emotional moves when the market dips. Logic may go out the window when this happens, in addition to perspective.
 
Some long-term investors keep focus. Warren Buffett does. He has famously said that an investor should, “buy into a company because you want to own it, not because you want the stock to go up.2
 
Buffett often tries to invest in companies whose shares may perform well in both up and down markets. He also has famously stated, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”2
 
In contrast with Buffett’s patient long-term approach, investors who care too much about day-to-day market behavior may practice market timing, which is as much hope as strategy.
 
To make market timing work, an investor has to be right twice. The goal is to sell high, take profits, and buy back in just as the market begins to rally off a bottom. But there is volatility in financial markets and the sale at any point could result in a gain or loss.
 
 Even Wall Street professionals have a hard time predicting market tops and bottoms. Retail investors are notorious for buying high and selling low.
 
Investors who alter their strategy in response to the headlines may end up changing it again after further headlines. While they may expect to be on top of things by doing this, their returns may suffer from their emotional and impatient responses.
 
Nobel Laureate economist Gene Fama once commented: “Your money is like soap. The more you handle it, the less you’ll have.” Wisdom that may benefit your strategy, especially during periods of market volatililty.3
        
Citations.
1 - nytimes.com/2019/07/26/your-money/stock-bond-investing.html [7/26/19]
2 - fool.com/investing/best-warren-buffett-quotes.aspx [8/30/19]
3 - suredividend.com/best-investment-quotes/ [12/5/18]

More families should know about these tax-advantaged savings vehicles.
 
Families with special needs children have a new tax-deferred savings option. The ABLE account, also called a 529A savings account, is patterned after the popular 529 savings plan, created to help parents save for a child’s higher education. Like 529 plans, ABLE accounts are run by states rather than the federal government. These plans emerged after the passage of the Achieving a Better Life Experience (ABLE) Act in 2014.1
 
ABLE accounts address an underpublicized financial need. While some families open college savings accounts, comparatively few start discrete savings accounts or trusts for children with disabilities. That difference may be partly due to the presumption that “the money will be there” when the child becomes an adult.
  
The money may not be there; at least, not as much of it as many families hope. State agencies and nonprofit groups helping the disabled face ongoing funding challenges, including pressure to limit the “entitlements” they distribute. Social Security, which provides Supplemental Security Income (SSI) to millions of disabled adults, faces its own set of issues.
  
Financially and legally, what changes when a child with special needs turns 18? As an adult, a disabled person becomes eligible for Medicaid and monthly SSI payments, provided they meet the financial requirements, typically only available to those with $2,000 or less in assets. Some special needs adults have more than $2,000 in assets in their name by age 18. Savings accumulate, family gifts and investments are made on behalf of the child, and suddenly, that young person is ineligible for fundamental health care and income benefits.2
   
ABLE accounts nicely address this dilemma. Money accumulated in a tax-advantaged ABLE account does not count toward that $2,000 total. Even if funds in the account exceed $100,000, the account beneficiary will still be eligible for Medicaid (albeit, ineligible for SSI).1
 
How large can an ABLE account become? Current ABLE account maximums range from $235,000 to $529,000 (limits vary per state). Account contributions can be made by anyone.1,3
  
What if the state you live in has no ABLE accounts? Consider opening an account in another state. Some states allow out-of-state residents to participate in their ABLE programs. (It is also worth noting that some states have lower ABLE account fees than other states.)1,3
 
ABLE account holders have some new options, thanks to federal tax reform. The Tax Cuts and Jobs Act of 2017 brought notable changes for these accounts. While the basic annual account contribution limit is currently $15,000 for an individual, working ABLE account holders may now contribute employment income to their accounts in excess of that $15,000 threshold, up to the individual federal poverty level set for the preceding calendar year. In addition, some ABLE account beneficiaries may be eligible for the Saver’s Credit, a sizable federal tax break.1
 
You may now roll over up to $15,000 from a standard 529 plan into an ABLE account. One key condition must be met: the beneficiary of the standard 529 plan must either be the same person who is the beneficiary of the ABLE account or a member of the same family as the ABLE account holder.1
 
ABLE accounts are becoming an important component of special needs planning. The word worth emphasizing here is “component.” The money in an ABLE account alone may not be enough to cover lifetime care expenses for a disabled adult, even if the account is replenished. An ABLE account is usually not a financial “answer” for families with mentally or physically challenged children, but a part of a greater financial strategy that might include a supplemental needs trust or other savings vehicles.
 
