Month: May 2024

Spoiler: The answer is not ‘under your mattress.’

Written by Toni Husbands, Liliana Hall

Edited by Kelly Ernst

Saving for unexpected costs can be just as important as saving for anticipated goals because if you aren’t prepared when life strikes, you might find yourself with high-interest debt. An emergency fund should be a reserve you can fall back on in case you find yourself in a precarious situation. 

Most experts suggest having at least six months’ worth of expenses in an emergency fund, but how much you should have depends on your individual circumstances. That said, where you should keep your emergency fund is less complicated: It should be out of sight and mind until you need it. 

Here are some of the best places to keep your emergency fund — and some places you should avoid. 

Where should you keep your emergency fund?

Experts recommend keeping your emergency fund in an account that’s liquid and easily accessible. It should be completely separate from your primary checking account so you aren’t tempted to use it in a non-emergency.

“If you’re someone who might not have as much discipline, but you’re trying to build that savings muscle, I recommend putting it out of reach, but still within reach in case of an emergency,” said Krystal Todd, a certified public accountant and the creator of The Cash Compass on YouTube and Instagram.

Additionally, you’ll want to keep it in a bank that’s insured by the Federal Deposit Insurance Corporation or with a credit union insured by the National Credit Union Administration. These accounts are federally insured for up to $250,000 per person, per account category.

You also don’t want to tie up your emergency fund with access restrictions or taxable events that are triggered when withdrawing your money. Long-term investment accounts, like retirement funds, can make it difficult or costly — in terms of fees, taxes or penalties — to access your money when needed. “It shouldn’t be invested,” said Jeremy Schneider, founder of the Personal Finance Club. “If it’s invested, it’s not your emergency fund.” 

The best places to keep your emergency fund

You should be able to access your emergency fund quickly if something unexpected pops up, like job loss, a home repair or other hefty expenses. An emergency fund helps you plan ahead so you can address an emergency without turning to high-interest credit cards or expensive payday loans. But while you want it on hand, you don’t want to keep your stash under your mattress — in today’s high-rate environment, that’s leaving money on the table.

High-yield savings account

High-yield savings accounts are interest-earning savings accounts often offered by online banks or online-only branches of larger banks. Without the overhead costs associated with brick-and-mortar branches, these banks can pass savings onto you in the form of higher annual percentage yields, or APYs. The best APYs available on high-yield savings accounts are as high as 5.35%. 

High-yield savings account APYs are variable and can change based on market conditions. However, in this current climate of rising rates on deposit accounts, keeping your emergency savings in an account that earns competitive interest only helps your bottom line.

Traditional savings account

Most financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be very convenient. However, these accounts often pay very little interest on your savings. The national average annual percentage yield for a savings account is only 0.47%, according to the FDIC. Though your primary goal for an emergency fund should be accessibility and not interest growth, you can earn an even better return on your money by opting for a savings account with a higher yield.

Money market account 

A money market account is similar to a high-yield savings account. It offers a higher interest rate than a traditional savings account but provides the accessibility of a checking account. Unlike most savings accounts, MMAs generally offer debit card access and check-writing privileges. If having easy access to your emergency fund means you’ll be tempted to use it for nonemergencies, though, an MMA might not be the best option for you. 

Where should you avoid keeping your emergency fund?

Checking account

Keeping your emergency fund in the same account as the funds you use for everyday finances is a bad idea for two reasons: It’s too accessible, and you aren’t tapping into the interest-earning potential other accounts offer. 

“By leaving funds in your normal checking account, they are more likely to be spent like normal savings and not be saved for emergencies,” said Nicole T. Strbich, managing director of financial planning at Buckingham Advisors.

The national average APY for an interest-bearing checking account is only 0.07%. So your earning potential doesn’t even come close to competing with some of the best high-yield savings accounts. 

Certificate of deposit

A certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time with a predetermined APY. Competitive one-year CDs, for example, can earn as much as 5.4% APY, which is higher than the average high-yield savings account. 

While a CD can be a great place to store extra savings, it shouldn’t serve as the primary savings option for your emergency fund. That’s because if you need to withdraw your funds before the CD term ends, you’ll pay an early withdrawal penalty (typically equal to a portion of the interest earned). Some more flexible CD types, like no-penalty CDs, could be better options but currently earn less interest than high-yield savings accounts.

