Financial Strategy Associates – Insights
Helping you grow and protect your wealth.
New thoughts for year-end charitable giving (Advisor Perspectives)
Gavin Morrissey was included in this Advisor Perspectives article about the potential benefits of front-loading a Donor Advised Fund (DAF).
How can tax planning boost your retirement income?
Given the various potential sources of retirement income and the different ways they are taxed, it takes some planning to coordinate the most effective retirement income plan…
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How can tax planning boost your retirement income?
Posted October 3, 2018
You’ve spent your career saving a significant portion of your income in preparation for retirement. Now that retirement has arrived, you may be concerned about whether you’ve done enough to replace your regular and reliable employment income with distributions from your investment accounts. Given the various potential sources of retirement income and the different ways they are taxed, it takes some planning to coordinate the most effective retirement income plan.
What’s the 4% Rule – and is it enough?
There has long been a general rule of thumb that states you can comfortably distribute four percent of the overall value of your investment portfolio without depleting your accounts and eventually running out of money. Although weacknowledge that the four percent rule can be a reasonable starting point, we believe it over-simplifies the implementation of a successful retirement income plan. To have the best chance of meeting your needs in retirement, you need to do a little more work than simply following the four percent rule.
The four percent rule falls short due to the lack of attention given to income taxes. When comparing the rule with more varied approaches, a sizable gap emerges. Consider that if two individuals, Sandra and Sally, enter retirement on the same day with $1,000,000 in savings, they can have a very different outcome even if they are distributing the same amount each year. If Sandra accumulated her retirement savings by solely contributing to her employer’s retirement plan, she can expect to pay ordinary income tax on each dollar distributed. That can mean a 37 percent annual tax burden, significantly reducing the amount Sandra can take home. She may have to take steps to make up for that by rethinking the budget than she’d planned for in retirement.
Meanwhile, if Sally enters retirement with varied sources of retirement savings, she has an opportunity to increase tax efficiency and maximize the amount she takes home. Carefully allocated pools of savings can be drawn on to minimize the tax burden, alleviating stress and giving Sally more freedom after her working days are done. I don’t know about you, but I’d rather be in Sally’s shoes.
I explored the consequences of retirement earnings and tax exposure with CNBC earlier in 2018, and the article included a simple income tax table to demonstrate the implications of drawing down on a 401k. You can see that table and a few additional thoughts by reading it here: “Why squirreling away every spare dime into your 401(k) is a bad idea.”
Tax Characteristics of Retirement Income Sources
When developing a retirement income plan, it is most important to identify the sources from which a retiree can expect to receive distributions to meet their spending needs. Below is a list of common sources and a brief description of their income tax characteristics.
- Employer retirement plans – distributions are generally taxed as ordinary income up to the top federal rate of 37 percent .
- Traditional IRAs – distributions are generally taxed as ordinary income up to the top federal rate of 37 percent
- Roth IRAs – distributions are generally income tax free
- Qualified dividends – generally taxed at the preferred rate of 15 percent or 20 percent
- Long-term capital gains – generally taxed at the preferred rate of 15 percent or 20 percent
- Short-term capital gains – generally taxed as ordinary income up to the top federal rate of 37 percent
- Tax-exempt interest – generally received free of income tax.
- Return of capital – income tax free.
- Social Security retirement benefits – a portion of the benefit is taxed as ordinary income.
- Pensions – generally taxed as ordinary income up to the top federal rate of 37 percent
Blending is the key
With so many different income sources and tax characteristics, it can be confusing to know the best way to begin drawing upon your retirement savings. While it may be easy to establish a “set it and forget it” approach to taking distributions, that may lead you to pay more income tax then you need to. Rather than drawing from an IRA until those funds are depleted and then moving on to the next account, we believe that with proper planning you can improve your chances of success by being thoughtful about the impact of income taxes upon various sources of retirement income.
