The Tried-and-True Way to Build Wealth

In today’s ultra-connected world it’s even more tempting to compare ourselves to our family, friends, and neighbors. Are we falling behind in our career? Is our family life sub-par? Should we be making more money? Although we all know that people post their best images and experiences on social media, it’s easy to forget that we are tuning in to a lop-sided view of reality. Ironically, this warped perspective can encourage ideas and behaviors that move us further away from what we’re trying to find: a happy and rewarding life.

At Parsec, we work with one aspect of a happy and rewarding life: helping our clients reach their long-term financial goals. Often these include becoming financially independent and retiring comfortably.  While social media and the popular press would have you believe that the right image, owning an expensive car or home, and living a lavish lifestyle translates into financial success, it doesn’t. What does lead to financial independence – and happens to be highly correlated with happiness – is much less glamorous and a lot simpler. It’s the age-old adage of living below one’s means.

Although it’s not sexy, spending less than you earn month-in and month-out is one of the most dependable ways in which to accumulate wealth. Sure there are a handful of folks who will strike it rich with the next great idea, but for the vast majority of us, we will earn our livelihoods working for a company. This is good news, really. The risks are much lower with a nine-to-five job, along with stress levels, and the path to financial independence is quite clear. Time and again, research confirms that spending less than you earn while regularly contributing to a low-cost, well-diversified investment portfolio can lead to significant wealth accumulation.

No, it’s not very exciting and unfortunately, it’s not that easy either. We can see how difficult it is for Americans to live below their means by examining our aggregate retirement savings metrics. According to the Economic Policy Institute (EPI), the median retirement savings of all working-age families in the U.S., defined as those between 32 and 61 years old, is a mere $5,000! That stands in stark contrast with the amount of money most experts suggest we need to retire at age 67. While retirement savings will vary considerable from one person to another, one rule of thumb recommends having ten times your final salary in savings. Given a median U.S. income of $59,039, this suggests that the average American needs about $590,390 in savings to retire.

So why is it so difficult for most Americans to live below their means? Of course, it varies from person-to-person, but there are some recurring themes. In general, Americans seem to want instant gratification more so than in the past. One theory is that as an over-worked, time-crunched culture, we are dealing with higher stress levels than earlier generations. We then try to manage our stress by turning more and more to material things and experiences. While we know intellectually that spending on items we don’t really need only provides temporary relief, our tendency to accumulate things often becomes habit-forming. Big money problems can then arise when our need for immediate gratification gets paired with a lack of financial awareness. America’s current retirement savings situation reflects just such a scenario.

All that said, if you are reading this article it suggests you have or are starting to cultivate financial awareness, which we believe is a big part of the solution. As we start to question our spending motivations individually and as a culture, it will help us become clearer on what we’re really after and how to get there. While we are a vastly diverse nation of people, it would seem that at the end of the day most of us are after the same thing: a happy and fulfilling life.

Once we realize this, we can start to eliminate habits or tendencies that get in the way. We can start to simplify our lives and spend our time, energy, and money on things and activities that contribute to a happy and fulfilling life. Doing so naturally helps us live below our means and comes with the added benefit of reduced stress levels. From a financial perspective, a simplified lifestyle not only helps accelerate your ability to save for retirement but it means that once you reach retirement, you will require less income in your golden years. Starting to live below your means early-on, questioning your spending motives, and simplifying your life can become a virtuous cycle that suggests your retirement years can truly be golden.

Carrie Tallman, CFA, CFP®

Guest Blogger

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2017 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2017 is Tuesday, April 17. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances. Keep in mind that if neither you nor your spouse participates in a work-sponsored plan, you can deduct IRA contributions regardless of your income.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range
Tax Filing Status For 2017 Contributions For 2018 Contributions
Single, participates in an employer-sponsored retirement plan: $62,000 – $72,000 $63,000 – $73,000
Married filing jointly, participates in an employer-sponsored retirement plan: $99,000 – $119,000 $101,000 – $121,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $186,000 – $196,000 $189,000 – $199,000

Do you qualify to contribute to a Roth IRA?

Modified Adjusted Gross Income Phase-Out Range – Roth
Tax Filing Status For 2017 Contributions For 2018 Contributions
Single: $118,000-$133,000 $120,000-$135,000
Married, filing jointly: $186,000-$196,000 $189,000-$199,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®

 

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Get Ready for Tax Season

Regardless of whether you prepare your own tax return or hire a professional to do it for you, you are still responsible for collecting the information necessary to complete it.  Well-organized records can make the process significantly easier and potentially save money with your CPA who typically charges by the hour.

One way to tackle this chore is to create a checklist of the documents and information needed to complete your return.  As you gather the documents, start to organize them in a file by the following categories and check them off the list.

Prior Year’s Tax Return

Use last year’s tax return as a starting point to create your checklist.  Although you may have new sources of income or different deductible expenses for the current year, this is usually a fairly comprehensive list of needed documents such as Form 1099 or 1098.  It will also serve as a reminder of information you may need to determine from bank statements or receipts such as medical expenses.