Series I savings bond

Series I bonds are connected to the inflation rate. This savings option was all over the news in 2022 due to its record 9.62% interest rate. The current rate for the next six months is 5.27%. The interest rates for I bonds change twice a year, in May and November, so you can lock in this rate for the next six months if you open one before May 1, 2024.

Savings bonds are considered one of the safest investments, but they’re not the best place to store your entire emergency fund. You need to hold them for at least a year, and if you redeem them before five years, you’ll lose out on the previous three months of interest.

In your home

It’s never a good idea to keep money under your mattress or in your sock drawer because you’re missing out on two important things: insurance and the potential to earn interest. FDIC-insured banks and NCUA-insured credit unions protect your deposit for up to $250,000 per person, per account. If anything were to happen to your home, you wouldn’t have any way of getting your money back. Plus, you can’t earn a competitive yield when your cash is parked next to your favorite pair of socks.

The bottom line

Whether you’re just developing a strategy to build your savings or you have enough saved to float a year’s worth of expenses, selecting the best place to keep your money is a crucial decision. Keep your money close enough to access in an emergency, but far enough away to resist the temptation to dip into it.

This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.

Source: https://www.cnet.com/personal-finance/banking/advice/where-should-you-keep-your-emergency-fund/

Published Tue, Apr 23 202411:08 AM EDT

Cheyenne DeVon

If you’re in your 40s and have over $40,000 saved for retirement, you’re ahead of most people in your age bracket. However, you may need to take some proactive steps in order to retire comfortably.

The median 401(k) balance for Americans ages 40 to 49 is $38,600 as of the fourth quarter of 2023, according to data from Fidelity Investments, the nation’s largest 401(k) provider. That means half of account holders in this age range have savings above this balance and half have savings below it.

Here’s how much Americans have in their 401(k)s by age, according to Fidelity.

For people in their 40s who hope to retire in their 60s, retirement is edging closer each year. However, they’re likely a long way off from their savings goals.

By the time you reach your 40s, you should aim to have three times your salary saved for retirement, according to Fidelity’s guidelines. If you earn $80,000 annually, you’d ideally have $240,000 saved for your post-work years.

Why Americans in their 40s haven’t been able to save more

Various factors have gotten in the way of this age cohort’s ability to boost their retirement contributions.

For one, when many people in their 40s were beginning their careers, they didn’t get a chance to benefit from reforms to the tax system, such as auto-enrollment, which automatically enrolls you into your employer’s 401(k) plan, and auto-escalation, which automatically ups your savings rate by a given percentage or dollar amount annually, says Anne Lester, a retirement expert and author of “Your Best Financial Life: Save Smart Now for the Future You Want.”

“They were not the beneficiaries of all of the reforms that have happened in the 401(k) system in the last 15 years,” she tells CNBC Make It. “Many Gen Xers have changed jobs, and maybe they’re now contributing, but they missed out on saving in those early years if they didn’t sign up themselves.”

On top of that, many people in their 40s may find themselves in the “sandwich generation,” covering expenses related to both child care and taking care of aging parents.

“It just takes a huge bite out of your wallet,” Lester says. “I think as people are inevitably allocating scarce and finite resources, you may find yourself contributing less than you should.”

How people in their 40s can boost their retirement savings

If you’re in your 40s and your retirement savings aren’t where you’d like them to be, there are a couple of ways to get on track.

First, gain a clear understanding of where your retirement savings stand and what factors are within your control. Despite your contributions, your overall account balance can be impacted by things such as market volatility.

On the other hand, your savings rate, which is the percentage of your income you allocate toward your retirement investment accounts, is within your control.

That’s why you should make sure you’re contributing enough to get your company’s full match, if available. Fidelity recommends aiming for a savings rate of 15%, including any employer match.

If you’re behind on your retirement savings, you may need to make some short-term sacrifices so that you can contribute even more in order to make up for any missed years, Lester says.

“I’m not saying it’s going to be easy,” she says. “If you’re in your 40s and have saved zero for retirement, you may be looking at a savings rate of 30-plus percent.”

But this doesn’t have to be done all at once. You can use features like auto-escalation to increase your retirement savings rate by a few percentage points each year until you reach your goal.

