Money Matters

By Michael Christodoulou

If your children are grown and your mortgage is paid off, do you still need to carry life insurance? 

It depends on your situation, but for many people, a cash-value life insurance policy, such as whole life or universal life, can be a valuable, tax-efficient source of retirement income. And by drawing on the cash value of your policy, you might be able to temporarily reduce the amount you take out from your retirement accounts, such as your IRA and 401(k). This ability could be especially important when the financial markets are down — you’d probably like to avoid liquidating your assets when their prices have dropped.  

Basically, you can use the cash in your policy in the following ways:

Withdrawals: You can typically withdraw part of the cash value of your life insurance without losing coverage. You generally won’t incur income taxes on these withdrawals, up to the amount you’ve put into the policy — that is, the premiums you’ve paid. Once your withdrawals exceed this amount, you would generally owe taxes. Also, keep in mind that any withdrawals will reduce your policy’s death benefit and the available cash surrender value.

Policy loans: Rather than taking a withdrawal from your policy, you could take out a loan. You won’t have to go through an approval process or income verification, and policy loans typically have lower interest rates than bank loans and don’t assess closing costs. Plus, because your insurer will be lending you the money and using the cash in your policy as collateral, your policy’s cash value can remain intact and still potentially grow. However, policy loans do carry some issues of which you should be aware. For one thing, while a loan usually isn’t taxable, you could end up owing taxes on any unpaid loan balance, including interest. And if this balance exceeds the policy’s cash value, it could cause your policy to lapse. Also, outstanding loans can reduce your death benefit. 

Cashing out: If you cash out, or “surrender,” your policy, you can receive the entire cash value, plus any accrued interest. You will have to subtract any money needed to pay policy loans, along with unpaid premiums and surrender fees, which can be significant. Also, any amount you receive over the policy’s cash basis — the total of premiums you’ve paid — will be taxed as regular income. 

1035 Exchange: Through what’s known as a Section 1035 Exchange, you can transfer your life insurance policy to an annuity, which can be structured to pay you a lifetime income stream. The exchange won’t be taxable but surrender charges may still apply.  

Given the potential tax implications of the above options, you may want to consult with your tax advisor before making any moves. Also, be sure you are comfortable with a reduced or eliminated death benefit. Specifically, you’ll want to be confident that your spouse or other family members don’t need the proceeds of your policy. This may require some discussions about your loved ones’ plans and needs. And don’t forget that life insurance can help your family pay for final expenses, such as funeral costs and unpaid medical bills.

Whether it’s providing you with needed retirement income or helping your family meet future needs, your cash value life insurance policy is a valuable asset so try to put it to the best use possible.  

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

You may spend decades contributing to various retirement accounts. But for some accounts, such as a traditional IRA and 401(k), you must start withdrawing funds at a certain point. What should you know about this requirement?

To begin with, the rules governing these withdrawals — technically called required minimum distributions, or RMDs — have changed recently. For many years, individuals had to begin taking their RMDs (which are based on the account balance and the IRS’ life expectancy factor) when they turned 70½. 

The original SECURE Act of 2019 raised this age to 72, and SECURE 2.0, passed in 2022, raised it again, to 73. (If you turned 73 in 2023, and you were 72 in 2022 when the RMD limit was still 72, you should have taken your first RMD for 2022 by April 1 of this year. You will then need to take your 2023 RMD by Dec. 31. And going forward, you’ll also need to take your RMDs by the end of every year.) 

Not all retirement accounts are subject to RMDs. They aren’t required for a Roth IRA, and, starting in 2024, won’t be required for a Roth 401(k) or 403(b) plan. But if your account does call for RMDs, you do need to take them, because if you don’t, you could face tax penalties. Previously, this penalty was 50% of the amount you were supposed to have taken, but SECURE 2.0 reduced it to 25%.

When you take your RMDs, you need to be aware of a key issue: taxes. RMDs are taxed as ordinary income, and, as such, they could potentially bump you into a higher tax bracket and possibly even increase your Medicare premiums, which are determined by your modified adjusted gross income. 

Are there any ways you could possibly reduce an RMD-related tax hike? You might have some options. Here are two to consider:

Convert tax-deferred accounts to Roth IRA. You could convert some, or maybe all, of your tax-deferred retirement accounts to a Roth IRA. By doing so, you could lower your RMDs in the future — while adding funds to an account you’re never required to touch. So, if you don’t really need all the money to live on, you could include the remainder of the Roth IRA in your estate plans, providing an initially tax-free inheritance to your loved ones. However, converting a tax-deferred account to a Roth IRA will generate taxes in the year of conversion, so you’d need the money available to pay this tax bill. 