These accounts do have their shortcomings. The biggest drawback of ABLE accounts is that they do nothing for people who become disabled after age 26. You cannot open one for someone older than 26, unless the individual became disabled prior to reaching that age. Another little-known demerit: states sponsoring ABLE accounts can seek repayment from those accounts for the cost of care covered by Medicaid if the beneficiary dies.1,3
 
ABLE account contributions are not tax-deductible at the federal level (some states do permit deductions). This tradeoff is made in exchange for tax-deferred earnings and tax-free withdrawals. Withdrawals go untaxed, so long as the money is spent on “qualified disability expenses,” which can range from education, housing, and transportation costs to job training and health care. Nonqualified withdrawals, naturally, are taxable.1
 
The bottom line? ABLE accounts give families with children who have special needs a new way to save and invest for future needs and expenses.
      
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 
Citations.
1 - finra.org/investors/able-accounts-529-savings-plans [1/23/20]
2 - mn.db101.org/mn/situations/youthanddisability/benefitsforyoungpeople/program2c.htm [1/17/20]
3 - ablenrc.org/what-is-able/what-are-able-acounts/ [1/23/20]

Protecting yourself from potential calamity.
 
Cybercrime affects both large corporations and private individuals. You’ve likely read about the large data breaches in the business world. These crimes are both expensive and on the rise. The U.S. Identity Theft Resource Center says that these corporate data breaches reached a peak of 1,632 in 2017. The response to the growing need for data protection has been swift and powerful; venture capitalists have invested $5.3 billion into cybersecurity firms.1
 
That’s good news for the big companies, but what about for the individual at home? What can you do to protect data breaches to your personal accounts? 
 
For most private individuals, the key idea is to both:
* Know what to do if you’ve had a data breach.
* Know what you can do that might help prevent a data breach.
 
Total cybersecurity for your financial matters isn’t something that can be strategized in a single short article like this one, but I would like to offer you two suggestions that can help you get started. Both can be done from home and represent reactive and preventative measures.
 
Credit Freeze. By reactive, I mean that a step that you can take after the fact. In many cases, a credit freeze might be a reaction to identity theft or a data breach. What it specifically does is restrict access to your credit report, which has information that could be used to open new lines of credit in your name. The freeze prevents this, but it will not prevent a criminal from, for instance, using an active credit card number, if they’ve discovered it. For that reason, you still have to monitor for unauthorized transactions during the freeze.2
 
While the freeze is in place, you can still get your free annual credit report. You also won’t have issues with credit background searches for job or renter’s applications or when you buy insurance – the freeze doesn’t affect those areas of your credit history. You can even apply for a new line of credit during a credit freeze, though that requires a temporary or permanent elimination of the freeze during the process. This can be done through either a call to the big three credit reporting agencies (Equifax, Experian, and Transunion) or a visit to their respective websites.2
 
Password Manager. This is a preventative measure. Yes, we all know the poor soul who uses “Password” as their password. While you are probably not that far gone, the truth is that there are many tricks that cybercrooks use to learn or intuit our passwords. In fact, 20% of Internet consumers have experienced some sort of account compromise. That comes at a time when about 70% of consumers operate 10 or more accounts. A few, against best practice, will use the same password across each of those accounts. A good security measure against that is password manager software – applications that allow us to keep all our numerous passwords encrypted in a vault and drop them into our browsers when requested. While yes, there are options to save these passwords, encrypted on most browsers, these security measures are limited. Password managers are focused solely on security and are more frequently updated than the browser security features might be. That attention might be difference between a criminal obtaining access to your sensitive personal information or being blocked in the attempt.3,4
 
While this is a very basic pair of tips, they are worth thinking about and may prove to be helpful in your efforts to prevent identity theft. There are, however, additional, more-advanced choices for you to explore. Talk with your trusted financial professional about other cybersecurity best practices that you might consider.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 
 
Citations.
1 - forbes.com/sites/forbestechcouncil/2019/10/09/the-need-for-a-breakthrough-in-cybersecurity/ [10/9/19]
2 - consumer.ftc.gov/articles/0497-credit-freeze-faqs [9/2019]
3 - wired.com/story/best-password-managers/ [9/25/19]
4 - digitalguardian.com/blog/uncovering-password-habits-are-users-password-security-habits-improving-infographic [12/18/18]

Things you can do for your future as the year unfolds.
 