Additionally, as expenses related to things like caring for young children decrease, you can allocate that money toward your retirement.

“Those expenses will drop off at some point and then you’ve got to redirect that money into savings,” Lester says. “Mentally plan for that now so that you’re not feeling poor or deprived when you get that a little bit of extra money.”

Source: https://www.cnbc.com/2024/04/23/fidelity-how-much-money-americans-in-their-40s-have-in-their-401ks.html

Bonds can be more complex than stocks, but it’s not hard to become a knowledgeable fixed-income investor.

BY ANNE KATES SMITH, DAN BURROWS

When it comes to bond investing, there’s a lot more to know than the current interest rate on Treasuries.

Bonds have two primary roles: income – whether taxable or tax-free – and portfolio diversification. Much of the time, when stocks or other investments struggle, bonds hold their value.

Read on to learn some key concepts every bond investor should know.

1. It’s all about interest rates

The Federal Reserve has raised interest rates by more than 5 percentage points over the past two years. Why is this important to investors in bonds?

Bond prices certainly are linked to interest rates, but inversely. When interest rates overall are on the rise, older, lower-yielding bonds become devalued. Conversely, falling rates raise the value of older issues with higher coupon rates.

So remember this like it’s your mantra:

• When interest rates rise, bond prices fall.
• When interest rates fall, bond prices rise.

Rinse, wash, repeat.

2. What does ‘duration’ mean?

To dispel with some misconceptions, “duration” is not a rough estimate of how long it will take to reach your investing goal. Neither is it the number of years a bond issuer has gone without a negative credit event. And it doesn’t refer to the number of years before the borrower has to return your principal.

Rather, it’s a measure of a bond’s interest rate sensitivity. As a general rule, for every 1% increase or decrease in interest rates, a bond’s price will change approximately 1% in the opposite direction for every year of duration. 

Duration – roughly related to a bond’s maturity, or the average maturity of the bonds in a fund’s portfolio – tells you approximately how much the price of a bond, or a fund’s net asset value, would fall or rise depending on the direction of interest rates. A duration of 5.5, for example, implies that a fund’s share price would fall roughly 5.5% if market rates rise one percentage point over a 12-month period.

3. What’s the single biggest risk to bond returns?

A rising stock market that attracts investment assets at the expense of bonds or a growing government budget deficit can hurt returns on bonds, but nothing cripples them like the “I” word.

Indeed, nothing is as pernicious to a lender than inflation, which represents a double-whammy for bondholders.

After all, inflation both devalues the real worth of future interest payments and usually results in higher interest rates that detract from a bond’s current market value.

Recession talk makes bond investors nervous for good reason. Corporate bonds are at increased risk of default when the economy is contracting. It turn, that keeps a lid on bond prices.

4. What is an inverted yield curve?

Nothing gets recession talk started like an inverted yield curve.

A wild and volatile bond market, also known as an upside-down bond market, isn’t nearly as worrisome. It’s also not good when Treasury securities pay higher interest rates than corporate bonds or mortgages with the same maturity.

But an inverted yield curve is worse. When short-term Treasury notes pay a higher interest rate than long-term government notes and bonds, there be monsters ahead.

Inverted yield curves are usually taken as a warning that the economy is slowing and might go into a recession. Longer-dated maturities typically yield more than shorter ones; when that relationship reverses, it could be because investors foresee lower interest rates as the economy slows along with borrowing demand.

However, there are exceptions, and an inverted yield curve doesn’t always spell disaster.

5. What is the highest rating a bond can have?

The two most important agencies that rate the creditworthiness of bond issues are Moody’s and Standard & Poor’s.

The highest credit score for borrowers – be they companies or countries – is AAA. Both agencies use the same designation when it comes to the very best, most reliable debtors.

AAA ratings are precious and hard to earn. The government of Canada gets one. Pharmaceutical giant Johnson & Johnson also has a AAA rating. Amazon, however, even with its massive war chest and firehouse of free cash flow, gets a rating of A1 from Moody’s and S&P rates Amazon at AA-.

Famously, the U.S. lost its top-notch rating from Standard & Poor’s when the rating agency downgraded Uncle Sam to AA+ in August 2011, citing a high level of debt and weakened “effectiveness, stability and predictability of American policymaking” with regard to the debt load.

