Jimmy J. Williams, CPA/PFS, CFP® | Live a Life By Design

Time is Running Out

Posted on December 6, 2019December 6, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

As a calendar-year, cash-basis taxpayer, you will have fewer opportunities to reduce your 2019 income tax burden once the calendar rolls over to 2020. By taking a few simple steps today, you will see a better result when you file your income tax return in April, 2020.

If you participate in a Flexible Spending Health Plan, referred to as a “cafeteria plan”, through your employer, it is critical that you utilize (spend) your elected deferral amount for 2019. The IRS has liberalized the rules regarding the ability to claim qualified medical expenses and you may carry over a small portion of your elected deferral amount to a following year. Discuss your options with your company’s Human Resource Officer for your particular plan.

Consider paying your total advalorem tax assessment in full prior to December 31, 2019. The Tax Cuts and Jobs Act of 2017 increased the amount of standard deductions to such levels that most individuals will not incur sufficient qualified itemized deductions to file a Schedule A – Itemized Deductions Form – with their returns. Analyze your current level of qualified deductions to determine if you exceed your standard deduction of $12,200 for individuals or $24,400 for married filing joint taxpayers. A lowered state tax may be an added incentive to itemize deductions on your federal return.

What if you could take a deduction on your tax return for something that doesn’t require your current cash? You may receive an increased benefit by donating appreciated stocks to qualified charities. The process requires that a donor (you) physically donate the certificate of the shares to the charity instead of selling the stock and donating the proceeds. You will receive a tax deduction based on the fair market value of the stock on the date of the donation (transfer). Since the charity is generally exempt from federal and state income taxes, the charity will sell the stock and receive the much needed cash it desires to run its programs. For example, you may have basis in the stock of $1,000 and the fair market value has risen to $10,000. Your charitable deduction is $10,000 (your deduction is limited to 30% of your adjusted gross income). You do not realize the $9,000 capital gain that would be taxed if you sold the stock. It is a win-win situation!

Lastly, review any employee benefit elections for 2020 that are required this month. Most employer-provided retirement plans utilize an enrollment period in November or December of the current year to elect the amount of contributions for the next year. One of the most effective and efficient tax deductions is the contribution to your retirement. Maximizing this election will save federal and state income taxes as well as receives growth via the employer matching contribution. We advise clients to defer at least the matching percentage provided by the employer so that you literally “double” your money notwithstanding market conditions.

Be proactive in your finances and retain more discretionary income for your family. If you want additional information on the above tax strategies and other financial planning methods to help your family reach its goals, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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Thanksgiving – Wealth Is More Than Money!

Posted on November 27, 2019November 27, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

It is that time of year when each of us should pause and reflect on the life we lead in the United States of America. While our nation is far from perfect, the freedoms, opportunities and rights we claim are superior to any other nation on the planet! I am often asked how I define “wealth”. Many people think it is about tangible goods (i.e., cars, houses, land, etc.) and intangible assets (i.e., investments, cash in the bank, etc.).

To me, to be wealthy simply means that I have the freedom to live my life in the manner I choose. An old friend, I will call “Bill”, was diagnosed with cancer and given a short time to live. He and I were talking and I thought I had known him pretty well. Boy, was I surprised with the words that came out of Bill’s mouth over the next thirty minutes!

By all outward appearances, Bill had a great life – money, land, houses, cars, boats, etc. When he started telling me about his life he quickly dismissed the value of his property, cars and investment accounts and began a story of loss in his life. His daughters had been estranged from him due to a misunderstanding when the girls were in the 20s. Now, with his daughters in their 40s and Bill dying of cancer, he realized the most valuable “asset” in his portfolio of wealth had been squandered many years ago. With tears in his eyes, I could see he was living a life of regret.

As I sat there intently listening, Bill continued his saga to define the difference between riches and true wealth. Although he had not worried or wanted for any material need during his life, his emotional void with his children had left him feeling that his life had been lived without meaning. I asked him a simple question, “Would you give it all away to spend some quality days with your daughters before your passing?” The biggest smile came upon his face and he nearly shouted, “You bet!”