 What financial, business, or life priorities do you need to address for the coming year? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:
  
Can you contribute more to your retirement plans this year? In 2020, the contribution limit for a Roth or traditional individual retirement account (IRA) remains at $6,000 ($7,000 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $139,000 and joint filers with MAGI above $206,000 cannot make 2020 Roth contributions. 
 
Before making any changes, remember that withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.
 
Make a charitable gift. You can claim the deduction on your tax return, provided you itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the Internal Revenue Service (I.R.S.) does not equate a pledge with a donation. If you pledge $2,000 to a charity this year, but only end up gifting $500, you can only deduct $500.
 
These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your strategy. 
 
See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with homebased businesses.
  
Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,550 contribution for 2020, if you are single; $7,100, if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.
 
If you spend your HSA funds for non-medical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.
 
Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pretax accounts, and your most tax-efficient securities should be held in taxable accounts.
 
Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Before adjusting your asset allocation, consider working with an investment professional who is familiar with tax rules and regulations. 
 
Review your withholding status. Should it be adjusted due to any of the following factors?
  
* You tend to pay a great deal of income tax each year.
* You tend to get a big federal tax refund each year. 
* You recently married or divorced.
* A family member recently passed away.
* You have a new job and you are earning much more than you previously did. 
* You started a business venture or became self-employed. 
 
These are general guidelines and are not a replacement for real-life advice. So, make certain to speak with a professional who understands your situation before making any changes.
  
Are you marrying in 2020? If so, why not review the beneficiaries of your retirement accounts and other assets? When considering your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2020, you will need a new Social Security card. Additionally, the two of you may have retirement accounts and investment strategies. Will they need to be revised or adjusted with marriage?
 
Are you coming home from active duty? If so, go ahead and check the status of your credit and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still there and revoke any power of attorney you may have granted to another person.
 
Consider the tax impact of any upcoming transactions. Are you planning to sell any real estate this year? Are you starting a business? Do you think you might exercise a stock option? Might any large commissions or bonuses come your way in 2020? Do you anticipate selling an investment that is held outside of a tax-deferred account? 
   
If you are retired and older than 70½, remember your year-end RMD. Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs and 401(k), 403(b), and profit-sharing plans by December 31 of each year. The I.R.S. penalty for failing to take an RMD can be as much as 50% of the RMD amount that is not withdrawn.
  
Lastly, should you make 13 mortgage payments this year? If your house is underwater, this makes no sense – and you could argue that those dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January 2020 mortgage payment in December 2019. If you have a fixed-rate loan, a lump-sum payment can reduce the principal and the total interest paid on it by that much more. 
 
If you’re considering making 13 payments, consider working with a tax, legal, or accounting professional who is familiar with your situation.
    
Vow to focus on being healthy and wealthy in 2020. And don’t be afraid to ask for help from professionals who understand your individual situation. 

Helpful tips for tax time.
 
Being a small-business owner isn’t easy. After all, balancing payroll, managing employees, drawing up marketing plans, and handling the bookkeeping can be stressful! Luckily, the Internal Revenue Service (I.R.S.) allows small-business owners to take some surprising deductions, which may help come tax time. Read on to learn more.
 
Remember, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a professional with legal or tax expertise for specific information regarding your individual situation.
 
Employ your personal cell phone. The I.R.S. allows small-business owners to deduct the cost of the time spent on business calls made while using their personal mobile device. The key is to make sure you keep an itemized monthly phone bill for your records.1 Assuming an $80-per-month phone bill and a 50% deduction, you may be able to deduct $480 from your state and federal tax returns! The best way to track your business call time? Try a using separate number for your business, which automatically routes to your phone. This way, it will be easy to see your business versus personal phone usage. 
 
