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Are All Your Eggs in the Proverbial “One Basket?”

Echo Huang • Jul 13, 2020

In our next few chats, I want to explore what’s in your financial basket. Are all your eggs in one basket? Do you even know what’s in your basket? There are strategies you can implement to maximize your tax savings. Everyone likes to save money, right? And certainly we all want to decrease our taxes. Come along with me as I introduce you to my eight tax strategies.



Just as diversification is important in investing , income source diversification is also important when it comes to planning for your financial future. While today’s top income rate of 37 percent is relatively low compared to historical income tax rates, which were as high as 94 percent during World War II, it’s still vitally important that you diversify your income sources in order to have more flexibility in dealing with potential future tax increases.



The US progressive tax system ensures that all taxpayers pay the same rates on the same levels of taxable income. The overall effect is that people with higher incomes pay higher taxes. For tax planning, you need to understand the difference between your marginal tax rate and your effective, or average, tax rate.



Your marginal tax rate, or tax bracket, is not the tax rate you pay on all of your income after adjustments and deductions. Rather, it’s the rate applied to your additional income over a certain threshold amount. Your effective tax rate is the total taxes you pay divided by your taxable income.



Effective tax rate only matters as a group of taxpayers is compared to another group of taxpayers to illustrate how much taxes each group pays based on their income levels.



For individual tax planning, your focus should be on your marginal tax rate because you can take some action to reduce taxes by not getting into the next higher tax bracket.

How Tax Brackets Work



What if your taxable income is $78,950?

Married filing jointly in 2019 puts you in the 12% tax bracket, but this doesn’t mean you pay 12% on all your income. Here is the math:



First tax bracket: $19,400 x 10% = $1,940

Second tax bracket: ($78,950 - $19,400) x 12% = $7,146

Total Federal Income Tax: $9,086



This tax table shows a 12% marginal tax rate, but an effective tax rate of 11.51%.



What if your taxable income is $321,450? If married filing jointly in 2019, you will be in the 24% tax bracket. Here is the math:



First tax bracket: $19,400 x 10% = $1,940

Second tax bracket: ($78,950 - $19,400) x 12% = $7,146

Third tax bracket: ($168,400 - $78,950) x 22% = $19,679

Fourth tax bracket: ($321,450 - $168,400) x 24% = $36,732

Total Federal Income Tax: $65,497



This tax table shows a marginal tax rate of 24%, but an effective tax rate of 20.38%.



Some people think if they earn more money, all of their income becomes subject to the next-highest tax bracket. They think they will pay more taxes and possibly have less money left over than they would have had they earned less.



As you can see from these examples, that is not true. Each dollar you earn only affects the tax rate and taxes owed on additional income and not to the dollars earned in lower tax brackets.



Eight Tax Strategies



Now that you know how the progressive tax system works, I want to introduce you to eight strategies you can adopt to maximize tax savings. Today we will talk about the first strategy.

Strategy 1: Diversify Your Income Sources


Since you cannot predict your future income tax rates, owning investments in all three tax buckets gives you the flexibility you need to reduce taxes.


Many people miss out on opportunities to save taxes by failing to realize that they are making tax-inefficient decisions and by failing to own investments in all three tax buckets: tax deferred (401(k) and IRA), tax-free (Roth IRA and HSA), and taxable (individual, joint, revocable living trust).


These three buckets provide different opportunities: by maximizing your after-tax-rate return, you pay only the taxes that you are required to pay, you can reduce your tax bill, and you can position yourself better for the long term.


A taxable traditional IRA withdrawal is taxed at the highest ordinary income tax rate. People often forget how much the financial climate can change. For example, a higher income earner could find himself/herself with a tax hike down the road if the government finds itself in need of money. 


People often overlook the importance of having a Roth IRA account. Because Roth IRA contributions do not reduce their current tax bill, they may not see the benefits of putting a small amount in a Roth IRA and leaving it to grow for twenty or thirty years.


At retirement, if you find yourself in a 55 percent tax bracket because the political climate has changed, and with it the tax laws, having a tax-free account will offer you a lot of flexibility. You can treat the taxes you choose to pay now on the Roth conversion as “tax insurance” because it helps to manage the risk relating to potential future tax rate increase.


There are other advantages to having a Roth IRA:

You are able to make contributions at any age even after age seventy as long as you and/or your spouse have earned income.

