Frequently Asked Questions (FAQ)

Before investing it is necessary first to ensure you have an adequate emergency fund and you have paid off any unnecessary credit cards or high-interest consumer debt. If you are single or married with one income, it is recommended that your emergency fund is sufficient to meet six (6) months of living expenses. If you are married or have two sources income three (3) months of living expenses in an acceptable amount for your emergency fund.

Once these first two criteria are met by reducing debt and saving for and emergency fund, you should contribute to your employer-sponsored retirement account and individual retirement accounts. Examples of a employer-sponsored retirement plans include: 401(k), 403(b), 457 and TSP’s. If you do not have the opportunity to contribute to an employer-sponsored retirement account or you have additional reserves, you may contribute to an Individual Retirement Account (IRA). There are two main types of IRAs, Roth and Traditional. Of these two Roth IRAs are subject to income phase-out and are made with after-tax contributions. Furthermore, Roth IRAs are not subject to required minimum distributions when you reach age 70.5, and distributions are tax-free after the age of 59.5. You may contribute to Traditional IRA’s pre-tax, but unlike Roth IRAs, they are taxable in retirement and RMD’s begin for these after age 70.5. That said, if you have funds available after contributing to your company’s retirement plan then you should make it a priority to contribute to you and your spouse IRAs. Limits for individual and spousal IRA contributions are $5,500 to each account or earned income, which is less. If you are over the age of 50, you are eligible to make a catch-up contribution of $1,000, increasing the contribution limit to $6,500.

If you can fully maximize your retirement accounts and have sufficient reserves, you then may contribute to non-retirement accounts, education planning accounts, etc. The rationale for allocating your savings first to retirement accounts then to non-retirement accounts is that you give yourself an opportunity for tax-differed growth while maximizing your savings to accounts that you will need when you are no longer earning income. Furthermore, by eliminating debt and establishing an emergency fund, you will be prepared for an unexpected expense or job loss. For example, imagine if you had not established an emergency fund and unexpectedly had several repairs and medical expenses. Without the emergency fund, you would most likely need to sell your investments for these expenses, whereby most likely creating a tax liability or incur a loss by selling at an inopportune time. This is why the longer your money can stay invested the better it will perform long-term.

Over the years Plotkin Financial Advisors, LLC has worked with individuals and their families creating investing programs that align with their cash flow while helping to prioritize savings strategies. If you have questions on establishing retirement accounts or how you should be investing your savings, please feel free to reach out to one of our advisors today.

One of the most prominent financial goals for many households is accumulating enough resources to be able to pass your wealth along to family members as well as supporting them in their endeavors.  However, whether you are supporting family or transferring wealth, it remains important to be vigilant of gift tax implications.  That said, most gift around the following circumstances:

• Education
• Support or wealth transfer
• Down payment on a house
• Medical necessity

Currently, the maximum amount any individual can gift another individual is $14,000 per year.  If you are married, you can gift jointly for a maximum amount of $28,000 to another without incurring a gift tax liability.  If you gift above these exclusion amounts you will create an income tax liability, and will need to plan for this liability with your tax preparer.  Yet, depending on your gift’s purpose, it can be given without incurring a gift tax.  Below are a few examples:

• If you remit payment directly to an educational institution for another individual you will not incur a gift tax liability.  For example, you and your spouse can directly pay the education institution your grandchild attends while also jointly gifting $28,000 to him or her without incurring a gift tax liability.
• If you are helping a loved one or family member save for college you can establish a 529 college savings plan.  These plans allow you to contribute 5 times the current exclusion amount without incurring a gift tax liability, however you must wait at least 5 years after the gift before gifting any other funds to that beneficiary.  For example, an individual may gift his or her grandchild’s 529 plan a lump sum amount of $70,000 without incurring a gift tax or a couple may jointly gift $140,000 without incurring a gift tax.  In addition to these savings, individuals may also benefit from state income tax deductions for the respective state the 529 plan is established.
• You can pay a medical facility or institution directly for another individual without incurring a gift tax liability for that gift.  For example, if a family member has an emergency medical expense at hospital in the amount of $25,000, you can pay the bill directly without creating a tax liability.