Put your home to work. If you use part of your home for business, you may be able to deduct those expenses. These can include a portion of your home as well as insurance and utilities. 
 
However, there are some conditions that must be met to claim these deductions. First, the portion of your home you claim for business use must be exclusively for your company. Second, the part of your home used by your company must be either your principal place of business, a place to meet with customers, or a separate structure used in connection with your business. 
 
Hold your meetings over a meal. If you and your employees have meetings, consider having them over a meal. As long as the dining expenses are reasonable and you’re eating with an employee to discuss business-related items, you are permitted to deduct 50% of the meal cost. 
 
This may seem like a small advantage, but consider this: if you manage to have a “business lunch” every day for $10, you can deduct $5 of that expense, which could amount to over $1,200 a year in claimable deductions!
 
Deduct and fly for free. Many small-business owners believe they can reduce travel costs by using the miles they earn through a qualifying credit card to pay for their next business flight. Since your travel costs for business may be fully deductible, however, why not put those miles to use in your personal life instead? 
 
Depending on your air-travel expenses, your income tax rate, and the number of miles you may be able to accrue in a year, this could save you thousands of dollars in expenses.

What you need to know.
 
 When you reach age 70½, the Internal Revenue Service instructs you to start making withdrawals from your traditional IRA(s). These withdrawals are also called Required Minimum Distributions (RMDs). You will make them, annually, from now on.
   
If you fail to take your annual RMD or take out less than the required amount, the I.R.S. will notice. You will not only owe income taxes on the amount not withdrawn, you will owe 50% more. (The 50% penalty can be waived if you can show the I.R.S. that the shortfall resulted from a “reasonable error” instead of negligence.)
   
Many IRA owners have questions about the rules related to their initial RMDs, so let’s answer a few.
   
How does the I.R.S. define age 70½? Its definition is pretty straightforward. If your 70th birthday occurs in the first half of a year, you turn 70½ within that calendar year. If your 70th birthday occurs in the second half of a year, you turn 70½ during the subsequent calendar year.
 
Your initial RMD has to be taken by April 1 of the year after you turn 70½. All the RMDs you take in subsequent years must be taken by December 31 of each year.
 
So, if you turned 70 during the first six months of 2020, then you will be 70½ by the end of 2020, and you must take your first RMD by April 1, 2021. If you turn 70 in the second half of 2020, then you will be 70½ in 2021, and you won’t need to take that initial RMD until April 1, 2022.
 
Is waiting until April 1 of the following year to take my first RMD a bad idea? The I.R.S. allows you three extra months to take your first RMD, but it isn’t necessarily doing you a favor. Your initial RMD is taxable in the year that it is taken. If you postpone it into the following year, then the taxable portions of both your first RMD and your second RMD must be reported as income on your federal tax return for that following year.  
 
An example: James and his wife Stephanie file jointly, and they earn $78,950 in 2019 (the upper limit of the 22% federal tax bracket). James turns 70½ in 2019, but he decides to put off his first RMD until April 1, 2020. Bad idea: this means that he will have to take two RMDs before 2020 ends. So, his taxable income jumps in 2020 as a result of the dual RMDs, and it pushes the pair into a higher tax bracket for 2020 as well. The lesson: if you will be 70½ by the time 2019 ends, take your initial RMD by the end of 2019 – it might save you thousands in taxes to do so.
 
How do I calculate my first RMD? I.R.S. Publication 590 is your resource. You calculate it using I.R.S. life expectancy tables and your IRA balance on December 31 of the previous year. For that matter, if you Google “how to calculate your RMD,” you will see links to RMD worksheets at irs.gov and a host of other free online RMD calculators.
 
If your spouse is more than 10 years younger than you and happens to be designated as the sole beneficiary for one or more of the traditional IRAs that you own, you should use the I.R.S. IRA Minimum Distribution Worksheet (downloadable as a PDF online) to help calculate your RMD.
    