For more information, please contact Gavin Morrissey at email@example.com.
About the author
Gavin Morrissey, JD, LLM, AIF, has spent the past 18 years providing comprehensive financial and estate planning guidance to financial advisors across the country, in an effort to continuously improve the lives of their clients. He began his career with Commonwealth Financial Network in 1998 where he served in various roles with the majority of his tenure providing estate and financial planning advice to financial advisors seeking guidance for their clients’ most complex issues. Most recently, Gavin served as the senior vice president of wealth management, overseeing the investment management, research, and financial planning teams. Throughout his career, Gavin has been a contributor to several financial and news industry publications, including ThinkAdvisor, MarketWatch, InvestmentNews, and the Wall Street Journal.
Gavin joined FSA Wealth Management in 2016 as an opportunity to apply his expertise in a manner that directly assists clients reach their financial goals. He applies the disciplines learned through his education to provide tax-efficient holistic solutions that are customized to each clients’ needs.
Gavin earned his undergraduate degree in economics and finance from Lafayette College, a juris doctorate (JD) from Thomas Jefferson School of Law, and a Master of Law in taxation (LLM) from the University of San Diego School of Law and holds the Accredited Investment Fiduciary (AIF®) designation.
Gavin and his wife, Nikki, are parents to two girls, Cailin and Teagan. When not working, Gavin can be found shuttling his children to various sporting events, including swimming, lacrosse, basketball, and soccer games. He is also an active member in his community volunteering at various school and sporting events in addition to serving on the board as chair and treasurer of Commonwealth Cares, a public charity located in Waltham, Massachusetts.
Why squirreling away every spare dime into your 401(k) is a bad idea (CNBC)
Gavin Morrissey was interviewed by CNBC about staying diversified when planning for retirement.
Socially Responsible Investing: an opportunity to invest in your values
The escalating war of rhetoric in the United States has highlighted the increasing tensions over social issues — and for many, the need for change…
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Socially Responsible Investing: an opportunity to invest with your values
Posted April 23, 2018
The escalating war of rhetoric in the United States has highlighted the increasing tensions over social issues — and for many, the need for change. The intense news cycle is partly to blame, but the issues appear to be deepening and the divide in our discourse widening. Bitter partisanship in Washington is a large contributor, and issues over social and economic policy are further polarizing the various factions within our nation.
This has been most visible following the recent spate of mass shootings, notably in our schools. It has caused the youth of our country to band together and demand social change in the form of stricter gun control laws. This is just one of many examples that demonstrate how people can create better outcomes and affect change through political activism and lobbying, climate change and human rights issues. But the issue of gun violence has also caused many individual investors to take action with their portfolios.
Changing social impact through investments:
Social awareness has become a bigger issue for investors in light of the current environment and more are looking to invest in socially conscious portfolios. This is commonly referred to as SRI – Socially Responsible Investing or Sustainable, Responsible and Impact investing. The field has continued to evolve, and now the industry ranks companies using a grading system that includes Environmental, Social and Governance (ESG) scores. This framework not only screens out specific industries, it also avoids companies with poor or exploitive labor practices, inadequate corporate governance or a history of damaging environmental policies.
According to the most recent survey data, SRI investing grew 33% between 2014 and 2016 and accounts for $8.7 trillion in assets or roughly 20% of the total assets that are professionally managed (Source: US SIF Foundation, 2016 report). Tobacco and alcohol restrictions remain highest in priority, but corporate governance issues such as pay inequality and climate change mitigation rank high in terms of influencing the total dollars invested in a given area.
It is clear that investor demand for SRI is increasing and we are beginning to see major investment firms aspiring to be more purposeful in their investment decisions. One of the largest money management firms in the world recently announced a policy to incorporate more social awareness in their investments. We have yet to see the broader implications – but one of the goals is to clearly send a message to major corporations that the capital markets are taking notice.