Donate RMDs to charity. In what’s known as a qualified charitable distribution, you can move up to $100,000 of your RMDs directly from a traditional IRA to a qualified charity, avoiding the taxes that might otherwise result if you took the RMDs yourself. After 2023, the $100,000 limit will be indexed to inflation.

Of course, before you start either a Roth IRA conversion or a qualified charitable distribution, you will need to consult with your tax advisor, as both these moves have issues you must consider and may not be appropriate for your situation.

But it’s always a good idea to know as much as you can about the various aspects of RMDs — they could play a big part in your retirement income strategy.  

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

You’ll find some big differences between traditional and speculative investments — and knowing these differences can matter a great deal when you’re trying to reach your financial goals.

To begin with, let’s look at the basic types of traditional and speculative investments. Traditional investments are those with which you’re probably already familiar: stocks, bonds, mutual funds, government securities, certificates of deposit (CDs) and so on. Speculative investments include cryptocurrencies, foreign currencies and precious metals such as gold, silver and copper.

Now, consider these three components of investing and how they differ between traditional and speculative investments:

The first issue to consider is risk. When you own stocks or stock-based mutual funds, the value of your investments will fluctuate. And bond prices will also move up and down, largely in response to changing interest rates. However, owning an array of stocks — small-company, large-company, international, etc. — can help reduce the impact of volatility on your stock portfolio. And owning a mix of short- and long-term bonds can help you defend yourself somewhat against interest-rate movements. 

When interest rates fall, you’ll still have your longer-term bonds, which generally — but not always – pay higher rates than short-term ones. And when interest rates rise, you can redeem your maturing short-term bonds at potentially higher rates.

With speculative investments, though, price movements can be extreme as well as rapid. During their short history, cryptocurrencies in particular have shown astonishingly fast moves up and down, resulting in huge gains followed by equally huge, or bigger, losses. The risk factor for crypto is exacerbated by its being largely unregulated, unlike with stocks and bonds, whose transactions are overseen by well-established regulatory agencies. There just isn’t much that investors can do to modulate the risk presented by crypto and some other speculative investments.

A second key difference between traditional and speculative investments is the time horizon involved. When you invest in stocks and other traditional investments, you ideally should be in it for the long term — it’s not a “get rich quick” strategy. But those who purchase speculative investments want, and expect, quick and sizable returns, despite the considerable risk involved.

A third difference between the two types of investments is the activity required by investors. When you’re a long-term investor in traditional investments, you may not have to do all that much once you’ve built a portfolio that’s appropriate for your risk tolerance, goals and time horizon. 

After that point, it’s mostly just a matter of monitoring your portfolio and making occasional moves — you’re not constantly buying and selling, or at least you shouldn’t be. But when you speculate in crypto or other instruments, you are constantly watching prices move — and then making your own moves in response. It’s an activity that requires considerable attention and effort.

One final thought: Not all speculative instruments are necessarily bad investments. Precious metals, for instance, are found in some traditional mutual funds, sometimes in the form of shares of mining companies. And even crypto may become more of a stable vehicle once additional regulation comes into play. 

But if you’re investing for long-term goals, such as a comfortable retirement — rather than speculating for thrills and quick gains, which may disappear just as quickly — you may want to give careful thought to the types of investments you pursue.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

When you retire, you’ll experience many changes — should one of them involve your living arrangements?

The issue of downsizing is one that many retirees will consider. If you have children, and they’ve grown and left the home, you might find yourself with more space than you really need. Of course, this doesn’t necessarily mean you must pack up and scale down yourself. You might love your home and neighborhood and see no reason to go. But if you’re open to a change, you could find that moving to a smaller house, a condo or an apartment may make sense for you.

Let’s consider some of the advantages of downsizing:

You could save money. Moving to a smaller space could lower your utility bills and upkeep costs.

You could save effort. A smaller home will mean less maintenance and cleaning.

You could de-clutter. Over the years, most of us accumulate more possessions than we really need. Downsizing gives you a chance to de-clutter. And you can do some good along the way, too, because many charitable organizations will welcome some of your items.  

You could make money. If you’ve had your home for many years, it’s certainly possible that it’s worth more — perhaps a great deal more — than what you paid for it. So, when you sell it, you could pocket a lot of money — possibly without being taxed on the gains. 

Generally, if you’ve lived in your home for at least two years in the five-year period before you sold it, you can exclude $250,000 of capital gains, if you’re single, or $500,000 if you’re married and file taxes jointly. (You’ll want to consult with your tax advisor, though, before selling your home, to ensure you’re eligible for the exclusion, especially if you do own multiple homes. Issues can arise in connection with determining one’s “primary” residence.)