After a discussion with Bill’s daughters, a meeting was established to reacquaint themselves. Bill and his daughters’ eyes were swollen with tears of joy as their family was reunited. Bill only lived a few more months but his daughters conveyed to me that those few months were the most happy he had been his entire life.

Remember, a thankful and kind heart is an asset that can’t be bought with material goods. I often define wealth to people as “those things in life that money can’t buy and death can’t take away.” Seek out the true “assets” in your life and enjoy a blessed Thanksgiving Day with family and friends!

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3 Mistakes Most People Make With Their Retirement

Posted on November 15, 2019November 15, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

During my thirty year career of guiding individuals to realizing their retirement goals, I have reduced the most critical of mistakes people commit when accumulating retirement assets in their employer’s plan. These mistakes can be overcome and people have a higher probability of reaching their intended goals.

Mistake #1: Making Decisions through Fear

Investing should be performed with a clear mind and thoughtful research being the driver for change. Too often people accumulating for retirement commit the mistake of making changes to their retirement plan account after the negative impact has occurred. This is the equivalent of turning on the hydrant and spraying water on your house after the structure has completely burned to the ground.

We believe everyone should self-assess their goals for retirement. These goals should be attainable. For example, everyone uses the same phrase when thinking about investments: “High return on my investments with no risk.” This, of course, is a fantasy. Risk is present in every facet of life including your employer-provided retirement plan.

To correct for this mistake, learn to keep calm during temporary market disruptions. With the volatility of our current markets, you would be buying and selling all the time and miss the opportunities to meet your goals for long-term growth.

Mistake #2 – Timing the Market

One of our clients informed us that a former colleague of his was constantly buying and selling in his Thrift Savings Plan. His friend thought this approach would prevail for better growth in his account. However, just the opposite has been proven true by economists and researchers of behavioral finance. To believe a long-term perspective can be maintained with such a short-term approach to finances is not a valid one.

To overcome this mistake, each investor should realize he doesn’t possess all of the knowledge of the market and may turn his retirement plan assets into a speculative investment. This does not have to be the case. We firmly believe proper allocation and diversification of your portfolio will keep risk at acceptable levels while obtaining long-term potential for your assets.

Mistake #3 – Borrowing from Your Retirement Savings

As individuals it becomes difficult for us to look at this bucket of money and experience struggle in our lives. Instead of adjusting our lifestyle and budgeting within our means, we use loans from our retirement plans with the understanding that we are “borrowing from ourselves so it isn’t hurting my account”. The fallacy of this statement is that you’re, in fact, providing for a shortfall in your retirement account during possible peak earnings or growth seasons.

Your plan will require interest to be paid on your “loan”. The rate of interest is usually lower than your market returns and the smaller payments returned to your account may grow but your overall compounding effect will be diminished.

The overall solution to these critical mistakes is to ask for advice from someone that can hold you accountable to a plan that you design for your future. We serve as an advisor as well as life coach for our clients. To be that calming voice of assurance when you are making progress or the soft correction needed when you attempt to deviate from your plan allows us to help you achieve success on your terms.

If you are concerned about your current ability to reach your retirement goals in your TSP, IRA, 401(k) or other employer plan, contact a CPA/PFS or Certified Financial Planner™ practitioner for a complimentary consultation. You may find the answers you need.

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Simplify Your Life, Consolidate Your IRAs

Posted on November 8, 2019November 7, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Diversification is a common term heard by most investors. However, its true meaning is sometimes lost. Recently, we were meeting with a new client of ours that is retired. When the woman brought her giant, purple, three-ring binder to the first meeting, we were somewhat puzzled. Near the end of our first meeting, she opened up the binder to reveal that she owned six, yes six, different IRAs with a total of three advisors!

She must have noticed the look of shock on my face and responded with a phrase we hear, although erroneously, that this is a form of diversifying her portfolio. We examined her statements for the different custodians and asked if we could provide her a “second opinion” as to the state of her investments according to her goals. She quickly responded affirmatively and we set the next meeting.