Socially aware investing – not all or nothing:
Even as individuals, we can make meaningful changes in the way we invest. Indeed, implementing an SRI strategy is not an all or nothing proposition. There are some investors who have transitioned entirely to an ESG investment philosophy, but many are not ready to fully commit to SRI and choose instead to seek a balance in their investment dollars.
At FSA Wealth Management, we work with our clients to determine how we can support their social interests while still achieving their financial goals. That often means committing only a portion of their overall portfolio to SRI. We look at a variety of factors, including tax implications of moving to SRI in after-tax accounts, in which case we may invest new cash savings or perhaps a retirement account for which tax implications of wholesale changes would be nominal.
There are also SRI strategies that may make sense for smaller account solutions and can be ideal for a young investor. Roth accounts, sometimes viewed as longer-term or legacy assets from a tax perspective, can be strong options for implementing SRI. And when pre-funding charitable intentions through a donor-advised fund, SRI is an excellent choice for the investment mandate.
It can be fairly straightforward to begin implementing a sound SRI strategy that is adaptable as situations evolve over time. But for socially conscious investing, what was once practiced by a small niche of specialty investment firms is most certainly gaining significant traction in the marketplace. SRI is now more clearly a viable and attractive investment preference, and worth exploring for those who want to take social action with their portfolio.
For more information, please contact Simon J. Heslop, CFA® at firstname.lastname@example.org.
About the Author
Simon Heslop has been with FSA Wealth Management as a managing partner since 2014. Simon brings a passion for excellence and 20 years of financial services experience to the company. He works with clients in all stages of life on realizing their financial vision. He has a history of developing targeted investment portfolios to help investors meet their long-term objectives and truly enjoys the process of getting to know each FSA Wealth Management client.
Simon is responsible for all of the investment management and research activities of the firm. He spent much of his career designing and managing investment portfolios, where he developed a keen understanding of client needs. Simon applies his results-driven approach to creating tailored investment and financial planning solutions for clients seeking to fulfill their vision of financial success.
Previously, Simon designed and researched investment portfolios for Fidelity Investment’s Strategic Advisors division and founded a private wealth management firm. Most recently, he developed and managed a multibillion-dollar asset management platform for Commonwealth Financial Network®. As a portfolio manager, he was the expert that other financial advisors turned to for their client needs. Simon is happy to provide that same expertise directly to FSA Wealth Management’s clients.
Simon earned his undergraduate degree in engineering from Union College and an MBA from Northeastern University and holds the Chartered Financial Analyst® designation.
Outside of work, Simon enjoys spending time with his wife, Alicia, and his three children, Rebecca, Kate, and Jack. He is an avid builder and furniture maker and enjoys the art of designing and building custom projects. An outdoor enthusiast, Simon enjoys cycling, hiking, and skiing. He has taken part in a number of community service activities, including a role on the Newfield School Board’s Budget Advisory Committee.
Financial Strategy Associates, Inc. is a registered investment advisor. Information contained in this report is for informational purposes only and should not be considered investment advice or recommendations. Advice may only be provided after entering into an advisory agreement with Advisor.
Q&A with FSA
Getting the full picture in 2018 – Posted 4.9.18
Q: How do you describe the services you provide your clients in comparison to the majority of other wealth managers? Can you tell us about any new services?
A: In terms of servicing clients, we consider ourselves wealth managers who look at things with an open mind. We approach clients based on their specific needs, pausing to ask questions and determine exactly how their investments are leading them down the path to achieve their goals…
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Posted April 9, 2018
Q: How do you describe the services you provide your clients in comparison to the majority of other wealth managers? Can you tell us about any new services?
A: In terms of servicing clients, we consider ourselves wealth managers who look at things with an open mind. We approach clients based on their specific needs, pausing to ask questions and determine exactly how their investments are leading them down the path to achieve their goals.