If your IRA is held at one of the big investment firms, that firm may calculate your RMD for you and offer to route the amount into another account of your choice. It will give you and the I.R.S. a 1099-R form recording the income distribution and the amount of the distribution that is taxable.
    
When I take my RMD, do I have to withdraw the whole amount? No. You can also take it in smaller, successive withdrawals. Your IRA custodian may be able to schedule them for you.
         
What if I have more than one traditional IRA? You then figure out your total RMD by calculating the RMD for each traditional IRA you own, using the IRA balances on the prior December 31. This total is the basis for the RMD calculation. You can take your RMD from a single traditional IRA or multiple traditional IRAs.
 
What if I have a Roth IRA? If you are the original owner of that Roth IRA, you don’t have to take any RMDs. Only inherited Roth IRAs require RMDs.
  
Be proactive when it comes to your first RMD. Putting off the initial RMD until the first quarter of next year could mean higher-than-normal income taxes for the year ahead.

​Is it appropriate for your estate?
 
When an individual dies, the executor is faced with an important decision that has the potential to impact the taxes owed by the estate and its heirs. The executor will have the option of valuing the estate on the date of death, or on the six-month anniversary of death – the “Alternate Valuation Date.”
This situation assumes the deceased has a valid will and has named an executor, who is responsible for carrying out the directions of the will. If a person dies intestate, it means that a valid will has not been executed. Without a valid will, a person’s property will be distributed to the heirs as defined by the state law.
Pick a Date. It may seem like an obvious decision and simple choice, but it’s not. Here’s why.
For estates with substantial holdings in stocks, the use of the Alternate Valuation Date may be an appropriate approach if the executor believes stock prices will be lower than they were on the date of death.
When heirs inherit assets, such as stocks, they may receive a step-up in the cost basis if the value of the asset is higher than it was when the original owner acquired it. The heir’s valuation is reset to either the value on the date of the owner's death – or the value on the Alternate Valuation Date – whichever is chosen by the executor.
Market Moves. Let’s take a look at a hypothetical example. Say Dad bought Out-of-Date Technologies at $10 per share several years ago. At his death, the stock was worth $35. The executor used the Alternate Valuation Date and six months later, due to market movements, the stock was worth $28.
His heir, Julie, will inherit this asset and receive a step-up in the cost basis to $28, the value declared by the estate. Let’s now assume that Julie sells the stock a short-time later at $35.
If the estate had used the value on the date of death – $35 – she might not have owed capital gains tax, since she would have been selling the stock at the same price as her cost basis. But since she received the stock with the lower cost basis – $28 – because the executor chose the Alternate Valuation Date, capital gains tax on the $7 per share gain may be due.
This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
In this example, the estate saved money by electing the Alternate Valuation Date, but the heir was exposed to a lower cost basis and the prospect of paying higher capital gains tax in the future.
Consider & Balance. As the executor thinks through this balancing act, they should consider the relative prevailing tax rates for the estate and for the heirs to ascertain what approach may result in the most efficient transfer, net of taxes, to the heirs.
Keep in mind the information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Sometimes you can take penalty-free early withdrawals from retirement accounts.
 
Do you need to access your retirement money early? Maybe you just want to retire before you turn 60 and plan a lifelong income stream from the money you have saved and invested. You may be surprised to know that the Internal Revenue Service allows you a way to do this, provided you do it carefully.
 
Usually, anyone who takes money out of an IRA or a retirement plan prior to age 59½ faces a 10% early withdrawal penalty on the distribution. That isn’t always the case, however. You may be able to avoid the requisite penalty by taking distributions compliant with Internal Revenue Code Section 72(t), section 2.
   
While any money you take out of the plan will amount to taxable income, you can position yourself to avoid that extra 10% tax hit by breaking that early IRA or retirement plan distribution down into a series of substantially equal periodic payments (SEPPs). These periodic withdrawals must occur at least once a year, and they must continue for at least 5 full years or until you turn 59½, whichever period is longer. (Optionally, you can make SEPP withdrawals on a monthly basis.)
   
How do you figure out the SEPPs? They must be calculated before you can take them, using one of three I.R.S. methods. Some people assume they can just divide the balance of their IRA or 401(k) by five and withdraw that amount per year, but that is not the way to determine them.
   