While downsizing does offer some potentially big benefits, it can also entail some drawbacks. First of all, it’s possible that your home might not be worth as much as you had hoped, which means you won’t clear as much money from the sale as you anticipated. Also, If you still were paying off a mortgage on your bigger home, you may have been deducting the interest payments on your taxes — a deduction that might be reduced or lost to you if you purchase a less-expensive condo or become a renter. 

Besides these financial factors, there’s the ordinary hassle of packing and moving. And if you’re going to a much smaller living space, you may not have much room for family members who want to visit or occasionally spend the night.

So, as you can see, you’ll need to weigh a variety of financial, practical and emotional issues when deciding whether to downsize. And you will also want to communicate your thoughts to grown children or other family members who may someday have reason to be involved in your living space. In short, it’s a big decision — so give it the attention it deserves. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

Most investors are aware of the different types of stocks: big-company, small-company, technology, international and so on. And it may be a good idea to own a mix of these stocks as part of your overall investment portfolio. But the importance of diversification applies to bonds, too — so, how should you go about achieving it?

To begin with, individual bonds fall into three main types: municipal, corporate and government. Within these categories, you’ll find differences in the bonds being issued. For example, government bonds include conventional, fixed-rate Treasury bonds as well as inflation-protected ones, along with bonds issued by government agencies, such as the Federal National Mortgage Association (or Fannie Mae). Corporate bonds are differentiated from each other by several factors, but one important one is the interest rate they pay, which is largely determined by the credit quality of the issuer. (The higher the rating grade — AAA, AA and so on — the lower the interest rate; higher-rated bonds pose less risk to investors and therefore pay less interest.)

Municipal bonds, too, are far from uniform. These bonds are issued by state and local governments to build or improve infrastructure, such as airports, highways, hospitals and schools. Generally, municipal bonds are exempt from federal tax and often state and local taxes, too. However, because of this tax benefit, municipal bonds typically pay lower interest rates than many corporate bonds.

How can you use various types of bonds to build a diversified bond portfolio? One method is to invest in mutual funds that invest primarily in bonds. By owning a mix of corporate, government and municipal bond funds, you can gain exposure to much of the bond world. Be aware, though, that bond funds, like bonds themselves, vary widely in some respects. To illustrate: Some investors may choose a low-risk, low return approach by investing in a bond fund that only owns Treasury securities, while other investors might strive for higher returns — and accept greater risk — by investing in a higher-yield, but riskier bond fund.

But you can also diversify your bond holdings by owning a group of individual bonds with different maturities: short-, intermediate- and long-term. This type of diversification can help protect you against the effects of interest-rate movements, which are a driving force behind the value of your bonds — that is, the amount you could sell them for if you chose to sell them before they matured. When market interest rates rise, the price of your existing, lower-paying bonds will fall, and when rates drop, your bonds will be worth more.

But by building a “ladder” of bonds with varying maturities, you can take advantage of different interest-rate environments. When market rates are rising, you can reinvest your maturing, shorter-term bonds at the new, higher rates. And when market rates are low, you’ll still have your longer-term bonds working for you. (Generally, though not always, longer-term bonds pay higher rates than shorter-term ones.)

A bond ladder should be consistent with your investment objectives, risk tolerance and financial circumstances. But if it’s appropriate for your needs, it could be a valuable tool in diversifying your bond holdings. And while diversification — in either stocks or bonds — can’t always guarantee success or avoid losses, it remains a core principle of successful investing.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

ETFs can diversify your portfolio.

By Michael Christodoulou

Michael Christodoulou

Mutual funds offer investors a chance to own shares in dozens of companies, as well as bonds, government securities and other investments. But you might be able to broaden your portfolio further by owning another type of fund — an exchange-traded fund (ETF).

An ETF, like a mutual fund, can own an array of investments, including stocks, bonds and other securities. Many ETFs are passively managed in that they track the performance of a specific index, such as the S&P 500. In this respect, they differ from most mutual funds, which tend to be actively managed — that is, the fund managers are free to buy and sell individual securities within the fund.

Another difference between ETFs and mutual funds is that ETFs are traded like stocks, so shares are bought and sold throughout the day based on the current market price, whereas mutual funds are traded just once a day, at a price calculated at the end of the trading day. Whether this ability to make intra-day trades is meaningful to you will likely depend on how active you are in managing your own investments.

For some people, the main attraction of ETFs is their tax advantages. Because many ETFs are index funds, they generally do much less buying and selling than actively managed funds — and fewer sales mean fewer taxable capital gains. These ETFs are somewhat similar to index mutual funds, which are also considered to be tax-efficient, as opposed to actively managed funds, which constantly buy and sell investments, passing on taxable capital gains to you throughout the life of the fund. 