Lastly, if you’re helping a family member purchase a residence you are still subject to gift tax rules.  It is encouraged to also discuss the matter with a tax professional to be aware of your options.  Also, if you’re planning to loan these funds to a family member, you need to be sure that you are charging an appropriate interest rate, which is also known as the Applicable Federal Rates (AFR) per the IRS. The IRS offers a monthly table of these rates on their site.  You can review these rates by following this link to the IRS website.

If you have additional questions on gift planning, establishing a 529, or general planning questions please feel free to contact one of our advisors today.

Understanding your cash flow is one of the most important planning components when it comes to building long-term wealth or managing your resources in retirement. This analysis is necessary because it forces you to address if your income is sufficient to meet your monthly expenses and savings goals. To analyze your cash flow, you first need to determine the following:

• Net Income (after-tax income) as well as other income sources
• Discretionary expenses
• Fixed expenses

Your net income is the income you receive after paying federal and state income tax as well as social security and Medicare. Some people also contribute to their employer’s retirement plan and have insurance deducted before arriving at their net income. You can determine your annual net income by multiplying your most recent net paycheck by the number of paychecks you receive on an annual basis (assuming each check is consistent). Most individuals are either paid bi-weekly or bi-monthly. If you are paid bi-monthly, you will receive 24 paychecks per year, and if you are paid bi-weekly, you will receive 26 paychecks per year. Next, you will need to multiply your net paycheck by 24 or 26 depending on if you are paid bi-weekly or monthly to determine your annual net pay (note you will need to determine if your income is above social security phase-out). Your annual net income can then by divided by 12 (number of months in the year) to arrive at an average amount of net income you will receive per month.

After arriving at your average monthly net income you receive per month, you then will need to review your monthly fixed and discretionary expenses. This is usually an eye-opening experience for most individuals and families because annualizing certain expenditures such as dining out can be both surprising and substantial. Fixed expenses have little variation and are necessary expenses you cannot avoid, and these include monthly mortgage or rent, auto and homeowner’s insurance, household utilities, student loans, etc. Discretionary expenses are variable and depend on your habits as a consumer, and these include dining out, clothing purchases, gym memberships, credit card bills, etc. Once you determine these expenses, you will need to annualize these expenses and divide them by 12 to arrive at your average monthly expenses. Yes, certain expenses are paid annually or semi-annually rather than monthly. However, you can keep your monthly accounting consistent by prorating them to a monthly amount.

Finally, after determining your monthly expenses, you then can subtract your net monthly income from your monthly expenses to determine if you are cash flow positive or negative. If you are cash flow positive, you will need to determine if the excess funds meet your savings goals. However, if you are cash flow negative, you will need to reevaluate your spending. The outcome of cash flow analysis is it allows one to plan around a budget if his or her spending needs adjusting. Further, it allows individuals and families better plan how they invest their excess savings. This planning includes action items such as prioritizing contributions to retirement and investment accounts monthly or proactively paying down consumer and household debt. Regardless your situation, Plotkin Financial Advisors, LLC has been helping individuals and their families coordinate their cash flow. Please feel free to contact us today to learn more about how we can help you attain your financial goals.

The Roth IRA is one of the most tax-efficient retirement savings vehicles available. However, individuals and married couples may not be eligible to contribute to a Roth IRA if their earned income is too high or if they do not have qualified earned income. Specifically, single filers with an Adjusted Gross Income (AGI) above $132,000 are ineligible for Roth contributions, and joint filers with an AGI above $194,000 are also ineligible. A Roth IRA allows your account to appreciate tax-free while you are contributing funds and subsequent withdrawals from the account in retirement are entirely income tax-free so long as you are above the age of 59.5. This is useful because they help to keep your income tax liability hopefully lower in retirement than what it was during your career. Roth’s do not have required minimum distributions (RMD’s), which allows more flexibility for when you withdraw the funds. Also, Roth IRA’s are beneficial for estate planning because they do not carry the same tax ramifications for the beneficiary as does the Traditional IRA. It is for these reasons that many consider converting their existing Traditional IRA’s to the more tax efficient Roth IRA.

