Lessons from the Titanic

The magnificent ship failed to reach her destination. Consider the valuable lessons from the disaster that claimed more than 1,500 lives –

• Moderation versus full speed ahead
• Illusive goal of invincibility
• Challenges may loom larger than what we see on the horizon
• Big issues don’t lie at the surface
• And, icebergs don’t move

I share two discussions. First, we’ll explore some strategies to navigate one of two certainties in life – the ‘icebergs’ of death and taxes – the 3.8% Medicare surtax. And remember the shield of invincibility we carried in our youth? Kids today face a world of uncertainty – career and employment outlooks, accumulation of debt, and aging family members to name a few. So second, I’ll summarize three discussion areas with college students that gave me renewed optimism about young adults – our leaders of tomorrow.

Navigating the 3.8% Medicare Surtax

If you’re having a good year, so is the IRS. Some taxpayers view higher taxes as a cost of doing business. Others seek solutions for tax minimization and healthy wealth transfers. The new surtax is a provision of Obamacare. While it (and the 0.9% Medicare payroll tax) affects higher income taxpayers, tax reduction strategies may apply to taxpayers across the board.

• The surtax is complex. The strategies aren’t. Keep your income below the tax thresholds. Discuss with your tax and legal advisors.

• Net investment income (NII) – dividends, interest, capital gains, rent, passive activities, etc. – is subject to tax if modified adjustable gross income (MAGI) exceeds $250,000 for married filing jointly (or $200,000 for individuals). If a couple has $300,000 MAGI and $75,000 of NII, only $50,000 is subject to the surtax, and the tax is about $1,900 ($50,000 times 3.8%).

• Reduce Income – Contribute to 401k plans (current deferral limit is $23,000 for 50 year olds and over) and non-qualified deferred compensation plans. Look at tax-free (e.g. munis), tax-deferred annuities (not my favorite – potentially converts favorable capital gains to ordinary income, and surrender charges), or cash value life policies. Consider Roth IRA conversions (current tax from conversion versus tax-free withdrawals) if you expect future income to rise (e.g. SS and retirement plan distributions). And possibly spread capital gains over multiple tax years via installment sales.

• Gift Income – Remove income producing assets by gifting to charities or lower taxed family members. Qualified charitable IRA distributions were extended through 2013 for 70-1/2 year olds and over ($100,000 limit). Gifting appreciated stock, CRTs and CLTs are additional options.

Youth Manning Up to Realities

I was eager to lead two college class discussions. What words of wisdom and encouragement, and stories of mistakes made could I share with students? I focused on the financial planning process (case studies), investment strategies, and career opportunities. However, I was most interested in hearing what was on their minds. Here are my take-aways from those bright kids.

Debt and Cash Flow Management – They want to keep their finances in order, establish and maintain credit, and budget for saving and spending. They see the pressures of over-extended households, underwater homes, and national debt.

Investing for the Future – Currently the maximum SS retirement benefit is $2,533 per month, the average benefit is $1,224, and for half of couples 65 and older (and three quarters of singles), more than half of their retirement income comes from SS. But students asked “What if Social Security isn’t there for me?” They recognize a greater burden on their shoulders to invest – for retirement, emergency reserves, and in themselves.

Growing Older – Estate planning serves important roles. Areas of concern include aging family members (care giving, medical and assisted living expenses), talking to parents about their financial future, and inheriting wealth (being good stewards, and keeping peace in the family).

The luxury ship with her magnificent amenities lacked a sufficient number of lifeboats. Continue to put things in your favor and plan ahead.

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