  • You are not required to take a required minimum distribution (RMD) from a Roth IRA when you turn age 70.5.
  • A nonworking spouse can open a Roth IRA based on the working spouse’s earnings if they file tax returns jointly.
  • You can still make your annual contributions if you convert money from a traditional IRA to a Roth IRA in the same year.
  • You can contribute to a Roth IRA even if you participate in a retirement plan through your employer.


The Roth IRA allows you to pay taxes now at a certain rate instead of paying taxes later at an uncertain rate. This is a great way to hedge against future income tax increases. Roth IRA contributions are made on an after-tax basis. However, keep in mind that your eligibility to contribute to a Roth IRA is based on your income level. If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $139,000 for the tax year 2020 to contribute to a Roth IRA, and if you're married and file jointly, your MAGI must be under $206,000 for the tax year 2020. The maximum total annual contribution for all your IRAs combined is:



  • $6,000 if you're under age 50
  • $7,000 if you're age 50 or older



Even if your income exceeds the limits for making contributions to a Roth IRA, you can still do a Roth conversion, sometimes called a "backdoor Roth IRA." You can make non-deductible contributions to your IRA and report the contributions to the IRS using Form 8606 when you file income tax returns for the year. 



When you convert a traditional IRA to a Roth, you will owe taxes on any money in the traditional IRA that would have been taxed when you withdrew it. That includes the tax-deductible contributions you made to the account, as well as the tax-deferred earnings that have built up in the account over the years. That money will be taxed as income for the year you make the conversion. If you have made non-deductible contributions to your IRA due to high income, then this portion is not taxable and you will follow the pro-rata rule to calculate the taxable portion using form 8606 when you file your tax returns for the year you do the Roth conversion. 


One reason that a conversion might make sense for you is if you expect to be in a higher tax bracket after you retire than you are now. That might happen, for example, if your income is unusually low during a particular year (for example, you were furloughed or lost your job during the COVID-19 pandemic) or if the government raises tax rates substantially in the future.


Helping you learn how to save money is an important goal of mine. Understanding the tax codes and advantages and disadvantages of specific types of income, and specifically IRAs, is the first step in maximizing your tax savings. Next time, we will discuss how to help your children fund their IRAs, being creative with charitable giving, and opening a Health Savings Account (HSA). 



Until then, think about your financial basket and what eggs you have in it. I’m curious how many of you have a traditional IRA and how many have a Roth IRA? Please share below.