To implement a Roth conversion, you transfer a percentage or all your Traditional IRA into an established Roth IRA. The consequence of this transfer is you will pay ordinary income tax on the gains accumulated in the Traditional IRA and any pre-tax contributions. It is for this reason that it is important to have an accounting of your contributions over the years. For example, if you have a traditional IRA with a balance of $150,000 and you contributed $100,000, you will owe income tax on the $50,000 while your basis ($100,000) generates no income tax liability so long as your basis was contributed with after-tax dollars. The benefits of the conversion as outlined above can be significant, but we encourage an analysis to determine if the income tax liability incurred from the conversion makes the strategy beneficial for your circumstance. Also, for individuals over 70.5, they cannot use their RMD’s to fund a Roth or any tax-advantaged retirement account.

The ideal time to consider a Roth conversion is when one has little or no income as well as when the markets slump and lower your Traditional IRA account value(s). Often the time when income is least is after retirement before you are eligible for social security and well enough in advance before you need to begin taking your RMD’s. The conversion process can be implemented over several years versus all at once, which may offer an optimal tax savings strategy. Also, if you decide you do not want to convert your Traditional IRA to a Roth IRA, you usually can recharacterize or undo the conversion back to the traditional IRA by October 15 of the following year the conversion was made.

The Roth conversion is certainly a planning technique many individuals and married couples explore ahead of retirement or in retirement, but it is certainly important to carefully analyze the benefits and drawbacks ahead of moving forward with the conversion. If you have additional questions on Roth conversions or would like to explore if it would make sense for you, please feel free to reach out to one of our financial advisors today.

There are many different life insurance products available to individuals and their families. The product that is most appropriate for the individual should be determined by their rationale for being insured as well as their personal situation. That said, one of the most affordable life insurance policies available to individuals and families is term life insurance. Insured policyholders pay a relatively small premium compared to the coverage offered by a term policy.

The key disadvantage to term life insurance is there is no cash accumulation as there would be in a universal or variable life insurance policy. Term policies are usually beneficial for younger individuals or persons seeking coverage for a specified timeframe, which is why it is called “Term” insurance. Term policies can be incorporated meaningfully into financial plans to help protect individuals and families from the following unforeseen circumstances:

• Income Replacement – Younger parents often haven’t accumulated enough savings or wealth to support their family if the primary income earner passes away while still supporting his or her family. A term life insurance policy can cover the period while his or her children will need to be supported as well as offer enough of a cushion for the spouse to begin a career.
• Mortgage Protection – Often the largest debt for a couple or family is the mortgage. Consequently, a significant portion of earned income is used on servicing this debt over a period of 15 to 30 years. Therefore, purchasing mortgage protection should be considered if satisfying the monthly payment is not feasible without a spouse. One way to implement this strategy would be to match the policy with the years remaining and principal amount of the mortgage.
• Education Funding – One of the best gifts parents can give their children, is education as it helps foster their development and offers an opportunity for a career of their choosing. However, a college education is expensive, and tuition will most likely continue to appreciate in the future. Saving for college may take parents up to 18 years from the time their child is born, and if a parent should pass away during those years, it will make saving for college even more challenging and perhaps not possible. Allocating even a percentage of a term policy to go towards education planning will certainly go a long way for your child should the unexpected occur.
• Benefit Protection – Single life annuities usually offer the highest payment to the account owner. It is important to note that this comes at a price if you are married because if you should predecease your spouse, he or she will be without any income. Couples may purchase term insurance to offset the loss of this pension benefit. However, before selecting this strategy, you should determine if the cost of insurance still makes a single life annuity beneficial. For example, one may find a joint annuity to be optimal after factoring the cost of insurance.

Regardless your situation, term insurance should be compared with other policies in planning for the unexpected. If you would like to learn more about insurance planning or have additional questions on term insurance, please contact one of our advisors today.