Keep in mind, though, that mutual funds that trade frequently may still be appropriate for your financial strategy. While taxes are one element to consider when evaluating mutual funds, or any investment, other factors, such as growth potential and ability to diversify your portfolio, are also important.

ETFs typically also have lower operating costs than mutual funds, resulting in lower overall fees. Part of the reason for these lower costs is that actively managed mutual funds, by definition, usually have larger management teams devoted to researching, buying and selling securities. By contrast, passively managed ETFs may have leaner, less-costly management structures.

But while most ETFs may share the same basic operating model, many types are available. You can invest in equity ETFs, which may track stocks in a particular industry or an index of equities (S&P 500, Dow Jones Industrial Average, and so on), or you can purchase fixed-income ETFs, which invest in bonds. ETFs are also available for currencies and commodities.

Of course, as with all investments, ETF investing does involve risk. Your principal and investment return will fluctuate in value, so when you redeem your ETF, it may be worth more or less than the original investment. Also, liquidity may be an issue. Some ETFs may be more difficult to sell than other investments, which could be a problem if you need the money quickly. And because it’s so easy to move in and out of ETFs, you might be tempted to “overtrade” rather than following an appropriate long-term investment strategy.

A financial professional can evaluate your situation and help you determine whether ETFs are suitable for your needs. At a minimum, they represent another investment opportunity that may prove useful as you work toward your financial goals.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

Michael Christodoulou

Another school year will soon come to a close. And if you have young children, they’re now a year closer to heading off to college or some other type of post-secondary education or training. So, if you haven’t already done so, you may want to start preparing for these costs.

And they can be considerable. During the 2022-23 school year, the average estimated annual cost (tuition, fees, room and board, books, supplies, transportation and other personal expenses) was nearly $28,000 for public four-year in-state schools and more than $57,000 for private nonprofit four-year schools, according to the College Board.

Of course, some students don’t pay the full bill for college. Any grants and scholarships they receive can bring down the “sticker price.” Still, there’s often a sizable amount that students and their families must come up with. To help fill this gap, you may want to explore various strategies, one of which is a 529 education savings plan.

A 529 plan offers several key benefits. First of all, your earnings can grow tax deferred and your withdrawals are federally tax free when used for qualified education expenses, such as tuition, fees, books and so on. You may be eligible to invest in a 529 plan in most states, but depending on where you live, you may be able to deduct your contributions from your state income tax or possibly receive a state tax credit for investing in your home state’s 529 plan. Tax issues for 529 plans can be complex. Please consult your tax advisory about your situation.  

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And 529 plans aren’t just for college. You may be able to use one to pay K-12 expenses, up to $10,000 per student per year. (However, not all states comply with this 529 expansion for K-12, so you might not be able to claim deductions and your withdrawals could be subject to state tax penalties.)  

A 529 plan can also be used to pay for most expenses connected to apprenticeship programs registered with the U.S. Department of Labor. These programs are often available at community colleges and combine classroom education with on-the-job training.

Furthermore, you can now withdraw funds from a 529 plan to repay qualified federal private and student loans, up to $10,000 for each 529 plan beneficiary and another $10,000 for each of the beneficiary’s siblings.

But what if you’ve named a child as a 529 plan beneficiary and that child doesn’t want to pursue any type of advanced education? If this happens, you, as the account owner, are free to name another family member as beneficiary.

And beginning in 2024, you may have even more flexibility if a child foregoes college or other post-secondary education. Due to the passing of the Secure Act 2.0 in December 2022, unused 529 plan funds of up to $35,000 may be eligible to roll over to a Roth IRA of the designated beneficiary.

One of the qualifications for this rollover is to have had your 529 plan for at least 15 years. To determine if you qualify for this rollover, you will want to consult your tax advisor.

A 529 plan has a lot to offer — and it might be something to consider for your family’s future.

Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty. Make sure to discuss the potential financial aid impacts with a financial aid professional as Edward Jones, its financial advisors and employees cannot provide tax or legal advice.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

Invest in your future on Earth Day. METRO photo

By Michael Christodoulou

Michael Christodoulou

It’s almost Earth Day, when people around the world focus on ways of protecting and preserving the environment. And the lessons from this occasion can be applied to other areas of life — such as investing.

Here are some themes to consider:

Sustainability – From an environmental perspective, sustainability encompasses a range of issues, such as using natural resources wisely. As an investor, you, too, need to protect your resources.

So, for example, to sustain a long-term investment strategy, you won’t want to dip into your retirement accounts, such as your IRA and 401(k), to pay for major home or car repairs or other unexpected, costly bills before retirement.