Sources of Income

This category generally includes wages, dividends, interest, partnership distributions, retirement and rental income.  You may receive a Form W-2, 1099, or K1 that indicates the amount of income reported to the IRS.  For other types of income, such as alimony received, you may need to determine the amount to report from bank statements.

Adjustments to Income

These are direct reductions to taxable income that commonly include deductible IRA contributions, alimony paid, Health Savings Account (HSA) contributions, SEP, SIMPLE or other self-employed pension plan contributions,  and self-employed health insurance payment records.

Deductible Expenses

If you itemize deductions rather than taking the standard deduction, you may need to collect source documents indicating the amount of mortgage interest paid (Form 1098), real estate and personal property taxes paid, medical expenses, and charitable contributions to be reported on Schedule A.

Tax Credits

Tax credits are a direct reduction of your tax bill so take a few minutes to research available 2017 credits.  You may be able to claim the American Opportunity Credit if you have a child in college or a Residential Energy Credit if you have made any “green” home improvements.

Basis of Property

This is also a good time to review and update the basis of property if necessary.  Home improvements made during the year may have increased the basis so collect and file those valuable receipts.

Taxes Paid

Federal and state taxes you have already paid may be found on your W-2 but if you pay quarterly estimated taxes you may need to collect records of payment.

While this is not a comprehensive list of every possible tax document needed to complete a tax return, it is a starting point from which you can develop your own, one that reflects your unique life circumstances.  Start organizing now and maybe tax season won’t be your least favorite season of the year.

Nancy Blackman - Parsec Financial Corporate Headshots
Nancy Blackman – Portfolio Manager
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(Tax loss) Harvest Season is Almost Here!

The kids are back in school, the leaves are changing colors, and pumpkin spice lattes – the age-old harbingers of harvest season – are everywhere. At Parsec, we are preparing for the harvest…of tax losses.

Every year, beginning in late October/early November, Parsec’s portfolio managers will scour clients’ taxable accounts for meaningful losses, which we can use to offset realized gains created from trading throughout the year. These tax-efficient trading strategies provide value to clients by minimizing their tax burden while keeping the portfolio aligned with their financial planning goals.

You might see trades from one security into another one that is similar, but not exactly the same – we do this so that you can recognize a loss while maintaining exposure to the same industry or sector, yet avoid incurring a wash sale. According to IRS publication 550, “a wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale, you buy substantially identical stock or securities,” either in the same account or in another household account, including IRAs and Roth IRAs. Stocks of different companies in the same industry are not considered “substantially identical,” nor are ETFs that track the same sector but are managed by different companies (like a Vanguard Emerging Markets ETF vs. an iShares Emerging Markets ETF).

Sometimes it makes sense to place a loss-harvesting trade and leave the proceeds in cash for 31 days, then repurchase the same security. We may do this for clients who have cash needs during the holiday season, with the intention of placing rebalancing trades in January when there is no more need for liquidity. When liquidity is not an issue, however, we prefer to keep the funds fully invested in another high-quality name. We may later choose to reverse the trade, once the wash sale period has expired, or we may leave the trade in place if we think it is appropriate and suits the clients’ needs.

Sarah DerGarabedian, CFA
Director of Portfolio Management

 

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Time to Update your Estate Plan?

Now that we have started a new year, it’s a good time for many of us to stop putting off getting an estate plan created or updated.

Under current tax law, most people do not have a concern with estate tax.  The current Federal estate tax exemption is $5.49 million per person. If properly elected, any unused exemption is portable between spouses.  Therefore, a married couple with an estate of $10.98 million or below could pass their entire estate to heirs without any Federal estate tax liability.

While much attention is focused on the tax aspects, estate planning is more a matter of organizing and simplifying your affairs so that your heirs are not burdened with additional stress at the same time they are grieving for the loss of a loved one. We recommend that you engage the services of a qualified attorney to guide you and create the appropriate documents.

Your estate plan should include a will and possibly living or revocable trusts. Advanced directives and incapacity planning are other items that are typically addressed as part of your estate plan. This includes having documents prepared such as a durable power of attorney, health care power of attorney and living will.

As part of your estate plan, you should review your beneficiary designations. By filling out a beneficiary designation form, individuals can bypass the probate process and pass specific assets upon their death directly to their heirs. Many types of assets such as IRAs, qualified retirement plans, life insurance policies and commercial annuities pass via beneficiary designation rather than through your will. In addition, beneficiary designations can be added to taxable investment accounts (known as Transfer on Death or “TOD”) and bank accounts (known as Payable on Death or “POD”). Note that while the assets passing by beneficiary designation bypass the probate process, they are still included as part of the decedent’s estate for calculating any potential estate tax liability.

There is talk that the estate tax may be changed or even eliminated this year. For most people that shouldn’t be a deterrent to getting their estate plan done, since few are affected by the estate tax in the first place. Having an updated estate plan gives you peace of mind and helps prevent additional stress on your heirs. Once you have a plan in place, it can always be modified as tax laws and your personal circumstances change.