By Fang Huang 03 Dec, 2022
How important is long-term care? It is important enough for you to plan it. It is important enough for you to do it. It is important enough for you to think twice. That is why we observe National Long-term Care "Planning" Month in October, followed by National Long-term Care "Awareness" Month in November. The double reminder tells us that long-term care is critical in creating a healthy financial picture. It can be a meaningful gift that enhances peace of mind to the very end for you and your loved ones. In the previous article, we discussed the following: How long-term care is not as scary as you think Long-term care as part of your wealth management plan Why plan early for long-term care Let's now expand the long-term care conversation to explore the most common questions people ask to help you gain clarity on the next steps. What is long-term care, and why is it important? Long-term care involves various services designed to meet a person's health or personal care needs during a short or long period. These services help you live as independently and safely as possible when you can no longer perform everyday activities independently. What are the three basic levels of long-term care? Care is usually provided in three main stages: independent living, assisted living, and skilled nursing. Nursing homes offer care at home or in the community. Nursing homes provide skilled nursing care, rehabilitation services, meals, activities, help with daily living, and supervision. What is the monthly cost of long-term care? According to Genworth's year 2021 data, monthly median costs for Minneapolis Area are $11,708 for a semi-private room in a nursing home facility. Homemaker services: $7,055. How long do most people live in long-term care? According to the latest AOA research, the average woman needs long-term care services for 3.7 years, and the average man for 2.2 years. What are the significant trends in long-term care? An AARP survey revealed that 90% of adults over 65 would prefer to remain in their homes as long as possible. This statistic should be significant to long-term care facilities because they must consider including in-home health care to meet changing consumer preferences. What is commonly offered at long-term care facilities? These services typically include nursing care, 24-hour supervision, three meals daily, and assistance with everyday activities. Rehabilitation services, such as physical, occupational, and speech therapy, are available. Remember that you might stay at a nursing home for a short time after being in the hospital. Why is long-term care growing? An aging population and the increasing prevalence of chronic conditions will drive up demand for long-term care services, including assistance with the activities of daily life. What is the purpose of a long-term care policy? Owning a long-term care insurance policy aims to help you maintain your lifestyle as you age. Medicare, Medicare supplement insurance, and the health insurance you may have at work usually won't pay for long-term care. Thank you for exploring this important topic with us. For a complimentary long-term care plan review, schedule a time with an Echo Wealth Management team member. Together, let's identify possible action items to help you deliver continued peace of mind for your family.
By Fang Huang 28 Sep, 2022
According to LIMRA's 2022 Insurance Barometer Study, the secret to financial security is owning life insurance. Choosing the right products can help you to better protect your family’s lifestyle today and into the future. No matter what your age or situation is, owning a life insurance policy is an excellent family protection strategy. It allows you to leave an inheritance without your beneficiaries having to pay income tax on the death benefit they receive. Your beneficiaries could use the death benefit to replace your lost earned income and pay for essential expenses such as food, shelter, credit card bills, funeral or cremation costs, student and auto loans, medical bills not covered by health insurance, and so much more. It can also be used to provide extra support for retirement and the unexpected such as injury or illness. Whether you’re single, retired, or in any stage, life insurance can be a critical tool in a comprehensive financial plan. As a general rule of thumb, it’s an excellent idea to review your life insurance needs with a licensed financial professional every year to see where you stand regarding adequate coverage - should benefit increase or additional policies be necessary. Let’s explore how your life insurance needs may change according to the three primary stages of work and life. 1. Primary years (single and early career) Life insurance is often overlooked in the career establishment years, especially if you do not have a spouse or children who financially depend on you. The first step is to check with your employer and explore their benefits. Still, employer-sponsored policies typically offer coverage about 1-2 times your annual salary, which is a fraction of the coverage you may need. In addition, group life insurance coverage typically does not carry over with a job change. A good decision would be to purchase an individual or private life insurance policy outside of the workplace to supplement their coverage through work, especially if you have student loans or debt with a co-signer, support aging parents, or don’t wish to leave final expenses to family. Getting an early start on life insurance is smart as rates are typically much more affordable when you’re young and healthy. Generally, level-term life insurance (20 to 30 years) works well for people who plan to have children in the future. Level-term life insurance means the premium does not change during 20 or 30 years, unlike the group term policy through work. For example, it can cost $250,000 to raise a child, and you have a student loan balance and a mortgage, paying less than $500 per year could potentially have $1 million coverage when you are under age 30 and healthy. 2. Growth years (married with children and mid-career) At this stage, the need for life insurance coverage typically increases with your growing family and career advancement, so be wise in how you structure your policies. Consider the coverage you need to replace future lost earned income and any large debts that would burden your loved ones. In addition, factor in the cost of raising your children through college and add emergency savings for economic and lifestyle disruptions. Employer-sponsored life insurance benefits are typically not enough for your dual-income and household expenses, so consider increasing the benefits on your existing policy and purchasing life insurance for your spouse and children are great ways to help with maintaining adequate coverage for the entire family. Suppose your income is high and you have maximized contributions to all retirement plans. In that case, you can consider buying a permanent life insurance policy that has cash value and will pay the death benefits regardless of how long you live. The cash value can be invested, and the earnings are not taxed each year which helps you pay for the cost of insurance. 