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Vol. 71, No. 5, September 2017

FOCUS ON Tax, Investment, & Financial Planning

Taxable Social Security Benefits and High Marginal Tax Rates
Greg Geisler, PhD, CPA
When Social Security Benefits (SSBs) are collected, the usual federal tax rates of 0 percent, 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent change to effective marginal tax rates (MTRs) of 0 percent,15 percent, 22.5 percent, 27.75 percent, 46.25 percent,25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. The four higher effective MTRs (italicized) are due to SSBs phasing in as taxable until reaching the maximum taxable percentage, 85 percent. Further, if the taxpayer’s income contains any qualified dividends or long-term capital gains, an effective MTR of 55.5 percent is sandwiched between the 27.75 percent and 46.25 percent MTRs. This article identifies when a client has a higher effective MTR and discusses tax planning strategies.

The Potential Impact of State-Based Retirement Plans on Retirement Savings
Cassandra R. Cole, PhD
Numerous studies suggest there is a significant portion of working Americans who are not adequately saving for retirement. At retirement, these individuals may be heavily dependent on Social Security, reliant on family for support, or forced to work longer or return to work. All of these outcomes can have adverse effects on these individuals and the economy as a whole, including a lower standard of living and reduced consumption. One proposed solution to the lack of wide-scale availability of employer-sponsored retirement plans and inadequate personal savings is state-based retirement plans. This article discusses the current status of these plans, explores the potential impact on retirement savings, and considers the possible implications for financial planners.

Investing in Stocks inside Retirement Accounts and Bonds in Taxable Accounts
Greg Geisler, PhD, CPA
It is widely held that investing in bonds inside retirement accounts and stocks inside taxable accounts is tax efficient. This view leads to the rule of thumb that ordinary-income-producing investments should be held inside retirement accounts. This rule does not stand up to scrutiny. This article shows that, if the economic environment is one of low expected inflation, low expected bond returns, and expected stock returns about double (or more) bond returns, investing in stocks with contributions to retirement accounts and buying investment-grade bonds in taxable accounts are wealth maximizing.

Avoiding Accuracy-Related Penalties on Individual Income Tax Returns
Paul G. Schloemer, CPA, PhD
The accuracy-related penalty of Internal Revenue Code (IRC) Sec. 6662 has been a frequent source of contention between taxpayers and the IRS. Thus, financial and tax advisors should have a basic knowledge of this law and be aware of successful strategies for avoiding this penalty. This article defines situations in which the IRC Sec. 6662 penalty applies and reviews recent court decisions to provide clarification on the standards taxpayers must meet to avoid this penalty.

DEPARTMENTS

Editor’s View
Taking Your Retirement Planning Practice to the Next Level
Kenn Beam Tacchino, JD, LLM, RICP
Financial planners looking to provide wraparound services for their clients may want to consider several unique ideas to augment their financial planning practice. These include: appointing a daily money manager to service their client’s basic financial needs, connecting with a reverse mortgage counselor, engaging a social worker or life coach to help counsel a client about the transition to retirement, compiling a package of brochures about local retirement living options for distribution to clients, and dispensing the “Financial Self-Defense Guide for Seniors” and other industry brochures. Retired clients often need these extra services, and the planner can cement his or her relationship by caring enough to go the extra mile.

Advice for the New Planner
Don’t Let Uncertainty Lead to Tax Planning Inaction
Carl M. Rosenfeld, CPA, CFP, MST
A skilled planner should focus on building a plan that is flexible and outlines the potential impact, both positive and negative, of changes to the tax environment on the financial results of the plan. The art of skilled planning is finding the balance between taking current action and delaying for further insights into congressional movement. Planners need to take a three-step approach. First, while income tax planning is important, we should be careful not to allow the tax implications of a planning scenario to cloud the client’s actual underlying intention. We need to always remain focused on the planning goal and try to implement that goal in a tax-efficient manner. Second, some planning ideas can be reversed in the event of a tax law shift that would affect their attractiveness. Third, some planning steps can be implemented in a flexible manner to allow for the ability to shift as needed for future tax changes.

