“This is the season of the year when we discover that we owe most of our success to Uncle Sam and the IRS” – The Wall Street Journal

Investment Strategies for Massive Tax Benefits

All state and federal governments rely heavily on tax incentives to shape and guide behaviors of their citizens. They provide these incentives not only to boost the economy and other programs they support but also to control the way the economy grows. The Internal Revenue Service (and other tax authorities around the world) have established tax laws that are a “roadmap” for reducing taxes (sometimes to zero) and building vast amounts of wealth. The wealthy have long used these laws to grow and protect their wealth. You can too. In fact with proper education, anyone – rich or poor, young or old – can use the same roadmap to build and protect their wealth. The Win-Win Wealth Strategy by Tom Wheelwright, CPA is a fun and easy to read book that explains the 7 strategic investments that ordinary people can make in order to keep more of their hard earned money and begin to build tax-free wealth. Check it out.

This Tax Move Is A ‘Game Changer’ For Freelancers and Gig Economy Workers, Advisor Says

If you’re a freelancer or contract worker, there are still ways to lower your 2022 tax bill — including contributions to a retirement plan improved by legislation passed in December.

One of the provisions from Secure 2.0 included a change to solo 401(k) plans, designed for self-employed workers (and possibly spouses) or business owners with no employees.

Like standard 401(k) plans, there’s a deduction for pretax solo 401(k) contributions. But since solo 401(k) account owners can make deposits as both the employee and employer, there’s a chance to save more.

Before 2022, you needed to open a solo 401(k) by Dec. 31 for current-year deposits. But Secure 2.0 extended the deadline, allowing you to establish a plan after the end of the taxable year and before your filing due date.

“It was a huge game changer for us when we saw that come through,” said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

Previously, when single-employee businesses wanted to open a retirement plan after the calendar year, Lucas may have opted for simplified employee pension plans, also known as SEP individual retirement accounts, or SEP IRAs, another option for self-employed workers.

However, since the recent legislative change, his company “almost always” picks the solo 401(k) because clients may have the ability to contribute more.

Solo 401(k) contribution limits

For 2022, you can contribute the lesser of up to $20,500, or 100% of compensation into a solo 401(k) as an employee. (You can save $6,500 more if you’re 50 or older.) Plus, on the employer side, you can contribute up to 25% of compensation, for a plan maximum of $61,000.

By contrast, SEP IRA contributions can’t exceed 25% of the employee’s compensation or up to $61,000 for 2022.

Previously, you could make employer contributions after the tax year ended if the solo 401(k) was already open. Secure 2.0 approved retroactive solo 401(k) account openings in 2023 while still allowing employer contributions by the tax deadline.

By the 2024 tax season, you’ll also be able to make 2023 employee deferrals into your solo 401(k) after the tax year ends, according to John Loyd, a CFP and owner at The Wealth Planner in Fort Worth, Texas. He is also an enrolled agent.

Of course, picking the right retirement plan may depend on other factors, such as future employees or plan rules. “But it’s mostly dependent on their net income,” he said.

Source: https://www.cnbc.com/2023/03/31/you-can-still-open-and-fund-a-solo-401k-plan-before-the-tax-deadline-.html

Investing Isn’t Free. But Here’s Why 20% Of Investors Thinks It Is

Death and taxes are, as Benjamin Franklin famously declared, two of life’s certainties.

Investment fees may be a worthy addition to that list in the modern era — though not all investors are aware of this near-universal fact.

The fees financial services firms charge can be murky.

One-fifth of consumers think their investment services are free of cost, according to a recent Hearts & Wallets survey of about 6,000 U.S. households. Another 36% reported not knowing their fees.

A separate poll conducted by the Financial Industry Regulatory Authority Investor Education Foundation similarly found that 21% of people believe they don’t pay any fees to invest in non-retirement accounts. That share is up from 14% in 2018, the last time FINRA issued the survey.

The broad ecosystem of financial services companies doesn’t work for free. These firms — whether an investment fund or financial advisor, for example — generally levy investment fees of some kind.

Those fees may largely be invisible to the average person. Firms disclose their fees in fine print but generally don’t ask customers to write a check or debit money from their checking accounts each month, as non-financial firms might do for a subscription or utility payment.

Instead, they withdraw money behind the scenes from a customer’s investment assets — charges that can easily go unnoticed.

“It’s relatively frictionless,” said Christine Benz, director of personal finance at Morningstar. “We’re not conducting a transaction to pay for those services.”

“And that makes you much less sensitive to the fees you’re paying — in amount and whether you’re paying fees at all.”

Small fees can add up to thousands over time

Investment fees are often expressed as a percentage of investors’ assets, deducted annually.

Investors paid an average 0.40% fee for mutual and exchange-traded funds in 2021, according to Morningstar. This fee is also known as an “expense ratio.”

That means the average investor with $10,000 would have had $40 withdrawn from their account last year. That dollar fee would rise or fall each year according to the investment balance.