6. What is a bond’s yield to maturity?

Don’t mistake this for the interest rate on the bond when it is issued, or the interest rate the bond pays between now and the date it is scheduled to mature.

Yield to maturity is the total return, including a gain or loss in the bond’s price, that you can expect if you buy the bond today and keep it until it matures.

Rather, it’s a total return calculation.

Although the word “yield” is in the phrase “yield to maturity,” the figure also includes the future gain or loss in the bond’s value to bring it back to par.

7. Where do bondholders rank in case of bankruptcy?

If a company goes out of business and liquidates, bondholders have the first claim on whatever cash becomes available in the bankruptcy.

Anyone who does not own securities but is owed money by the borrower becomes a general creditor. General creditors might include employees, contractors and suppliers. Stockholders are last in line.

Everyone else – including shareholders, bankers with delinquent loans to the business, and the company’s suppliers – must get in line behind the bondholders.

8. What’s the minimum order my broker will sell me?

It’s a misconception that when you buy bonds from your broker, you must order in multiples of $1,000.

In fact, you can buy $25 “baby bond” units, and often those are better and more liquid than bonds with a face value of $1,000. The $25 units are simple to buy because they are listed just like stocks or ETF units.

9. When do low-rated, high-yield bonds do well?

High-yield bonds, also known as junk bonds, can have a legitimate place in a fixed income portfolio.

That’s especially true when the economy is so strong that even weak companies are profitable and paying their debts.

Junk bonds are often seen as more related to stocks than to other bonds, and they tend to do better when the economy is growing swiftly and stocks are rising.

10. What’s the deal with munis?

Municipal bonds are often known as tax-exempt bonds, but that doesn’t mean you always escape income tax on the interest.

Some municipalities issue both tax-free and taxable bonds because some buyers, such as pension funds and foreign investors, would benefit from the higher yield but do not get anything from a tax exemption.

Source: https://www.kiplinger.com/investing/bonds/601094/bonds-10-things-you-need-to-know

Life experience can make individuals more flexible and adaptable. Here are some strategies to bolster your emotional staying power.

By Lisa B. Samalonis

April 25, 2024

Mental Health and Well-Being

Many people over 50 struggle with difficult life experiences, including personal losses, chronic health conditions and/or professional and financial issues, among others. Research shows these challenges often provide wisdom and perspective and help people become more resilient as they age.

“Human struggles are increasing and becoming more debilitating. The pandemic remains in our rearview mirror and has caused a vast majority of Americans to claim their mental health has been negatively affected by a ‘constant stream of crises without a break over the last two years’,” notes Gina Vild, co-author of “The Two Most Important Days: How to Find Your Purpose and Live a Happier, Healthier Life” and a forthcoming book on resilience.

“We all face everyday struggles that affect our state of mind and our health.”

The World Happiness Report, an initiative of the United Nations, reveals that Americans are trending toward gloom with our worst showing since it was first released in 2012. Today Americans rank 19th, above Afghanistan but well below Finland. In addition, Americans struggle with increasing political divisiveness, Vild notes.

As Vild notes, “We all face everyday struggles that affect our state of mind and our health. We experience professional problems, divorce, conflicts in relationships, debt, miscarriage, infertility, relocation, and the death of those we love. It is especially challenging as we age and face a change in our appearance, make peace with dreams that never came to pass, watch our children grow up and leave the nest, and begin to lose neighbors and friends to illness, death and relocation.”

“The point is that no one escapes adversity,” she says.

Yet, because we struggle, we also strengthen our power to rebound. For example, Vild notes that she has personally — and consciously — cultivated this fortitude at different times in her life, most notably when she lost her parents within 72 days of each other when she was in her late 20s.

“Another was when at 59 I discovered through a devastating series of reveals my marriage wasn’t at all what I thought, and I chose to walk away at a time in my life when most are nesting and readying for the later years, comfortable with long cultivated security and familiarity,” she says.

What Is Resiliency?

Resilience is the process and outcome of successfully adapting to difficult or challenging life experiences, especially through mental, emotional and behavioral flexibility and adjustment to external and internal demands, according to the American Psychological Association.