We’re able to create comprehensive financial plans with confidence because we offer unique skillsets in terms of our individual backgrounds. Our clients recognize that we work together to draft plans in their best interests and help them navigate through it. Further, we review estate and trust planning, and we incorporate tax planning strategies into what we do. For every client, we offer comprehensive planning and every client has an opportunity to consider options that tie into their goals, like responsible investing, charitable giving, wealth transfers, stock options, and executive benefits.
Simply put, we don’t miss anything.
As far as new services are concerned, we’re making things easier for our clients and embracing technology. Our main goal is to ensure that have we all the information we need to provide our clients with relevant and specific advice. To do so, we’ve just implemented new software that allows our clients to have their own portal to easily provide a comprehensive view their accounts no matter where they are held.
Q: What are the most commonly asked questions you receive from clients?
A: We’re certainly receiving questions about tax planning given the passage of a new tax law! We’re putting together a few thoughts on the law and providing advice so our clients know exactly what to look at and how to respond.
Q:What’s your best advice for clients looking to reach their wealth goals? In your opinion, where are other wealth management firms falling short?
A:Our best advice is really specific to each client—and maybe that’s exactly where other wealth managers are falling short, as they rely on prepackaged solutions that don’t necessarily work for every individual. Many of our clients are looking for us to respond to their specific concerns, and so they ask us: “What’s your answer, FSA Wealth Management?”
We tell our clients that if they remain consistent, focus on solid investment themes, and stay committed to the client process, they have the ability to reach their life goals, even through bad markets.
Q: With such strong upward momentum in the markets, what kind of strategies are you recommending for clients entering retirement? For business owners?
A: Again, we say focus on consistency, long-term goals, and most importantly we tell our clients not to solely chase returns. As such, we focus on asset allocation and will use strong markets to re-balance and ensure that investments are aligned with client goals.
From a planning perspective, retirement can be a time to really change the way clients view their financial picture. When we see clients entering this stage and they’re considering increasing charitable donations, for example, we always have discussions about giving in a tax-friendly way. Charity-inclined potential retirees might consider donating by using a donor-advised fund. During that time in their lives, it’s important for clients to stop giving away post-tax dollars and ensure that giving is viewed as part of their retirement planning.
Q: What’s ahead for FSA Wealth Management?
A: This year, we’re growing steadily but are not willing to sacrifice our laser-focus on delivering the right financial plans from all angles. Looking forward, we’re going to diversify our staff to offer fresh perspectives that support our clients.
We’re going to continue to help business owners, families with complex estate planning needs, and charitably inclined clients — many of whom have shown interest in responsible investing and women’s issues.
Our holistic approach and vision does make us unique, and we look forward to maximizing that for our clients in 2018 and in the years to come.
Market Update for the Month Ending January 31, 2018
As we transitioned from 2017 to 2018, equity markets continued their advance, with all three major U.S. indices posting large gains in January. The Nasdaq Composite led the way, climbing 7.40 percent…
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Posted February 5, 2018
Stock markets have strong start to the year
As we transitioned from 2017 to 2018, equity markets continued their advance, with all three major U.S. indices posting large gains in January. The Nasdaq Composite led the way, climbing 7.40 percent. The Dow Jones Industrial Average and the S&P 500 Index followed closely behind with gains of 5.88 percent and 5.73 percent, respectively. Despite a dip at the end of the period, this was another great month for investors.
This strong performance was supported by better-than-expected earnings results for the fourth quarter of 2017. According to FactSet, as of January 25, the blended earnings growth rate for the S&P 500 was 12 percent—a number seemingly buoyed by the recent Tax Cuts and Jobs Act. This was up from estimates of 11-percent growth at the end of December. Further, the growth was widespread, with all 11 sectors showing higher profits. As earnings ultimately power long-term results, this faster growth could help keep equity markets moving higher.
U.S. markets were also supported technically in January, as all three indices remained above their respective trend lines.