The percentage and dollar amount may seem innocuous, but even small variations in fees can add up significantly over time due to the power of compounding. In other words, in paying higher fees an investor loses not only that extra money but the growth it could have seen over decades.

The bulk — 96% — of investors who responded to FINRA’s survey noted their main motivation for investing is to make money over the long term.

The Securities and Exchange Commission has an example to demonstrate the long-term dollar impact of fees. The example assumes a $100,000 initial investment earning 4% a year for 20 years. An investor who pays a 0.25% annual fee versus one paying 1% a year would have roughly $30,000 more after two decades: $208,000 versus $179,000.

That dollar sum might well represent about a year’s worth of portfolio withdrawals in retirement, give or take, for someone with a $1 million portfolio.

In all, a fund with high costs “must perform better than a low-cost fund to generate the same returns for you,” the SEC said.

Fees can affect moves such as 401(k) rollovers

Fees can have a big financial impact on common decisions such as rolling over money from a 401(k) plan into an individual retirement account.

Rollovers — which might occur after retirement or a job change, for example — play a “particularly important” role in opening traditional, or pretax, IRAs, according to the Investment Company Institute.

Seventy-six percent of new traditional IRAs were opened only with rollover dollars in 2018, according to ICI, an association representing regulated funds, including mutual funds, exchange-traded funds and closed-end funds.

About 37 million — or 28% — of U.S. households own traditional IRAs, holding a collective $11.8 trillion at the end of 2021, according to ICI.

But IRA investments typically carry higher fees than those in 401(k) plans. As a result, investors would lose $45.5 billion in aggregate savings to fees over 25 years, based only on rollovers conducted in 2018, according to an analysis by The Pew Charitable Trusts, a nonpartisan research organization.

Fees have fallen over time

This annual fee structure isn’t necessarily the case for all investors.

For example, some financial planners have shifted to a flat-dollar fee, whether an ongoing subscription-type fee or a one-time fee for a consultation.

And some fee models are different. Investors who buy single stocks or bonds may pay a one-time upfront commission instead of an annual fee. A rare handful of investment funds may charge nothing at all; in these cases, firms are likely trying to attract customers to then cross-sell them other products that do carry a fee, said Benz of Morningstar.

Here’s the good news for many investors: Even if you haven’t been paying attention to fees, they’ve likely declined over time.

Fees for the average fund investor have fallen by half since 2001, to 0.40% from 0.87%, according to Morningstar. This is largely due to investors’ preferences for low-cost funds, particularly so-called index funds, Morningstar said.

Index funds are passively managed; instead of deploying stock- or bond-picking strategies, they seek to replicate the performance of a broad market index such as the S&P 500 Index, a barometer of U.S. stock performance. They’re typically less expensive than actively managed funds.

Investors paid an average 0.60% for active funds and 0.12% for index funds in 2021, according to Morningstar.

Benz recommends 0.50% as a “good upper threshold for fees.” It may make sense to pay more for a specialized fund or a small fund that must charge more each year due to smaller economies of scale, Benz said.

A higher fee — say, 1% — may also be reasonable for a financial advisor, depending on the services they provide, Benz said. For 1%, which is a common fee among financial advisors, customers should expect to get services beyond investment management, such as tax management and broader financial planning.

“The good news is most advisors are indeed bundling those services together,” she said.

Source: https://www.cnbc.com/2023/03/25/investors-pay-fees-but-may-not-know.html

Personal Finance and Inflation

I recently read an article that indicated 62% of Americans are living paycheck to paycheck forcing more people to have a side job to make ends meet. As we all need to make changes to our spending and savings in these inflationary times, check out the below strategies and tips to help plan and spend less.

  1. Purge useless services – Review each recurring expense and eliminate unnecessary services such as unused subscriptions or memberships and premium movie channels you never watch
  2. Clear up debt – To keep up with higher prices, more Americans are leaning on credit cards and carrying debt from month to month, many reports show. If you’re struggling to pay off a balance, switch to a 0% balance transfer card, which may offer up to 21 months with no interest.
  3. Plan before you buy – Make a grocery list or even a meal plan before you head to the grocery store. If you go to the grocery store without a list, it can be easy to grab items that you don’t need. Creating a meal plan is a great idea because shopping for specific items means you’ll be less likely to impulse shop — and definitely don’t go grocery shopping on an empty stomach.
  4. Look for sales and deals – No single store has all the best deals. If you are doing all of your grocery shopping in the same grocery store every time, you are probably paying much more for your groceries than someone who is willing to shop around for sales at multiple stores. Look out for weekly deals at two or three grocery stores and shop where the best deals are for what you’re buying.
  5. Use coupons for even more savings – You can save even more on your grocery bill by using coupons. There are always coupons on items like toothpaste, deodorant, cereal, yogurt, cheese — even eggs! These can offset the cost of non-coupon items like meat and produce. There are several places to find coupons for grocery store items: digital coupons on grocery store apps, Sunday newspaper coupon inserts, coupons you receive at the register, and manufacturer websites.