“Resiliency often encompasses experiences of flexibility or adaptability, being able to problem-solve, not letting situations ‘ruffle your feathers’ and maintaining some semblance of optimism despite life’s difficulties and adversities,” explains Cynthia Shaw, licensed clinical psychologist and owner of Authentically Living Psychological Services in New York.

“We may be surprised when we are hit with overwhelming emotions of anxiety, loneliness, self-doubt and sadness.”

“It can be quite challenging to practice this during our midyears, as there are often many changes that can cause disruptions, invite self-doubt and shake our sense of inner peace,” says Shaw. “For example, the midyears is a time when children leave the home, we consider retiring and look toward the future with more questions. We may be experiencing a decline in health, dissatisfaction with what we have or haven’t accomplished in life thus far, and concern for what the latter portion of our lives might look like.”

In addition, the generation of people currently over 50 may be less adept at attending to their mental health. “We may be surprised when we are hit with overwhelming emotions of anxiety, loneliness, self-doubt and sadness. Being less aware of how to cope with such experiences, we may resort to behaviors and activities that are either fleeing or counterintuitive. For example, engaging in ‘retail therapy’ [and possibly spending money we don’t have]. This may lead to even less resiliency as we become frustrated with our current state of being, unsure of how to regain control,” she says.

Older People Cope Better

While older age may bring challenges, it also comes with experience. Recent research by Zhen Cong, PhD, director of the School of Public Health’s Climate and Health Initiative at the University of Alabama Birmingham, found older adults between ages 65 and 74 had better coping appraisals of negative outcomes than did younger adults.

“Older people also are more resilient to financial losses and stressful experiences than are younger adults,” reports Cong, a professor in the Department of Environmental Health Sciences.

Her research looks at why older adults are vulnerable or resilient to disasters. Cong explains that understanding the reasons behind resilience will help communities work together to build a disaster and climate-resilient society in a time with the population aging.

The Effects on Long-Term Mental Health

Physical ailments and chronic conditions play an integral role in resilience and these factors impact long-term mental health. For example, one recent study in the International Journal of Molecular Sciences, concluded that “physical resilience, such as preserved mobility and good physical function, is an important element in attaining high psychological resilience, because it positively influences a sense of self-coherence and self-efficacy, and boosts optimism and feelings of satisfaction with life.”

“Resilience is a learned skill, as necessary, I always say, as learning to tie your shoe and program your remote control.”

In short, if our health is not good and we don’t feel well, it’s hard to be resilient.

How to Cultivate More Resiliency

“Resilience is a learned skill, as necessary, I always say, as learning to tie your shoe and program your remote control. Rather than relying on the crutches of drinking, overeating and sabotaging relationships, we can choose to feel happy again and survive the burden of problems by choosing to thrive,” Vild says.

Here are some tips to put into action:

Forgive Others and Yourself

Suzy Welch, professor of management at the Stern School of Business at New York University defines resilience as grit plus forgiveness. If you are going to be resilient in your life, you have got to be forgiving of people you think have held you back and be forgiving of yourself for not doing something right, she says. “You can’t pick yourself up and try again if you are still holding on to anger and resentment.”

Attend to Self-Care

Self-care does not have come with a big price tag. It means caring for your whole self — what you think and how you feel. Good nutrition and exercise play a role here, too.

“It’s important to allow yourself to experience all emotions, as each emotion plays a function and isn’t objectively negative or positive (even though there are certain emotions we don’t enjoy all that much, like sadness). Creating space for your emotions is only one form of self-care. Additional practices can include spending time in nature, participating in a water aerobics class, joining a knitting group, or going for regular manicures,” explains Shaw.

Cultivate Presence

The benefits of being present to your life are always immense especially when you are grieving a loss or disappointment and trying to heal, says Vild. “You practice acceptance by being present to your life. Consider it a form of self-care that increases mindfulness, improves health, lowers blood pressure, boosts immunity and regulates sleep patterns. Being present also boosts inner calm, increases positive emotions, provides greater clarity, increases creativity and prods patience and tolerance — all factors necessary for resilience,” she explains.

Being present has social perks as well. Presence makes you more receptive to opportunities that will lead to a stronger social network. Things like meditation, tapping and Reiki can help increase your mindfulness, Vild adds.  