It is wise to calculate your potential SEPPs by each of these three methods. When the math is complete, you can schedule your SEPPs in the way that makes the most sense for you.
   
The Required Minimum Distribution (RMD) method calculates the SEPP amount by dividing your IRA or retirement plan balance at the end of the previous year by the life expectancy factor from the I.R.S. single life expectancy table, joint life and last survivor expectancy table, or uniform life table.
   
The Fixed Amortization method amortizes your retirement account balance into SEPPs based on your life expectancy. A variation on this, the Fixed Annuitization method, calculates SEPPs using your current age and the mortality table in Appendix B of Rev. Ruling 2002-62.
  
If you use the Fixed Amortization or Fixed Annuitization method, you are also required to use a reasonable interest rate in calculating the withdrawals. That interest rate can’t exceed more than 120% of the federal midterm rate announced periodically by the I.R.S.
    
A lot to absorb? It certainly is. The financial professional you know can help you figure all this out, and online calculators also come in handy. Bankrate.com, in fact, offers you a free 72(t) distribution calculator.
   
There are some common blunders that can wreck a 72(t) distribution. You should be aware of them if you want to schedule SEPPs.
    
If you are taking SEPPs from a qualified workplace retirement plan instead of an IRA, you must generally separate from service (that is, quit working for that employer) before you take them. If you are 51 when you quit and start taking SEPPs from your retirement plan, and you change your mind at 53 and decide you want to keep working, you still have this retirement account that you are obligated to draw down through age 56 – not a good scenario.
     
Once you start taking SEPPs, you are locked into them for five consecutive years or until you reach age 59½. If you break that commitment or deviate from the SEPP schedule or calculation method you have set, then the I.R.S. applies a 10% early withdrawal penalty to all the SEPPs you have already made, plus interest.
   
The I.R.S. does permit you to make a one-time change to your distribution method without penalty: if you start with the Fixed Amortization or Fixed Annuitization method, you can opt to switch to the RMD method. You can’t switch out of the RMD method to either the Fixed Amortization or Fixed Annuitization methods, however.
    
If you want or need to take 72(t) distributions, ask for help. A financial professional can help you plan to do it right.

A way to help you prepare.
 
The baby boomers redefined everything they touched, from music to marriage to parenting and even what “old” means – 60 is the new 50! Longer, healthier living, however, can put greater stress on the sustainability of retirement assets.
 
There is no easy answer to this challenge, but let’s begin by discussing one idea – a bucket approach to building your retirement income plan.
 
The Bucket Strategy can take two forms.
 
The Expenses Bucket Strategy: With this approach, you segment your retirement expenses into three buckets:
* Basic Living Expenses – food, rent, utilities, etc.
* Discretionary Expenses – vacations, dining out, etc.
* Legacy Expenses – assets for heirs and charities
 
This strategy pairs appropriate investments to each bucket. For instance, Social Security might be assigned to the Basic Living Expenses bucket. If this source of income falls short, you might consider whether a fixed annuity can help fill the gap. With this approach, you are attempting to match income sources to essential expenses.
 
The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
 
For the Discretionary Expenses bucket, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend. The market value of a bond will fluctuate with changes in interest rates. As rates fall, the value of existing bonds typically drop. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due, plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.
 
Finally, if you have assets you expect to pass on, you might position some of them in more aggressive investments, such as small-cap stocks and international equity. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
 
International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.
 
The Timeframe Bucket Strategy: This approach creates buckets based on different timeframes and assigns investments to each. For example:
* 1 to 5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution, so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
* 6 to 10 Years: This bucket is designed to help replenish the funds in the 1-to-5-Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
* 11 to 20 Years: This bucket may be filled with investments such as large-cap stocks, which offer the potential for growth.
* 21 or More Years: This bucket might include longer-term investments, such as small-cap and international stocks.
 
Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-to-10-Years bucket, even though it’s not quite time.
 
A bucket approach to pursue your income needs is not the only way to build an income strategy, but it’s one strategy to consider as you prepare for retirement.