You can help prevent this by building an emergency fund containing several months’ worth of living expenses, with the money kept in a liquid, low-risk account. And once you’re retired, you need to sustain your portfolio so it can help provide income for many years. For that to happen, you’ll need to maintain a withdrawal rate that doesn’t deplete your investments too soon.

Growth potential – Many people plant trees to celebrate Earth Day, with the hope that, as the trees grow, they’ll contribute to cleaner air. When you invest, you also need growth potential if you’re going to achieve your goals, including a comfortable retirement.

So, your portfolio will need a reasonable percentage of growth-oriented vehicles, such as stocks and stock-based mutual funds or exchange-traded funds (ETFs). Yet, you do need to be aware that these investments can lose value, especially during downturns in the financial markets. You can help reduce the impact of market turbulence on your holdings by also owning other types of investments, such as bonds, government securities and certificates of deposit (CDs).

While these investments can also lose value, they are typically less volatile than stocks and stock-based mutual funds and ETFs. The appropriate percentage of growth and fixed-income investments in your portfolio depends on your risk tolerance, time horizon and long-term objectives.

Avoidance of “toxins” – At some Earth Day events, you can learn about positive behaviors such as disposing of toxic items safely. And in the investment world, you’ll also want to avoid toxic activities, such as chasing “hot” stocks that aren’t appropriate for your needs, or trading investments so frequently that you run up commissions and taxes or jumping out of the markets altogether when there’s a temporary decline.

Consolidation – Getting rid of clutter and unnecessary possessions is another lesson some people take away from Earth Day. All of us, when we look around our homes, could probably find many duplicate items — do we really need two blenders or three brooms or five staplers? When you invest, it’s also surprisingly easy to pick up “clutter” in the form of multiple accounts. You might have an IRA with one financial company and brokerage accounts with two or three others.

If you were to consolidate these accounts with one provider, you might reduce correspondence — even if it is online — and possibly even lower the fees you pay. But perhaps more important, by consolidating these accounts at one place, possibly with the guidance of a financial professional who knows your needs and goals, you may find it easier to follow a single, unified investment strategy.

Earth Day only happens once a year — but it may provide lessons for investors that can last a lifetime.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

 

Pixabay photo

By Michael Christodoulou

During your working years, you generally know how much money you’re bringing in, so you can budget accordingly. But once you’re retired, it’s a different story. However, with some diligence, you can put together a “paycheck” that can help you meet your income needs.  

Where will this paycheck come from? Social Security benefits should replace about 40% of one’s pre-retirement earnings, according to the Social Security Administration, but this figure varies widely based on an individual’s circumstances. Typically, the higher your income before you retire, the lower the percentage will be replaced by Social Security. Private pensions have become much rarer in recent decades, though you might receive one if you worked for a government agency or a large company. But in any case, to fill out your retirement paycheck, you may need to draw heavily on your investment portfolio.   

Your portfolio can provide you with income in these ways:

Dividends: When you were working, and you didn’t have to depend on your portfolio for income to the extent you will when you’re retired, you may have reinvested the dividends you received from stocks and stock-based mutual funds, increasing the number of shares you own in these investments. And that was a good move, because increased share ownership is a great way to help build wealth. But once you’re retired, you may need to start accepting the dividends to boost your cash flow.

Interest payments: The interest payments from bonds and other fixed-income investments, such as certificates of deposit (CDs), can also add to your retirement income. In the years immediately preceding their retirement, some investors increase the presence of these interest-paying investments in their portfolio. (But even during retirement, you’ll need some growth potential in your investments to help keep you ahead of inflation.)

Proceeds from selling investments:  While you will likely need to begin selling investments once you’re retired, you’ll need to be careful not to liquidate your portfolio too quickly. How much can you sell each year? The answer depends on several factors — your age, the size of your portfolio, the amount of income you receive from other sources, your spouse’s income, your retirement lifestyle, and so on. A financial professional can help you determine the amount and type of investment sales that are appropriate for your needs while considering the needs of your portfolio over your lifetime.  

When tapping into your investments as part of your retirement paycheck, you’ll also want to pay special attention to the amount of cash in your portfolio. It’s a good idea to have enough cash available to cover a year’s worth of your living expenses, even after accounting for other sources of income, such as Social Security or pensions. In addition, you may want to set aside sufficient cash for emergencies. Not only will these cash cushions help you with the cost of living and unexpected costs, but they might also enable you to avoid digging deeper into your long-term investments than you might like.

You may be retired for a long time — so take the steps necessary to build a consistent retirement paycheck.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.