3. Empty nest (estate/retirement planning and late-career) In your final working years, you may have set aside a good bit of savings for retirement, but planning for your financial future doesn’t stop here. As you get older, you could tap into the cash value from your life insurance policy to help supplement your retirement income and may avoid paying income taxes on the earnings if you choose to borrow from the cash value. The unpaid loan balance will reduce the death benefit, which is all right as your beneficiaries may not need as much death benefit when you are retired and much older. The primary purpose of life insurance changes from income replacement to wealth transfer when you have accumulated enough assets to retire. If your estate is over $3 million, including the death benefit of your life insurance policies, consider advanced estate planning to reduce potential estate taxes. For Minnesotans, the estate exemption is $3 million per person for 2022, which means you may need to pay 13% to 16% Minnesota estate tax on the amount that exceeds $3 million. Federal estate exemption is $12.06 million for 2022, but it may be cut in half after the year 2024. The amount above the estate exemption amount is subject to a 40% federal estate tax. If you would like to minimize the shrinkage of your nest egg, using proper life insurance can be a solid strategy to address estate tax exposure. Setting up an irrevocable life insurance trust (ILIT) to own your existing permanent life insurance policies or buy a new one can remove the death benefit from your estate. In addition, you can gift annually to the trust to pay for the insurance premiums over time to further reduce your estate. Take advantage of an annual gift exclusion of $16,000 for 2022 and $17,000 for 2023 to fund the ILIT. You may not need to use much of your lifetime gift exemption as you file your gift tax return (Form 709). The ILIT with Crummey power gifts remains one of the most powerful estate planning tools for high-net-worth individuals. Done properly, you avoid entirely gift tax, estate tax, and income tax on your legacy to future generations. For business owners with most of their net worth in their business, liquidity is an issue as the estate taxes are due nine months from the day of death. To preserve the business for the next generation and to avoid selling stock portfolios during market decline to pay estate taxes, consider using life insurance to provide the money to pay estate taxes efficiently. Life insurance policies and tax laws are complicated, and they keep changing. I recommend you work with your trusted advisor who can help you assemble a financial dream team, including an estate attorney, a tax CPA, and a life insurance agent to give you customized recommendations and help you implement the strategies. Whether you have general or specific questions about life insurance, you can schedule a meeting with an Echo Wealth Management team member at any time. We'll be happy to answer your concerns and help you to find the right policies to achieve adequate coverage at every stage of your life.
By Fang Huang 31 May, 2022
You might be thinking… Other people get disabled, not me. My business can run without me. I’d rather put my money into growing my business. The truth is illness and injury impact all of us, even businesses. Whether you are a key employee or business owner, understanding the possible outcomes of a temporary or permanent disability will help you to identify smart solutions for your financial plan. Let’s look at each situation and its solution. 1. As a high-income earner, having both a workplace policy (group long-term disability insurance) and a private policy (individual disability insurance) helps to ensure that you will have adequate income protection for everyday living expenses like mortgage, utilities, and groceries. 2. Suffering a disability does not mean that you must stop contributing to your retirement account. Having a disability retirement security policy helps you to make that dream a reality; it pays benefits to a trust to be accessed as retirement income. 3. The worst thing that can happen to a business owner is when s/he can no longer keep the business open. Having overhead expense insurance helps you to pay for necessary expenses like employee salaries, accounting fees, and office rent. The key benefit here is that you can either return to your financially sound business or sell the business that has not depreciated because of your disability. 4. As a business owner, it’s crucial that you have a funding solution for your business should you or another owner become too sick or hurt to work. Disability buy-out insurance funds a buy-sell agreement helping to buy-out the disabled owner’s interest in the event of a long-term disability. Benefits are typically tax-free, and the disabled owner is taxed only on the gain from the sale of the business. If you are the main income earner in your family, even if you have group long-term disability insurance, it may not be enough to pay your basic living expenses as the benefits are taxable if your employer pays the premiums. You can consider buying an individual disability insurance policy that can supplement your current group coverage. Individual policies are not tied to employment that offers more flexibility as you may decide to change your job. Some policies can have an automatic increase in benefits feature based on your earned income without going through underwriting. According to the Centers for Disease Control and Prevention, one out of four adults in the U.S. will suffer some type of disability. You work hard for your family and/or business, so make protecting your income a priority. Remember that a disability is more than just an accident. It can happen to anyone, anywhere, anytime. To get started on a complimentary disability plan review, get in touch with me today and together, let’s take the necessary steps to protect the financial future of your loved ones, business, and/or key employees.
By Fang Huang 23 Feb, 2022