International markets did equally as well. The MSCI EAFE Index increased 5.02 percent during the month. The MSCI Emerging Markets Index fared even better with a gain of 8.34 percent. International stocks benefited from continued global expansion and a weaker dollar. Both indices also stayed above their 200-day moving averages in January.
Fixed income had a more challenging month, as increasing inflation expectations caused an upswing in rates. The yield on the 10-year U.S. Treasury rose from 2.46 percent to 2.72 percent during the month. This caused the Bloomberg Barclays U.S. Aggregate Bond Index to decline by 1.15 percent in January.
Although rising rates reflect growing inflation worries, the Federal Reserve (Fed) voted to keep interest rates steady at its January meeting. This was Janet Yellen’s last meeting as Fed chair; Jerome Powell is scheduled to be sworn in as the next chair this month. Meanwhile, the market continues to expect a rate hike in March, with further hikes later in the year.
High-yield bonds, which are typically less dependent on changes in interest rates, had a better start to the year. The Bloomberg Barclays U.S. Corporate High Yield Index managed a gain of 0.60 percent in January. Valuation levels for high-yield bonds remained near post-recession highs.
The economy keeps getting better
Like the markets, the economy started 2018 in good shape. Growth continued, and consumer and business confidence remained high. The first estimate of gross domestic product (GDP) growth for the fourth quarter of 2017 came in at 2.6 percent. Although this was slightly below expectations, seasonal factors likely contributed to this miss, and the surge in imports appears unsustainable. In fact, strong spending and confidence levels indicate that growth could well accelerate in 2018.
Business investment is poised to be one drive of that acceleration. Corporate confidence remains quite strong, holding near multiyear highs. The Institute for Supply Management’s Manufacturing and Nonmanufacturing indices both retreated slightly from December highs, but they remain in healthy expansionary territory. In fact, at its current level, the Manufacturing index has historically pointed to GDP growth of 4 percent or more. Given the recent tailwinds from tax reform and the weaker dollar, it is not surprising that businesses are feeling confident, but it is still good to see.
Of course, high levels of confidence alone are not enough to increase growth; we need to see hard spending figures as well. Businesses are walking the walk as well as talking the talk. Durable goods orders increased by 2.9 percent in December, against expectations for more modest 0.9-percent growth. This is the highest month-over-month growth level in six months. The November figure was revised upward as well.
Industrial production and manufacturing output also grew in the fourth quarter. Despite lower-than-expected growth in December, manufacturing still had the strongest fourth quarter in seven years. The weaker dollar likely played a large part in supporting manufacturers. As you can see in Figure 1, the trade-weighted value of the dollar has declined nearly 7 percent on a year-over-year basis versus major currencies. This boosts manufacturers and exporters, as U.S.-made goods become more competitive around the world.
Figure 1. Trade-Weighted Exchange Value of the U.S. Dollar, Year-Over-Year Change
Consumers also confident—and spending
January was a very good month for consumers as well, as confidence and spending both beat expectations. The Conference Board’s measure of consumer confidence increased by more than expected during the month and sits at levels consistent with strong consumption growth.
On the spending side, both headline and core retail sales figures had another strong month. Personal spending data also came in stronger than expected—growing 3.8 percent, annualized, in the fourth quarter. Consumer spending accounts for roughly 70 percent of GDP, so growth at this level is something we need to see.
Although consumers did well in general, one important sector of the economy slowed down. Housing, which has been a major driver of the expansion, slowed across the board in January. Homebuilder confidence pulled back from previous multidecade highs, while housing starts and permits both decreased as rising construction costs and lack of labor put a damper on new development. Buyers also stepped back, as existing and new home sales declined from previous months. Given the previous strength in the housing sector, this slowdown may prove to be a temporary speed bump. As affordability declines, however, this remains a sector to watch.