“Recognizing that you have choices in life is a definite way of improving resiliency.”

Develop Optimism

“While it’s important to make space for allowing yourself to experience your emotions, to practice resiliency, it can be helpful to invite balance by curating optimism,” Shaw says. “Being able to learn from experiences, practice gratitude, identify learnings from a situation and note the bright side is a sure way to develop resiliency.”

This sometimes means fighting the urge to stay in a negative headspace. “It is difficult to accept aging, physical and cognitive decline and life changes,” she says, but practicing mental flexibility or openness to possibilities in your future and learning to enjoy moments by incorporating mindfulness can make a difference on your outlook.

Seek Support

Friends and family members can offer support during the many changes occurring at this stage of life. Having trusted relationships can aid in building resilience, as well as increasing positive joined activities, Shaw adds.

Counseling from a professional (either in person or virtually) is also an option if more guidance is needed. Many insurance plans include behavioral health services and list affiliated providers on their websites.

Remember to Problem Solve

It is often helpful to remind ourselves of the tough things we have endured.

“When we are feeling stuck in life, it can be tempting to give up hope, surrender to the stuck-ness, and wallow in self-pity and frustration. Recognizing that you have choices in life is a definite way of improving resiliency,” advises Shaw. “Consider your options, make a pro and con list, identify what your values are and make efforts towards choosing and creating your next steps or achieving your next goals.”

Bring Beauty to Your Life

Surround yourself with things you love — flowers, people, art, music or anything that brings you joy. Indulge yourself without guilt, says Vild.

“My girlfriend surrounded her bed with flowering plants after her extensive cancer surgery. Another woman began painting as self-expression. Inhale and digest beauty and positivity,” she says. 

Source: https://www.nextavenue.org/mental-health-fortifying-your-emotional-resiliency/

Story by Ashlea Ebeling 

Death and money aren’t fun subjects to bring up over dinner. Yet families who make time for that awkward chat now can spare deep regrets and potentially millions in lost dollars.

More than $84 trillion in wealth has been, or is set to be, transferred by estates big and small between 2021 and 2045, according to Cerulli Associates. That wave of inheritance has brought a rise in lawsuits and other conflicts over family assets.

Sometimes the arguments are between one child who took care of Mom and another who didn’t. There are also the children from a first marriage who end up disinherited after the second.

Overall, about one-third of Americans say they don’t plan to have the inheritance talk with their family, according to a new study done by financial services company Edward Jones with consulting firm NEXT360 Partners and research firm Morning Consult.

“Shock and uncertainty don’t bode well for heirs,” said Caitlin DiMillo, a client adviser at Spinnaker Trust in Portland, Maine.

It is important for heirs to hear—when all those involved can still sit at the table—from the older generation why things have been put in place a certain way, no matter how uncomfortable they may be, she said.

Stephen Lane, a real-estate broker in Geneva, Ill., regrets not talking to his mother about her will. He’s still stewing about it nearly a decade after her death.

Lane says his mother had told his three daughters that she wanted them to have the family diamond rings, but didn’t put it in writing. The will left everything to her second husband.

His mother, a second-grade teacher who remarried after he and his older brother were grown, showed them where her will was stashed, but they didn’t push to see it.

“We probably should have pressed harder and said, ‘Show us the document, Mom. Is what you want done going to be done the way you want it done?’” said Lane, 62.

Blended families are a growing source of conflict in estate fights, and it is especially important for them to talk about wealth transfer, said Lena Haas, head of wealth management advice and solutions at Edward Jones. Resentment is common, no matter how assets are split among children from different marriages.

“This is not a one and done conversation. Family dynamics are constantly changing,” she said.

You can’t count on a new spouse to take care of your kids from your first marriage, but you can set up a trust or provisions in your will, and title accounts and real estate, to do so.

Adult children and their parents say they have found different ways to bring up the hard questions. Some start the conversations decades in advance.

Talk early and often

Once parents feel their children are mature enough, it is time to start the talk, said Stephen DeFilippis, an enrolled agent and wealth manager in Wheaton, Ill. DeFilippis’s son, Troy DeFilippis, a 29-year-old financial adviser who works with his father, says his dad opened the books for him when he was 23 and joined the firm. He and his dad have a succession plan for their business, and he has talked to his mom and his sister about what they would get when his father dies.

