Month: June 2023

What is truly important to you in life? Is it the welfare and security of your loved ones? Is it the ability to provide for your family, even in times of uncertainty? Your response to these questions sheds light on the essential role insurance can play in our lives.

Insurance isn’t just a box to check off your to-do list; it’s a crucial risk management tool that protects your most valuable assets — your health, your home, your car, and ultimately, your family’s financial well being. To help you navigate the often-complex world of insurance, we’ll discuss some different types of insurance and how much coverage you may need.

Covering the Bases

As you determine your insurance needs, here are a handful of the most fundamental forms of coverage to account for in your financial plan. From auto and homeowner’s insurance to disability and long-term care, these can help mitigate the financial impact of unexpected life events on your family and loved ones.

Auto Insurance

If you own a car, auto insurance is a must. In addition to being a legal requirement in  most jurisdictions, the right policy can safeguard you from financial burdens that may result from an accident or theft.

How much auto insurance you need and how much is required by law are two different questions. While the required minimums vary by state, it’s often recommended that you follow a standard 100/300/100 structure. This entails $100,000 of personal injury protection, $300,000 of total accident injury protection, and $100,000 of property protection. Your individual auto insurance needs may differ based on your circumstances and driving habits.

Homeowner’s or Renter’s Insurance

Homeowner’s insurance protects what’s likely your most valuable financial asset: your home. It covers damages to the structure of your home and the personal property within it, while simultaneously providing liability coverage for accidents that happen on your property. Without sufficient coverage, you risk financial hardship from unexpected events like fires, natural disasters, or legal liability, which may jeopardize your home and financial stability.

Renter’s insurance, on the other hand, does not provide coverage for the physical building you live in. This is the responsibility of your landlord, who should have their own insurance policy for the property. Instead, renter’s insurance covers your personal belongings, liability for accidents that occur within the rented premises, and sometimes living expenses if the rented space becomes uninhabitable due to a covered event.

For homeowners, consider a policy that covers the cost of rebuilding your home at current construction costs, not its real estate value. Renters, who won’t require as much coverage, should seek a policy that covers the replacement cost of personal
possessions.

Health Insurance

As healthcare expenses continue to rise, having a health insurance plan that covers a broad range of services, including hospitalization, prescription drugs, and preventive care can help shield your loved ones from potentially-burdensome medical bills. Your individual coverage needs will depend on factors like age, health status, family medical history, lifestyle choices, and those of your dependents. Balance the cost of premiums with your out-of-pocket exposure. Higher-deductible plans often have lower premiums but can leave you with high costs when you need care. At a minimum, look for a policy that protects against catastrophic health-related expenses that could jeopardize your financial stability.

Disability Insurance

Disability insurance helps you maintain your standard of living should an accident or disability render you unable to work. It replaces a portion of your income to alleviate some of the burden imposed by day-to-day expenses during challenging times for you and your family.

Disability insurance policies are broadly separated into two categories: short-term disability and long-term disability. The former provides temporary relief, usually for a period of up to six months, while the latter provides coverage for extended periods, often lasting for years or until your retirement date. The recommended coverage is usually around 60-70% of your income, although specific needs may vary based on your lifestyle, the needs of your family, and your existing financial obligations.

Life Insurance

Life insurance provides financial support to your loved ones upon your passing or incapacitation. This is particularly important if your family or other dependents rely significantly on your income. Life insurance can be used to cover outstanding debts, pay for your funeral, and even provide a living allowance for your loved ones. This support can help ease what’s bound to be a difficult transition for those you care about.

Universal life insurance provides coverage that lasts until the time of your death or incapacitation. These policies often include a cash value component that can grow over time and that you can tap into when needed. Term life insurance, by contrast, lasts for a finite period (typically between 10 and 30 years) but may entail lower premiums. For coverage, a common guideline is to carry 10-15 times your annual income, but your needs are likely to evolve over time. That’s why it’s essential to periodically review your life insurance coverage as your circumstances change.

Going a Step Further

These forms of insurance can serve as a safety net for your family in several key areas, but the list above is far from exhaustive. If you’ve already addressed the basics and are looking to add another layer of protection, these are some other options you may consider.

Supplemental Health Insurance

As the name implies, this is an addition to your primary health insurance that aims to fill gaps in your existing coverage. It can cover out-of-pocket expenses that your regular health insurance doesn’t cover, such as copayments, deductibles, and coinsurance. Some policies may also provide wage relief should an extended hospital stay or illness render you temporarily unable to work.

Long-Term Care

A long-term care policy can provide coverage for services that aren’t typically covered by regular health insurance, Medicare, or Medicaid. This includes assistance with daily activities over a prolonged period due to chronic illness, disability, or old age. It covers often-costly services such as in-home care, nursing homes, and assisted living facilities.