After much review of the statements, we noticed a trend among the various advisors. Each advisor had taken a similar strategy to helping the client meet her lifetime income goals! Further analysis explained what we previously thought about her approach to diversification – the client had not truly diversified her portfolio but had concentrated her portfolio, inadvertently, by never informing the advisors of her use of multiple advisors. In other words, she was highly concentrated in certain assets classes within her total holdings that exposed her to significant risk. We use the term “overlap” to describe the result of using several advisors that essentially invest in the same assets classes.

During the second meeting we verified her goals, risk tolerance and cash flow needs to confirm our understanding. We provided her a consolidated report of all six IRA statements and she was alarmed at the problem she created with so many accounts. After explaining our recommendation of diversification in many different forms – asset classes, geographically, market sectors, etc. – she was ready to simplify her life.

By combining all of her IRAs into one account, she reduced the amount of paperwork necessary to be maintained for tax purposes and monitoring of her investment positions. Additional diversification was achieved by including asset classes not previously in the portfolio that would reduce her exposure to risk while maintaining her need for immediate cash flow each month. Her smile was all we needed to see to know that we had provided her the highest level of response and service as well as a resolution to a worry she had been carrying for some time. She also through away the giant, purple binder!

If you have multiple accounts with multiple advisors, you should consider a simpler approach to achieve your desired result with a consolidated account of truly diversified investments. We have a saying in our company, “To make things complex is simple. To make things simple is complex.” In other words, let us help you make life simple that you can enjoy retirement on your own terms. Stress? We don’t think it’s necessary when you work with a retirement planning specialist.

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It’s That Time of Year for IRA Owners

Posted on November 4, 2019October 31, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

For many years you saved taxes by contributing to your Individual Retirement Account (IRA) or employer-provided retirement plan. Now, it is time to retire and the IRS says, “Do you remember all of the tax savings you realized for the past 35 years? We want it back!” Perhaps this is a bit extreme but there is an Internal Revenue Code section that requires you take required minimum distributions (RMD) from your IRA or pay a 50% penalty. Ouch!

To mitigate or eliminate this penalty it is critical that you aggregate all of your IRAs to calculate the total RMD that must be distributed by December 31, 2019. Over my 32-year career as a CPA and wealth advisor I have seen many instances where this simple task was erroneously performed and clients paid significant penalties. For example, Bill (not his actual name) was approached early in his retirement years to establish several IRAs to “diversify” his portfolio. This is not a form of diversification but merely a way to create more paperwork.

After he established six IRAs, he sat back and relaxed thinking retirement is a pretty good time of life. Time passed and the year came that Bill was required to take a RMD from his IRAs. The CPA for Bill thought he had accounted for all of Bill’s IRAs when, in fact, he had overlooked two of the accounts. The total funds in the two omitted accounts were $300,000! Imagine the impact this amount of funds would have made to the RMD calculation. Bill actually owned a total of $1,000,000 in IRAs and claimed a RMD on only $700,000. Bill failed to claim $10,949 of RMD and suffered a penalty in the amount of $5,474 for simply failing to account for all of his IRAs.

How can you avoid this negative impact? When we meet with new clients we perform a review of their income tax returns as well as all of their investment statements. Many people don’t understand the types of investment accounts they own.

To mitigate all of this confusion, we look for ways to eliminate or minimize paperwork to make your record keeping much simpler. As stated earlier, more accounts does not equate to diversification.

Required Minimum Distributions are required from IRAs the year after the owner turns 70½ years of age. To reduce the RMD amount you may wish to consider Qualified Charitable Deductions. This is a strategy in which the trustee of the IRA will distribute the RMD, or a portion thereof, to a qualified charity. To meet the criteria for this type of distribution, the taxpayer must meet the age criteria for RMDs. The limit for the charitable deduction is not the RMD limit for the year but a statutory limit of $100,000 per taxpayer.