William S. Hansen, CFA
President
Chief Investment Officer

bill

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2016 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2016 is April, 18 2017. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $62,000 – $72,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $99,000 – $119,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $184,000 – $194,000 $186,000 – $196,000

Do you qualify to contribute to a Roth IRA?

Modified Adjusted Gross Income Phase-Out Range – Roth
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single: $117,000-$132,000 $118,000-$132,999
Married, filing jointly: $184,000-$194,000 $186,000-$195,999

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

Harli Palme

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The Perfect Gift? Ideas…From a Planning Perspective

December is here and 2016 is drawing to a close.  As we enter the holiday season, we scramble to pick the perfect gift for our family members, our friends, teachers… the list goes on.

At Parsec, we work with clients to create gifting strategies that fit into their overall financial plan.

This December we encourage you to think about giving and its potential longer term impact on both your family (children and grandchildren) and your taxes.  Let’s first review a powerful gifting strategy to younger family members: the custodial Roth IRA.

As long as there is earned income, which can come from mowing lawns, housework, babysitting etc., contributions to a custodial Roth IRA can be made up to the amount of the earned income but not over $5,500*.  For example, your 9 year old grandchild earned $1,000 over the summer through his lawn mowing business.  You can open a custodial Roth IRA for him and deposit a matching gift of $1,000. Let’s say he continues to mow lawns each summer for the next 10 years and you continue to match his earnings with a $1,000 holiday gift.  Assuming a 7% return each year, your gifts will grow to over $15,000 at the end of 10 years.  Remember this is only the beginning, the approximate $5,000 earnings in this example will continue to compound over time and ALL earnings are tax free upon withdrawal later in life.  Rewarding your grandchild’s hard work through Roth contributions is a holiday gift that offers valuable lessons on many levels.

Let’s switch gears to philanthropy.  Each year Parsec’s client service team processes hundreds of charitable gift requests from our clients.  These gifts of course offer tax advantages in various forms.  For many of our clients, the qualified charitable distribution or QCD brings the most formidable tax savings.  How does it work?  If you are over 70 1/2, up to $100,000 of your required minimum distribution (RMD) can be given directly to charity through a QCD.  The result: your AGI will be reduced dollar for dollar by the amount of the QCD.  A simple, yet impactful strategy:  on not only your charity of choice but also on your tax dollar.

As we enter this holiday season we hope that you reach out to your financial advisor to talk about gifting strategies that may be appropriate for you and your family.  Happy Holidays!

Betsy Cunagin, CFP®

Senior Financial Advisor

*$5,500 is the IRA contribution limit for 2016 and 2017.  

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Land Trust

Individuals who are large landowners often face challenges in planning their estates. The land may have a value that causes the estate to exceed the federal estate tax exclusion limit. Currently the limit is $5,450,000 per person. In many cases, the landowner may not want the land to be sold to cover estate taxes, but would rather see the land continue to be used as a farm, ranch, or preserved for its natural beauty. The landowner may want to consider a conservation easement.

A conservation easement is a voluntary legal agreement that benefits landowners and the public, as it protects land while leaving it in private ownership. The uses of the property are then limited to those uses that are consistent with the landowner’s and the conservation easement holder’s objectives. Conservation easements are individually tailored, but in general they benefit landowners by protecting the features of the property they wish to preserve. They potentially receive significant tax relief, and they maintain ownership of the land. The land provides public benefits by conserving open lands, farms, forests, and other natural resources.

The tax benefit to the landowner is realized at the time the conservation easement is placed on the land. The landowner basically sells the right to develop the land to a land trust. The value of the land for property tax purposes becomes the much lower highest and best use in conservation value. The conservation easement rides with the deed of the land, therefore the intent of the original owner for the use of the land is protected in perpetuity.

For our clients in southeastern North Carolina, the offices of Sandhills Area Land Trust (SALT) are located on Southwest Broad Street in Southern Pines, next door to Parsec’s Southern Pines office. They are a community-based, 501(c)(3) non-profit organization that works to preserve and protect land and its environs in Moore, Richmond, Scotland, Hoke, Cumberland, and Harnett counties.

SALT was founded in 1991. Since that time, it has worked with private landowners to negotiate conservation easements on their property, and more than 13,000 acres of working farms, water supplies, endangered ecosystems, and urban-space have been permanently protected. The North Carolina Sandhills is a region of rolling hills with sandy soil located between the Piedmont and the Coastal Plain. This area is home to the largest contiguous stands of long leaf pine forest in North Carolina, and many wetlands and dozens of rare plants and animals, which all need to be protected. With this goal in mind, SALT cultivates partnerships among landowners, local businesses and government agencies.

If you have any questions pertaining to the use of land conservation easements in your estate planning process, please contact your Parsec Financial Advisor.

Wendy S. Beaver, AAMS®

 

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