Umbrella Policy

This form of insurance provides additional liability coverage beyond your auto and homeowner’s insurance. It kicks in when the liability limits on these policies have been exhausted. You might consider carrying an umbrella policy if your net worth exceeds the liability limits on your car or home insurance.

Assessing Your Insurance Needs

Insurance is a risk management tool that safeguards your family’s interests and lays a secure foundation for your financial plan. To gain a comprehensive understanding of the different types of insurance and how they cater to your specific needs, consider consulting a financial advisor. They will help you understand the complexities of insurance coverage and guide you in making informed decisions. After all, the peace of mind that comes with knowing you are adequately insured is invaluable.

Best, 

Robert (Rory) J. O’Hara III, CFP®, CRPC®

Founder | Senior Managing Partner

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

A 1031 exchange – frequently referred to as a “like-kind” exchange – is a tax-management strategy that allows real estate investors to defer capital gains taxes on the sale of a property by reinvesting the proceeds into a new property of the same type. These exchanges can be powerful tools, but there are some rules and other considerations investors should be aware of before implementing a 1031. This guide outlines what a 1031 exchange is, what the benefits may be, and what requirements must be met in order to unlock those benefits.

Potential Benefits of a 1031 Exchange

The primary benefit of using a 1031 exchange is the potential for tax savings. Typically, when an investment asset is sold and a gain is realized, you incur a capital gains tax for the year in which the sale was made. If you hold the asset for more than a year before selling, capital gains taxes can be as high as 20% depending on your income. If you hold it for less than a year, the IRS treats it as a “short-term” capital gain and taxes it as ordinary income, which may be higher than 20%. By allowing you to defer this tax obligation, a 1031 exchange may help you lower your total tax burden in the near term and free up capital for reinvestment. Here are some of the ways deferring capital gains taxes with a 1031 exchange may benefit you:

Tax-Deferred Growth. By allowing you to reinvest the proceeds from one investment property into another one without paying taxes on the gain, 1031 exchanges afford you the potential for tax-deferred growth. Deferring your taxes means you can reinvest a larger portion of your proceeds and possibly grow your portfolio faster. The tax burden from this sale is deferred until the sale of the new investment property, at which point you may be able to use another 1031 exchange.

Diversification. A 1031 exchange can be a tax-efficient method of diversifying your real estate holdings. By allowing you to exchange one investment property for another, you can move from one geographic area to another or swap a property out for one with better growth or income-generation prospects. Diversification can provide multiple benefits, such as managing risk, increasing cash flow, and bolstering long term returns.

Estate Planning. When an investor dies, the cost basis of their property is “stepped-up” to its market value at their time of death. By using a 1031 exchange, you may be able to pass on a larger real estate portfolio to your heirs on a stepped-up basis, possibly reducing the tax liability they’ll ultimately be burdened with. Your heirs may also be able to take advantage of further tax deferral if they choose to sell the property in the future.

Types of 1031 Exchanges

A 1031 exchange can work in a handful of different ways depending on the circumstances of the property sale and property acquisition. The most common types include:

Simultaneous Exchange. The most straightforward type of 1031 exchange, a simultaneous exchange refers to when the sale of the old property and the purchase of the new property occur on the same day.

Delayed Exchange. More common than simultaneous exchanges, a delayed exchange refers to when the sale of the relinquished property occurs before the purchase of the replacement property.

Reverse Exchange. In a reverse exchange, the investor acquires the replacement property before selling the relinquished property. This type of exchange is more complex and may require the use of an exchange accommodation titleholder (EAT) who holds the property until the sale of the relinquished property is complete.

Improvement Exchange. Also known as a construction exchange, an improvement exchange allows an investor to use some of the exchange proceeds to make improvements to the replacement property.

Requirements for a 1031 Exchange

There are a number of requirements that investors must meet in order to qualify for a 1031 exchange, including:

Like-Kind Property. The property being sold and the property being purchased must be of “like-kind” according to the IRS. For example, a rental property can only be exchanged for another rental property, and a commercial property can only be exchanged for another commercial property. If you were to exchange a rental property for a commercial property, you wouldn’t be afforded the benefits of a 1031 exchange.

Investment Property. Both of the properties involved in the exchange must be investment properties, not personal residences or vacation homes. This means they must be held for business or investment purposes, such as earning rental income or appreciating over time.

Qualified Intermediary. Investors must use a qualified intermediary (QI) to facilitate the exchange. The QI holds the funds from the sale of the relinquished property and uses them to purchase the replacement property.

Time Limits. Starting from the date of sale, you have 45 days to identify replacement properties and 180 days to complete the purchase of one or more of those properties.

Interested in a 1031 Exchange?

A 1031 exchange may be a useful tool for real estate investors looking to defer the capital gains taxes associated with the sale of an investment property. While there are requirements that must be met, the benefits of this strategy can make it well worth the effort. As with any investment decision, think about consulting with a qualified professional who can help you determine whether a 1031 exchange makes sense within the context of your financial plan.