IRAs can be confusing. Don’t take chances with your financial future. Seek out a CPA and Certified Financial Planner practitioner that specializes in retirement and tax planning. If you own an IRA, don’t give your money to the government. You worked for it, we can help you keep it!

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It’s All Taxable, Unless…

Posted on October 21, 2019November 8, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

All of your income is taxable! This is the premise of the United States Government. However, provisions are addressed through tax legislation that allows certain types of income to be partially taxable or fully exempt from taxation. How do you know which income is tax-free? Is it unpatriotic to pay the least amount of income taxes you lawfully owe?

Well, lets get one thought out of your mind. Judge Learned Hand, U.S. Court of Appeals in the early 20^th century, is credited with stating “nobody owes any public duty to pay more [taxes] than the law demands.” What is fair in our system? The U.S. tax system is based on the honor of its citizens and their willingness to remit taxes timely for the efficient function of the government.

The Internal Revenue Code of 1986, as amended, provides us guidance in the treatment of assets and monies received during the course of the year. For those of us employed, the compensation received from our employers is taxable. However, what about the gift received from Aunt Sally? Is there a limit to what she can give you? Good news! As a beneficiary, or donee, of a gift, of any size, you owe no federal or state income taxes. That means, you could receive a gift of $10,000,000 and owe no income tax. Wow! If that is true, why do we pay tax on other income that is not “earned” during employment?

Section 61 of the Internal Revenue Code states, “… gross income means all income from whatever source derived…” For an item of income to be exempt from taxation, the item must meet specific criteria within the Internal Revenue Code. How does anyone make sense of all of this legal speak? It is critical to understand your tax situation since this expenditure is one of the largest allocations of most individual’s annual budget.

Does this mean your Social Security Benefits are taxable? The answer is maybe. If your income from sources, other than the Social Security Administration, exceeds $25,000 as a single filer or $32,000 as a joint filer, you may have to pay tax on a portion of your benefits. To illustrate the changes in tax laws, the process used by Congress to create revenue for the federal government, in tax years prior to 1987, individuals were not taxed on their Social Security Benefits. Tax laws change, literally, daily.

The solution to this income tax conundrum is to seek a tax adviser that not only understands the tax laws but specializes in planning. Our role as wealth advisors, for our clients, is to provide guidance on the critical areas of their finances that may impair the clients’ abilities to live a life by design. Don’t simply sign your returns each year and send them off hoping for the best. To gain more confidence in your tax responsibilities, seek out a CPA and Certified Financial Planner practitioner that understands the interaction between your planning for the future and the impact of taxation on your investments and income. You can truly take control of your taxes. In the words of Nike, JUST DO IT!

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Be Confident In Your Retirement Years

Posted on October 7, 2019October 3, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

For most investors, including retirees, it is critical that they understand the philosophy of investing. If you utilize the services of a professional to assist with the implementation of your retirement goals, the logical approach to reaching your goals should be understood by all parties. One of the greatest causes of worry and concern, during retirement, is the lack of clearly communicating the needs, risk tolerance and definition of success between the client and advisor.

Recently, we discovered several individuals that had cash flow needs but had placed all of their retirement funds in a long-term investment that would penalize them to withdraw money from the investment. Many of these investments have a period of time that you are required to keep your money invested within the product and you are paid a “bonus” of interest for doing so. This type of product may have a surrender period of 12 to 20 years before you can withdraw all of your money for your preferential use.

Balance in investing is similar to balance in life. It is often a tragic turn of events when someone places all of their investment assets within a non-liquid investment for the promise of greater returns. These products may have their place in the portfolio but are often erroneously sold by insurance brokers as a superior investment to other options that allow liquidity and control to be retained by the investor.

To alleviate this concern during retirement, carefully review your cash flow needs. There may arise a need that is unexpected and will cause greater concern if you are strained for lack of funding. We believe it is critical to maintain sufficient cash flow, at all times, by creating a 90-day reserve for potential disruptions in life. Times will arise, they often do, when you will be faced with an incident that you will be proud you reserved plenty of funds to meet the need.