“I know what he wants to leave this world with us getting. It helps me plan,” he said.

The topics to cover go beyond just dollar amounts, financial advisers said. The discussion can also address caregiving, charity and educational costs.

Many families avoid the discussion until a health scare or other life event makes it urgent and even more stressful.

Rebecca Shoval, director of operations for her family’s real-estate investment office, said her parents had included her in wealth transfer talks since they sold their insurance business and started diversifying. When her dad, then 72, was suddenly hospitalized during the pandemic, she and their estate planner were able to ensure everything was in order.

“As people age, it can take on a haunting air to talk about these things,” she said.

Time and place

Thanksgiving dinner, with its attendant tensions, is not the best choice for many families, said Joseph Coughlin, director of the Massachusetts Institute of Technology AgeLab and senior adviser to Next360 Partners.

“This is a conversation, not a confrontation,” Coughlin said.

Families who live far apart don’t always have a choice. Ann Herring, a director of executive education in Chicago, says the wealth transfer talk with her 94-year-old father who lives in Michigan has been ongoing for decades, in the form of an annual review during holiday visits. When her mother got Alzheimer’s, he made Herring power of attorney for both of them.

Now Herring is administering her late mother’s estate, and the talk with her father continued this Christmas. He shared revised passwords, and they broached the trickier subject of lifetime gifts to the family. Talking in person “makes it more friendly to try to not make it feel like a business transaction,” Herring said.

Giving while living

One way to avoid surprises: Give heirs all or part of their inheritance while you are still alive.

Doug Fogwell, a retired marketing executive in Winfield, Ill., says that once his parents were up in years, they sat down with him and his two sisters.

His parents chose to take him and his sisters, spouses and later grandchildren, on 23 all-expenses-paid trips, from camping in Indiana to snorkeling in Tahiti.

“They joked: ‘We’re just spending your inheritance,’” he said.

This is becoming more common. About 68% of people in the decade before retirement said they would prefer to distribute inheritance money before they die, the Edward Jones study found.

Fogwell’s father died in 2014, and there won’t be a lot to pass along after his mother, now 94, dies, Fogwell said. But he and his siblings have those memories and a family tradition of togetherness.

“It is a great legacy that they established that we’re passing on to our kids as well,” Fogwell said.

Write to Ashlea Ebeling at [email protected]

Source: https://www.msn.com/en-us/money/personalfinance/hash-out-the-inheritance-now-or-fight-your-family-later/ar-BB1lbX3J

Here are some basics to know about required minimum distributions and how RMDs can impact your taxes.

BY KELLEY R. TAYLOR

LAST UPDATED APRIL 2, 2024

It is important to have a good grasp of required minimum distribution (RMD) rules and the tax implications that come with them. That can help you manage your tax obligations effectively in retirement. 

To get started, here is an overview of some core RMD concepts. 

Of course, if you need more detailed information, it’s best to seek guidance from a qualified financial advisor or tax professional.

What are required minimum distributions (RMDs)? 

A required minimum distribution is money that must be taken out of a retirement savings plan. More specifically, RMDs are the minimum amounts that must come out of given retirement plan accounts each year once the account holder reaches a certain age.

RMDs, calculated based on a formula described below, are generally designed to ensure that retirees gradually draw down their retirement savings and pay taxes on the funds as they withdraw them. 

Key points:

• Due to the SECURE 2.0 Act, the RMD age rose from 72 to 73 in 2023 and will rise again to 75 in 2033. 
• RMD rules generally apply to employer-sponsored retirement plans such as traditional IRAs, 401(k)s, 403(b)s, and 457(b) plans. 
• The IRS says the RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. 
• Inherited IRAs may be subject to different rules.

RMD Deadlines

RMD Age: When are RMDs due?

According to the IRS, April 1 is a key RMD deadline for some older adults receiving their first required distribution from an IRA, 401(k), or similar retirement plan. 

That’s because the first RMD is due by April 1 of the year following the calendar year in which you reach age 73, if you reach 72 after Dec. 31, 2022. Subsequent RMDs generally have to be made by Dec. 31. 

If you miss an RMD deadline or fail to pay the minimum amount, you may be subject to an IRS penalty (more on that below).