Best,

 

 

Robert (Rory) J. O’Hara III, CFP®, CRPC®

Founder | Senior Managing Partner

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Healthcare is a key consideration within your financial plan, as these expenses can account for a significant portion of your spending. Even if you and your loved ones are in good health now, circumstances can change on dime and it’s difficult to predict what your needs will be down the road. Luckily, there are savings accounts specifically designed to help you cover these expenses, providing certain tax benefits that encourage you to save.

Two popular options are Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). While both aim to help individuals save money for medical expenses, they differ in a number of key aspects. By understanding these distinctions, you can make a more informed decision about which of the two accounts better suits your needs.

How Do These Accounts Work?

Health Savings Accounts (HSAs) are tax-advantaged accounts for individuals with high-deductible health insurance plans that are funded with pre-tax dollars. The funds can be invested, potentially grown over time, and then withdrawn tax-free to pay for qualified medical expenses.

Flexible Spending Accounts (FSAs) are also funded with pre-tax dollars, but they’re typically offered by employers. The money in this account can be used to cover eligible healthcare costs but does not offer the same potential for investment growth.

If you could use a hand determining which option better suits your needs, we outline some of the key differences between these accounts that may bear consideration.

Eligibility

HSAs are only available to those enrolled in high-deductible health plans (HDHPs), so not everyone will be eligible to participate. Because of this requirement, those with more comprehensive health coverage, lower deductibles, or those who lack insurance altogether may not be able to fund an HSA. Conversely, FSAs are typically employer-sponsored and do not require a specific health insurance plan, making them accessible to a wider range of workers.

Rollovers & Contributions

One of the primary advantages of using an HSA over an FSA is that the funds within an HSA roll over from year to year, so the money you contribute to the account remains yours indefinitely. This rollover feature allows you to build a substantial balance over time that can be used to cover future healthcare costs.

FSAs, on the other hand, are subject to a “use it or lose it” policy. This means if you fail to use all of your FSA funds within the plan year, you lose the remaining balance. There are some exceptions, though. Employers have the option to offer a grace period of up to 2.5 months after the end of the plan year for employees to use their remaining FSA funds. Alternatively, they can allow employees to carry over up to $550 of unused funds into the following year. Employers can offer one of these options or neither – they cannot offer both.

HSAs also tend to have higher annual contribution limits than FSAs, allowing you to earmark more funds for healthcare expenses each year. These limits are adjusted each year to comply with IRS guidelines.

Ownership & Portability

HSAs are personally owned, so your account will remain with you even if you change jobs or retire. You can continue growing your account and using the funds within it for qualified medical expenses. Since FSAs are employer-owned, you risk forfeiting the remaining balance of your account when you leave your employer unless you’re eligible for continuation through COBRA. For this reason, HSAs are considered portable while FSAs are not.

Investments

A unique perk of HSAs is the opportunity to invest your funds, potentially growing your account balance over time. Similar to an IRA, 401(k), 529 College Savings Plan, or another tax-advantaged account, you can invest in a variety of securities like stocks, bonds, and mutual funds. This feature can make HSAs useful tools for investment growth, allowing your contributions to appreciate until you need to access them down the road. FSAs owners are not afforded the same investment opportunity.

Tax Benefits

Both accounts offer tax advantages, but the HSA provides a triple tax benefit: contributions are made pre-tax (and therefore entitle you to an income deduction), earnings and growth are tax-free, and withdrawals for eligible expenses are also tax-free. Withdrawals for non-eligible expenses may incur income taxes plus an additional 20% penalty. With FSAs, contributions are pre-tax, and withdrawals for eligible expenses are tax-free.

Another lesser-known benefit of investing in an HSA is you can withdraw funds penalty-free for any reason after turning 65. You will have to pay income taxes on the withdrawal if the funds aren’t used for qualified medical expenses, but you won’t be subject to the 20% penalty. In this way, an HSA can function similarly to a traditional IRA as a retirement savings vehicle.

Conclusion

Both HSAs and FSAs can be valuable tools for managing healthcare expenses and can provide certain tax advantages for saving. An HSA offers more flexibility with higher contribution limits, rollovers, and the ability to invest, but they’re only available to those with high-deductible plans. FSAs, while providing lower contribution limits and a “use it or lose it” structure, are accessible to a wider range of people.

Choosing between an HSA and an FSA depends on your individual circumstances, including your health plan, financial situation, and long-term needs. Understanding these differences can help you make the best decision for your healthcare and financial wellness. Consider speaking with a financial advisor or benefits specialist to get personalized advice.

 Best,

Robert (Rory) J. O’Hara III, CFP®, CRPC®

Founder I Senior Managing Partner

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.