Always challenge the costs of any investment. There are no “free” investments. If the insurance salesman is being paid a commission to sell you a long-term product, the higher his commission, the longer the penalty period for withdrawing your money out of the product. Control is the name of the game. When you ask questions, you should be receiving clear, concise answers instead of confusing statements.

Lastly, be alert to any investment approach that does not allow you the opportunity to understand the underlying investment strategy. Many people have been harmed by failing to truly ask the hard questions of the insurance salesman. Don’t be a victim, take control of your finances and your future. If you have questions pertaining to your current investments, seek out a Certified Financial Planner practitioner to receive a “second opinion”. We provide this service as a courtesy to individuals within 5 years of retirement or already retired. You can expect honesty, transparency and integrity in the process. Your retirement is not an infomercial on TV. You can’t set it and forget it!

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What Is Causing All of the Market Volatility?

Posted on September 23, 2019September 20, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Have you noticed your retirement portfolio activity looking like a bad EKG? Market fluctuations have been extreme the past few months. This type of market experience is a test of your investment philosophy and willingness to “stick with your approach”.

Many different factors create market volatility. One area that causes market concerns is the geopolitical risks faced by investors. This type of risk is controlled by policy of the U.S. Government and its leaders. The impact of geopolitical risks can be significant to our economy such as the tariffs currently imposed on a few of our trading partners. These countries have maintained a rather fluid trading program with our country and, due to the recently imposed tariffs, the cost of goods flowing from these countries to the U.S. are much higher. The purpose of the tariff is to persuade the trading partner to amend trade agreements on a more equitable basis. For example, the U.S. imports a significant number of consumer products that are considered necessities for Americans (i.e., electronics, appliances, clothing, etc.).

By forcing tariffs on the imported goods, Americans will consider alternatives that may be produced in the U.S. or another country that is not, currently, burdened with a tariff. Too often trading agreements become one-sided or inequitable. This simply means that we are importing far more in foreign goods than we are exporting to our trading partners’ countries. An imbalance results from this these transactions called a trade deficit. The role of the current policy makers in the U.S. is to create a balance of trade (i.e., our imports equal exports).

A concerted effort by the U.S. Congress and President determine the fiscal policy of our nation. This policy is primarily affected by two main tools – taxes and spending. Congress establishes, or approves, the appropriations (or spending) on various programs and it is ultimately signed by the President. Different approaches to the budget can cause significant market fluctuations. For example, if the Congress increases spending in the defense sector of our economy, the market may interpret this action to mean defense stocks could see a growth in the coming years. The inverse could be true if Congress were to reduce spending on defense. Social programs such Social Security and Medicare consumes a majority of the annual federal budget. These commitments to the participants, who are beneficiaries of the programs, are strongly defended against cuts in spending due to political will.

The Federal Reserve Board controls the monetary policy in the U.S. This regional banking system is responsible for the management of our banking processes and the supply of currency within the system. One of the most critical functions of the Federal Reserve Board is the gathering and interpretation of economic data to determine inflationary impacts on the domestic economy. Our current market conditions have created a prolonged lower interest rate environment and, coupled with the tariffs, a strong U.S. Dollar. Inflation has been relatively controlled through the efforts of the Federal Reserve Board members.

By developing a strong, long-term plan for investing to meet your goals and objectives, you should not be ruled by the recent volatility. Too often, investors react to volatility by trying to time the market. This approach could lead to a catastrophic ending for your retirement plans. If you are concerned about your current investment strategy meeting your needs, seek out a Certified Financial Planner practitioner to assist you with a “second opinion”. The only thing you have to lose is worry.

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Why Your Credit Score Is So Important

Posted on September 16, 2019September 12, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Are you considering the purchase of a retirement home? Or perhaps simply leasing a seasonal residence in a retirement community? Your credit score, no matter your age, is critical to managing your financial matters. Let’s discuss the various components and uses of a credit score that will assist you in achieving your retirement goals.