Note: Taking two RMDs in one year can have important tax implications.
Those distributions could push you into a higher tax bracket, meaning a larger portion of your Social Security income could be subject to taxes. You could also end up paying more for Medicare Part B or Part D premiums.

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How to calculate RMDs

Calculating 2024 RMD

RMDs are calculated based on life expectancy tables provided by the IRS and the retirement account’s value. To calculate your RMD, you divide the value of each retirement account at the end of the previous year by the IRS distribution period based on your age when you take the RMD.

• The account balance used for the RMD calculation is typically determined by the fair market value of all retirement accounts on Dec. 31st of the previous year.
• The distribution period for RMDs is determined based on the account owner’s age and life expectancy, as provided in the IRS tables.

Chris Gullotti, financial advisor and partner at Canby Financial Advisors, provides an example of how this works. “Say your IRA was worth $500,000 at the end of 2023, and you were taking your first RMD at age 73 [that] year. Your distribution amount would be $18,868 ($500,000 divided by 26.5).”

For more information, see Gullotti’s article for Kiplinger: What You Need to Know About Calculating RMDs for 2024.

How RMDs are Taxed

How required minimum distributions are taxed

RMDs are taxed as ordinary income and can push retirees into higher federal income tax brackets, which can increase the overall tax burden. As a result, you should plan distributions strategically to help minimize tax liabilities.

Note: To have an effective tax plan for retirement, it’s also important to know how the IRS taxes other types of retirement income. 

For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable. Additionally, earned income in states with no income tax isn’t subject to tax at the state level. 

Still, your tax planning should consider the tax treatment of income from annuities, pensions, and Social Security benefits. You will also want to assess tax liability from various investments, earnings, and proceeds.

Special RMD rules

Other RMD considerations

Inherited IRAs may have different RMD rules and timelines depending on the beneficiary’s relationship to the original account holder. 

• Also, Roth IRAs are not subject to RMD requirements during the account owner’s lifetime but may be subject to RMDs for some beneficiaries.
• As of 2024, RMDs are not required from designated Roth accounts.

IRS RMD delays: The IRS delayed the final rules governing inherited IRA RMDs — to 2025. As a result, some beneficiaries of inherited IRAs had more time to adapt to distribution requirements. The IRS will waive penalties for RMDs missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to RMDs. 

With previously granted relief, the IRS waived penalties for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023. For more information on the IRS RMD delays, see Another IRS RMD Delay.

RMD Penalties

Penalty for not taking RMD

Failing to take RMDs on time or in the correct amount can result in substantial IRS tax penalties. RMD penalties are calculated based on the shortfall between the actual distribution taken and the amount that should have been withdrawn. 

In the past, those penalties were typically 50% of the required amount not withdrawn. However, under the SECURE 2.0 Act, penalties for not taking RMDs are lower.

• The penalty is a 25% excise tax on the late RMD or RMDs that don’t meet the minimum amount. 
• However, if you correct the RMD within a certain period (i.e., by the end of the second year after the RMD was due), the penalty can be as low as 10%. 

For more information on these and other RMD rule changes, see Kiplinger’s report on new RMD rules. 

Tax filing

Reporting RMDs on your tax return

Financial institutions typically issue Form 1099-R to report distributions from retirement accounts, including RMDs. As mentioned, seeking guidance from qualified and trusted financial and tax advisors when filing your return (or beforehand) can help you develop personalized strategies to manage RMDs effectively.

MINIMIZING RMD TAX IMPACTS

RMD strategies

Common strategies some taxpayers use to minimize the tax impact of RMDs include but are not limited to Qualified Charitable Distributions (QCDs), considering Roth conversions, and planning withdrawals to reduce taxable income and stay within lower tax brackets.

Also, consulting with a financial advisor to understand how RMDs affect estate planning can help you make informed decisions about inheritance strategies. Doing so can minimize tax burdens for heirs and beneficiaries.

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Required minimum distribution basics: Bottom line

Learning about RMDs is crucial for managing income in retirement. By viewing RMDs as part of an overall retirement income strategy, retirees can ensure a steady income while preserving retirement savings for future needs.

Source: https://www.kiplinger.com/retirement/retirement-plans/required-minimum-distributions-rmds/602350/rmd-basics-12-things-you