Sometimes, the unknown can be a bit scary. Previously, I’ve shared several financial tips that will allow you to plan for your financial independence and to own your future. Today, I want to ask you to give me a few somber minutes of your time. I am asking you to turn off your emotions and turn on your intellect only. This way, you will be protected from your emotions entering in and shutting you off from discussing a tough but important topic: Long-Term Care. Come out from under the blanket for a few moments to learn about this important element of financial planning. Let’s look at what it is, and I promise you, it’s not as scary as you might think. Long-Term Care as Part of Your Wealth Management Plan Yes, long-term care is just as important in your wealth management plan as is saving for your children’s education. Maybe I could make it easier for you to consider if I asked you to look at long-term care as a protection for your children/loved ones in lessening their burden when caring for you. When her fifty-year-old husband suffered a fatal stroke, “Lily” came to me to figure out what financial decisions she needed to make for her and her daughter in case she ever needed long-term care. Neither she nor her husband had a long-term care policy because they assumed they wouldn’t need it until they were in their seventies or eighties. Like most people their age, they thought they had more time to think about it. Another reason people don’t think about long-term care is the same reason they often don’t want to think about estate planning - they don’t want to dwell on their own disability. No one wants to think about being incapacitated and not being about to perform the six activities of daily living: eating, dressing, bathing, toileting, transferring, and continence. Unfortunately, the reality is that many of us have to face this situation at some point in our lives. Too many people make the mistake of waiting too long to take out a policy to protect them from this eventuality. Why Plan Early? More than a decade ago, Congress passed a law to encourage more people, especially baby boomers, to plan early by buying long-term care insurance. Special tax benefits were offered to motivate people to plan ahead so that they didn’t end up on government assistance, either Medicare or Medicaid. The government’s attempt to incentivize individuals to plan early was a good idea for a number of reasons: First , monthly premiums are based on your age when you apply. This makes premiums less expensive when you’re younger. Second , people often wait until their late fifties or later to buy long-term care insurance without realizing that predicting the withdrawal of the benefits is problematic - we rarely know when we will need long-term care. A stroke or a heart attack can happen to people in their forties or fifties. Third , coverage is dependent upon your current health status. If you have a sudden heart attack or injury and have an extended hospital stay, the chances of getting a long-term care policy afterward dwindle away to almost nothing because of your preexisting condition. It’s best to buy your policy when you’re young and healthy because not everyone can qualify if they wait longer. This is particularly true for those with a family history of Alzheimer’s. These individuals are more likely to use long-term care for a longer period of time, which makes it even more important to consider buying long-term-care insurance early before you may show symptoms and buy a longer benefit period than the average of three years. I bought my policy before I turned forty. No one in my office at the time had heard of someone buying a policy this young. I had a good reason. For years, I had been calling home to my mother in China, and every time we spoke, she told me how difficult it had been for her to visit my uncle, who had Alzheimer’s and no longer recognized her. He was the oldest brother who put her through college after my grandfather died; he was like a father to her. After nine difficult years with Alzheimer’s, my uncle passed away, and this made me realize how important it is to have long-term-care insurance, not just so that you get adequate care as you decline mentally or physically, but also so that the estate you’ve worked so long to build isn’t used to pay for this care or for modifications to your home if, for example, you can’t climb the stairs. With the high cost of this care, paying out of pocket could leave your family penniless. The costs of long-term care often exceed what the average person can pay from their income and other assets. If you think about all the possible health scenarios you could face in your life, it becomes apparent that a financial plan that doesn’t include long-term-care planning is not comprehensive. Too often, people focus on investment planning or college or retirement planning without considering what would happen to their wealth if they were suddenly faced with the cost of long-term care, which can be upward of $7,000 a month. If you or your spouse needed two or three years of long-term care, that could significantly derail your retirement plans. It’s important to be smart about your resources now so that you don’t leave yourself open to that amount of risk. Very often, people do not plan ahead. This is due to a reluctance to think about getting older, developing a disability, becoming less independent, or needing help with personal care. At the same time, they often believe that health insurance, Medicare, and/or disability coverage will cover most long-term-care services should they be needed, so they don’t need to dwell on illness and aging. Health insurance, Medicare, and/or disability coverage is very limited in its coverage. That means people are often living with a false sense of comfort that their needs, should they have any, will be taken care of long-term. Thanks for bringing your head out from under the covers to read about long-term care. If you’d like to have a more personal conversation about what options and plans may be best for you, please get in touch with me today.
By Fang Huang 12 Jan, 2022
For the 11th year in a row , president and founder Echo Huang was awarded the 2022 Five Star Wealth Manager award . Using an in-depth research methodology with 10 objective criteria, including client retention rate, client assets, and households served, this award honors top local investment professionals for their commitment to professional excellence. "I help clients build financial confidence to follow their passions and dreams." -Echo Huang
By Fang Huang 28 Sep, 2021
Just about everyone wants to give their kids a head start in life, and building generational wealth is an effective way to do it. Join me at the next Master Your Money live event (free virtual hour-long bootcamp), “H ow to Create Generational Wealth” at 11 am CT on October 5, 2021. We will discuss the different forms of generational wealth, why it's so much harder to create for some communities than for others, and how you can start building wealth that will outlast you.
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There is nothing more frustrating than finances being a reason that you can't do something. Recently Echo spoke on The Abundant Beans Podcast about what business owners can do to break down the many things needed to run a successful business by creating a system that has your money working for you, from tax planning to exit planning and much more.
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