If you own property and/or an automobile, your insurance rate is partially dependent upon your credit score. The FICO (Fair Isaac Corporation) Score is an industry standard that allows lenders and other service providers to evaluate your capability and mindset toward credit. We highly recommend our retiring clients eliminate all indebtedness before retiring. However, many forms of credit extension, other than bank loans, rely on your credit score for purposes of granting the credit. Property and casualty insurance companies use your credit score to determine how responsible you operate your car. How is this possible? The company attributes your good credit history to also being a responsible automobile owner. Granted such attribution is not the only factor but it is a prominent function of the determination of your premium for insurance.

Your credit score is computed based on several factors:

payment history;
types of credit you obtain;
total amount of credit compared to income; and
amount of unsecured credit available to you (i.e., credit card lines of credit that are not used but available).

One of the goals of my life is to achieve a perfect credit score of 900. This is a Herculean task simply because of the manner in which the score is computed.

For years, I have maintained an 800+ credit score, which, at times, would drop for no apparent reason. Further research revealed that my score would be reduced because I didn’t use my credit cards! Yes, you read this statement correctly. I didn’t use my cards and my credit score would be reduced because of available unsecured credit that was not used but could be used immediately. Seems a little draconian to me but this is the rationale of the FICO algorithms.

We have many clients who have not utilized credit for many years. The only form of credit that is available to them is their credit card. With significant cash flow and net worth, you would think their credit score would be perfect. Not so. Their scores will be reduced for a lack of credit history of sufficient volume.

Even in our retirement years, the need may arise for you to borrow from a bank, request a better credit card and/or require insurance for your property. All of these transactions require an excellent credit score. If you are concerned about your credit score, or feel your credit history is incorrect, request a free copy of your credit report from Experian, Trans Union or Equifax. (Go to www.annualcreditreport.com to request your free report.) By law these credit reporting agencies are required to issue you one free copy of your credit report annually.

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Maximizing Support Benefits for Families

Posted on September 2, 2019August 30, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Many families lack the capabilities to replace the income for their household when they lose a spouse. Depending upon the circumstances, there are many options to prepare for and replace the income from your spouse.

First, life insurance is a means of replacing income by receiving, mostly if not all, tax-free income from an insurance company by claiming benefits against a policy owned by you or your significant other. To claim the benefits, simply complete a claim form, submit a copy of the death certificate and a copy of your identification. You are not required to be married to be the beneficiary of a spousal life insurance policy. One of our clients divorced after purchasing a life insurance policy. He never changed the beneficiary designation of the policy that originally stated that his wife would receive $500,000 of death benefit proceeds upon his passing. However, our client remarried and, by failing to change his beneficiary designation form, his former spouse received the life insurance benefit!

Obviously, this could cause some difficulties for the current spouse who may have an outstanding mortgage and other living expenses to pay. The prior spouse is under no obligation to share the proceeds of the life insurance policy with the current spouse and the courts will typically not overrule a beneficiary designation form that has been properly completed by the decedent.

Absent life insurance, your family may be entitled to SSA benefits. If your family consists of children less than 18 years of age on the date of death of your spouse, you may file for survivor’s benefits. The benefit amount depends on the number of years worked by the deceased spouse. As a surviving widow/widower, you may qualify for benefits at age 60 (age 50 if you are disabled). If you care for unmarried children under the age of 16, you may qualify for benefits at any age.

The surviving children of the deceased spouse may qualify for SSA benefits, based on the deceased parent’s earnings base, if the child is younger than 18 years of age or disabled. Some specific requirements must be met to qualify.

Your children may also qualify for SoonerCare (Medicaid for Oklahoma) to provide dental and heath care. This program will cover the child until he reaches age 19. Oklahoma citizens such as pregnant women and individuals 65 and older also qualify for SoonerCare benefits.

The greatest assets you own are your health and the health of your children. These programs don’t replace the value of a lost loved one but provide the minimal care necessary to give a family hope for the future. If your family has suffered loss, it is important to seek out the assistance of a certified financial planner practitioner that will help you care for your family currently and plan for the future.