Economics & Investment Management
Does Engagement in the Stock Market Shape Willingness to Take Financial Risk?
John E. Grable, PhD, CFP
Abed Rabbani, PhD
Using changes in Standard and Poor’s 500 data over a multiyear period, we found that people’s willingness to take financial risks moved in roughly the same direction of the equity markets. However, the change in risk-tolerance scores was only a small fraction of the change in market prices. We identified a gender difference in the relationship. Men exhibited a greater willingness to take financial risk. Women who owned equities were like men who did not own equities in terms of risk tolerance. Women who did not own equities reported the lowest risk-tolerance scores.

Estate Planning
Estate Tax Planning: Until the Other Shoe Drops
Dennis C. Reardon, JD, LLM, CLU, ChFC
Estate tax uncertainty brings with it a variety of planning concerns. We examine those concerns and suggest ideas that should be considered now and in the future.

Ethics & Regulation
The Ethos of Financial Advising and Its Detractors
Ronald F. Duska, PhD
The goal of the fiduciary rule is noble. It intends to make sure that the agent or advisor looks out for the “best interests” of the advisee or client. However, the fact that we need to promote such a rule in such a complex way points to two serious societal issues that have been largely overlooked: the lack of an ethos that views financial advisors as professionals and the muddied notion of best interest.

Executive Compensation
Does an Incentive Plan Provide Wages or ERISA Benefits? It Can Be the Employer’s Choice
Paul J. Schneider, JD, LLM
The issue of coverage under the Employee Retirement Income Security Act of 1974 (ERISA) of certain bonus, incentive, stock, severance, and other similar arrangements remains a source of considerable controversy and litigation. This column reviews the factors courts use to determine whether compensatory arrangements are being provided pursuant to an ERISA-covered plan. Furthermore, there is not a great deal of certainty in how courts will determine whether an ERISA-covered plan exists. Given this uncertainty, it is recommended that during the planning stages and as part of an employer’s overall risk management strategy, serious consideration should be given to the pros and cons of deciding whether a benefit plan should be covered by ERISA.

Financial Gerontology
How Do We (and Our Clients) Feel about Getting Older? It’s Time to Reframe Aging
Sandra Timmermann, MEd
Age discrimination and ageism are real issues for many people who are transitioning to retirement or are already deep into that life stage. Advisors who have a better understanding of how society views older people and how that may affect client attitudes about their own aging will be more empathetic and able to build lasting relationships.

Health Insurance
The Opioid Epidemic and Health Plans
William S. Custer, PhD
The challenges opioid abuse presents are part of a broader evolution of the health insurance product. An insurance plan’s market share is increasingly determined by the quality of care as well as the cost of the coverage. Identifying appropriate care or prevention strategies, defining populations at risk, and determining the most effective methods for realizing health outcomes are all important components of a well-designed insurance plan. The opioid abuse epidemic has direct impact on costs and outcomes. Reducing those effects requires integrating plan design, provider payments, population health, and patient education.

Insurance & Risk Management
Nonqualified Deferred Compensation and Domestic Relations Orders—Successfully Navigating Irreconcilable Differences
Andrew J. Rinn, JD, CFP, CLU, ChFC
John Gephart, JD, CLU
A well-versed financial professional can provide an incredible service to clients seeking clear guidance on how to properly handle nonqualifed retirement benefits. Although mastery of the details may fall to the plan participant’s administrator, attorney, or accountant, a competent working knowledge of the issues, concerns, and potential roadblocks will invariably assist clients in navigating through the seemingly irreconcilable differences presented by domestic orders.

Practice Management
Building Collaborative Client Relationships
Douglas B. Richards, JD, MBA, CLU, ChFC
We all need to learn better how to build collaborative relationships with our clients. That effort begins the first time a prospect becomes aware of our services prior to establishing a professional relationship. Because of the availability of information via the Internet, it is important to remember that while collaboration necessarily involves working together, it doesn’t necessarily involve working exclusively together. Whether collaboration occurs between two individuals or 20, it is important to acknowledge and accept the contributions that each brings.

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