Finally, on a more positive note, the January jobs report came in better than expected. The U.S. added 200,000 jobs against expectations for a more modest 183,000. December’s headline figure was also revised upward. The underlying data was solid as well: Annual wage growth increased to 2.9 percent, and the unemployment rate stayed at 4.1 percent. This bump in wage growth was very positive, as the tight labor market has so far failed to produce meaningful wage increases. Given the low unemployment rate and the large number of open positions, this could be the year that wage growth finally takes off.
Political risks persist
While the economic picture appears quite healthy, political developments could rattle markets. The most pressing is the ongoing need to pass a long-term federal funding bill to avoid a potentially lengthy government shutdown. The brief shutdown in January was proof that politicians are willing to use this issue as leverage for their respective platforms. So, the next vote in February remains a concern. Given the high level of political confrontation, there is a real possibility that this situation could get worse than anyone now expects—making this the story to watch.
International risks, though not gone, have pulled back a bit. With the Olympics scheduled to begin in South Korea, and a delegation of North Korean athletes expected to compete, this may be a chance for further diplomatic efforts to resolve tensions in the region. In Europe, there seems to be real progress in the German governmental negotiations. Meanwhile, the pending Italian elections are looking to be less of a concern than had been feared. With that said, there is still the potential for volatility if any negative developments occur.
Foundation in place for a strong year
Despite the brief government shutdown, markets had a great start to the year, cushioned by a strong economy. As we look toward the rest of the year, we seem to be well positioned for growth. The positive economic data and improving earnings situation should provide a strong tailwind to help weather potential short-term turbulence.
Risks certainly exist, but many of the most pressing concerns appear to have moderated. As always, though, a well-diversified portfolio that aligns with your time horizon can be the best way to achieve financial goals.
Co-authored by Brad McMillan, senior vice president, chief investment officer, and Sam Millette, investment research associate, at Commonwealth Financial Network®.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
Able Accounts: Frequently asked questions
Learn the answers to some commonly asked questions about ABLE accounts…
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ABLE accounts, also known as 529A or 529 ABLE accounts, were established as part of the Achieving a Better Life Experience Act of 2014. This act created these tax-advantaged accounts for people with disabilities under section 529A of the Internal Revenue Code. But who is eligible to establish an ABLE account, and what are the advantages? We’ll answer these frequently asked questions and more in this in-depth look at ABLE accounts.
Who is eligible?
Eligibility to establish an ABLE account is limited to individuals living with significant disabilities and whose disability onset began before age 26. (Note, this does not mean a person must be younger than 26 to be eligible.) Those who meet these criteria and are already receiving benefits under Supplemental Security Income (SSI) and/or Social Security Disability Insurance (SSDI) are automatically eligible to establish an ABLE account. Those who meet these criteria but are not receiving benefits under SSI and/or SSDI must first obtain a disability certification from a doctor. Here, it is important to keep in mind that ABLE accounts are owned by the disabled individual, but contributions can be made by the beneficiaries, their family, and their friends.
How does an ABLE account affect government benefits?
For individuals with disabilities and their families, these accounts are valuable because they allow for saving without jeopardizing eligibility for government benefits. Without an ABLE account, a disabled person cannot earn more than $700 per month or have more than $2,000 in savings or other assets in order to remain eligible for Medicaid health coverage or SSI. With an ABLE account, on the other hand, a balance of up to $100,000 can accrue before federal benefits are affected, allowing disabled people to save for the future and use the funds for a range of needs.
Is there a contribution limit?
For 2018, the annual contribution limit for an ABLE account is $15,000 (the amount of the annual gift tax exclusion). This figure may be adjusted periodically to account for inflation. Many states have set total contribution limits of $300,000; however, if a person’s ABLE account balance exceeds $100,000, his or her SSI cash benefit will be suspended until the account balance falls below $100,000. The ability to receive or be eligible to receive medical assistance through Medicaid is not affected by the individual’s account balance. The Tax Cuts and Jobs Act of 2017 (TCJA) made one minor but significant change to ABLE accounts. The TCJA permits tax-free rollovers of funds between 529 and ABLE accounts for the benefit of the same beneficiary or a family member of the beneficiary. The $15,000 contribution limit still applies, so a maximum of $15,000 can be rolled over from a 529 to an ABLE account in 2018.
How can ABLE accounts be used?
Similar to a 529 plan for college, contributions to an ABLE account can grow and be spent tax free on qualified disability expenses for the designated beneficiary. These include any expense related to the designated beneficiary as a result of living a life with disabilities, such as:
- Employment training and support
- Assistive technology
- Personal support services
- Health care expenses
- Financial management and administrative services
- Other expenses that help improve health, independence, and/or quality of life
What are the ABLE account options?
Like state 529 college savings plans, ABLE accounts are not limited by the state of residency—although investment options and expenses can vary by state. Eligible individuals are free to enroll in any state’s program provided that the program accepts out-of-state residents. Some states provide residents with a state income tax deduction on contributions made to ABLE accounts opened in that state, although all contributions are made with after-tax dollars. Further, some states offer debit card/purchasing cards, which can make it easier to use ABLE account assets for qualified expenses. To compare state plans, we recommend you check out the ABLE National Resource Center website (http://ablenrc.org/state_compare).
What is the difference between an ABLE account and a special needs trust?
The biggest difference between an ABLE account and a special needs trust is tax efficiency. With an ABLE account, income and distributions are tax free if used for qualified disability expenses, whereas special needs trusts are subject to trust tax rates for any and all income that is not paid out to trust beneficiaries each year. ABLE accounts are also far cheaper to establish and easier to administer than special needs trusts. Plus, they offer a greater level of control and flexibility. Special needs trusts do offer advantages in several key areas, however. Most important, they allow unlimited funds to be set aside for the benefit of a disabled individual without affecting federal benefits. ABLE accounts can shield only $100,000 before SSI benefits are turned off. Qualified disability expenses from an ABLE account are very broadly defined, but a special needs trust drafted with the appropriate language can be used for an even wider array of expenses. Last but not least, a properly established and implemented special needs trust can pass leftover trust assets to the disabled individual’s beneficiaries, whereas money left in an ABLE account at the time of this individual’s death will be subject to Medicaid payback and will likely be exhausted. Given these advantages, it is no wonder that special needs trusts have long been the most popular way to support a disabled individual without jeopardizing his or her federal benefits. Despite the benefits of ABLE accounts, the relatively low contribution limits mean ABLE accounts are unlikely to fully meet the needs of disabled individuals. As such, families with the means to do so should still consider creating special needs trusts, although ABLE accounts can be used in conjunction to maximize savings and benefits.
Interested in learning more?
For more information on ABLE accounts and to compare plans, be sure to visit the ABLE National Resource Center website (www.ablenrc.org). Of course, our team is happy to answer any further questions you may have regarding ABLE accounts. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. © 2018 Commonwealth Financial Network®
Tax season starts January 29th (CNBC)
Gavin Morrissey shares his thoughts on getting ready for the upcoming tax season…
Entrepreneurs: Grab these last minute tax breaks while you still can (CNBC)
Gavin Morrissey comments on tax options for business owners.
Red Flag Time: Your Broker Offers a Can’t-Miss Sales Opportunity (New York Times)
Gavin Morrissey was interviewed by The New York Times on what is in the best interest of clients and how to better manage this process.
Jagger’s Changing Diapers at 72. How to manage that (CNBC)
FSA’s newest partner, Gavin Morrissey, was interviewed by CNBC regarding some of the planning issues that accompany having a child at a later stage in life.
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Investment advisory services may be offered through Commonwealth Financial Network, a Registered Investment Adviser, and/or FSA Wealth Management, a Registered investment adviser. Commonwealth Financial Network and FSA Wealth Management are separate and unrelated entities.