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A friend of mine, we'll call him John, recently wanted to know why retirement planning is important. Perhaps you've pondered the same question. John is well educated and enjoys a successful career. Like many people, John is busy and simply didn't feel like there were enough hours in the day to tackle one of the most important decisions in his life. Download Now: Key Retirement Planning Issues to Consider [Free Retirement Cheat Sheets] A lack of time and a feeling of being overwhelmed is what made him hesitate about tackling retirement planning in the first place. As John quickly found out, there are a lot of reasons why retirement planning is important for just about everyone - regardless of education or wealth. Our free retirement cheat sheets can help you answer many important retirement questions. These cheat sheets are one of the best ways to understand the importance of retirement planning because they can reveal hundreds of considerations for folks who want to maintain their lifestyle in retirement. For starters, retirement can last a lot longer than you think. According to Money Guide, a 65-year-old married woman today has a 50% chance of living to age 90! That means it’s entirely possible your post-career phase lasts 25 years or more. Your life expectancy may be a lot longer than you anticipate. That’s great news if you’re well prepared. But, if you’re retirement planning is a priority, living longer can be a little terrifying. The fact is, the average Social Security check in 2022 is only about $1,550 per month, which isn’t nearly enough to maintain pre-retirement standards of living for many individuals. Social security benefits simply don’t provide the income necessary for a comfortable retirement. Medicare, which is the primary insurer for seniors in retirement, doesn’t cover the healthcare costs many seniors will encounter as they age. Someone turning 65 this year has a 70% chance of needing long-term nursing care; women, on average, need over three years of supportive care as they approach the end of life. Only 20% of today’s 65-year-olds won’t need long-term supportive care. It’s more important than ever to have a realistic retirement savings goal and a solid plan for achieving it. With the help of a free retirement checklist and a fiduciary financial advisor to help guide your decisions, you stand a much better chance of retiring comfortably—and maximizing your sources of income so you can live the life you want. So why is retirement planning important? Here is an easy to understand infographic to help you see nine powerful reasons why you should consider getting started on your retirement planning. 1. You don't know what you don't know You probably know a lot about many things in life. But, when it comes to retirement planning, there are literally thousands of factors that can impact your ability to maintain financial security. Hopefully, you'll only retire once. But, this also means you lack the experience necessary to identify critical questions and answers that can contribute to a successful retirement. Retirement planning can help fill in the gaps and answer key questions. Click on any of the links below to gains free access to powerful retirement planning checklists. What important tax, savings, and investment information should I plan around? What accounts should I consider if I want to save more? Am I eligible for social security benefits as a spouse? Should I consider doing a Roth conversion? What issues should I consider during a recession or market downturn? Should i rollover my dormant 401(k)? What financial issues should I consider before the end of the year? When should I take social security? Do I still need life insurance? What's the right mix of mutual funds or investments? Should I take my pension as a lump sum? How much income can I generate from my portfolio when I retire? Which retirement accounts should I draw from first in retirement? How can I reduce volatility in my portfolio? 2. Better health due to lower levels of stress Money problems are a major source of stress. According to the American Psychiatric Association, over 70% of adults worry about money, and that can take a toll on your physical health. Financial stress is linked to physical conditions such as diabetes, heart disease, migraine headaches, and poor sleep. Not only that, money worries can cause anxiety and depression, robbing you of peace of mind to enjoy your life today. Taking steps today to get your retirement planning on track is an important step in your overall financial wellness—which can only be good for your physical and emotional health. 3. Send less money to Uncle Sam No one likes paying more taxes than necessary. Unfortunately, retirement is a period when taxes can destroy a major part of your income and savings if you aren’t careful. Avoiding those taxes is a major reason why retirement planning is important. Your tax strategy for retirement should start during your working years. But the tax strategies you use while working will change drastically once you retire. Both are important, but how you approach them is very different. When you are working, your income is relatively stable and you may not have control over your income sources. As a result, finding deductions and tax credits to reduce your taxable income is paramount. If you are still building your retirement savings, contributions to your employer’s 401(k) plan can lower your taxable income, saving you money right off the top. If you don’t have an employer plan, you may be able to deduct your qualifying IRA contributions up to the annual limit ($6,000 in 2022, or $7,000 if you’re age 50 or over). If you'd like to download additional important tax, savings, and investment information for 2024, click here. You may also want to consider building a tax-free savings bucket with a Roth IRA, back-door Roth IRA, or even a Mega-Back Door Roth IRA. Lower earners may even qualify for the Saver’s Credit to further reduce your tax bill. Depending on your adjusted gross income and filing status, you could earn a tax credit of between 10% and 50% of your retirement savings contributions. You’ll also want to know how to reduce your Virginia income tax or your respective state income tax. Upon retirement, the more control you have over your income sources, the more likely you will be able to reduce your taxes. If planned appropriately, you’ll want to have three buckets or sources of income in retirement from a tax standpoint: Tax Deferred - Includes pension plans, social security, 401 (k)s, and pre-tax IRAs. Tax Free - Includes Roth IRAs, Health Savings Accounts (HSAs), and Municipal bonds. Tax Managed - Includes standard brokerage accounts with tax-efficient investments like index funds. Since it’s impossible to predict tax policy in the future, diversifying your income sources in retirement could save you tens of thousands of dollars in taxes upon retirement. As you can see, reducing taxes is an excellent reason why retirement planning is important. 4. Big-picture context helps you make better career and financial decisions Life hands you a lot of important questions as you get older. More often than not, the answers aren’t always black and white. For example: Should you stay with your company or start your own? Does it make sense to pursue a new degree or professional path late in your career? Should you pay for your child’s college or fund it another way? Can you afford to buy a vacation home at the beach? These life decisions have a major impact on your finances and can’t—or shouldn’t—be made in a vacuum. Knowing where you are with your retirement plan gives you essential context to make big decisions with confidence. Making better financial and life decisions is another major reason why retirement planning is important. Download Now: Key Retirement Planning Issues to Consider [Free Retirement Cheat Sheets] 5. Enjoy a happier marriage It’s no surprise that money issues are a leading cause of divorce. Mismatched financial priorities, high levels of debt, and the inability to work toward a common financial goal all cause marital strife. When you and your spouse are on the same page with retirement planning, you eliminate some major sources of discord in your marriage. Take money out of the retirement equation and you can focus your efforts on more exciting decisions—such as where you want to retire . Hiring a financial advisor who can provide objective, non-emotional counsel may do wonders for your marriage. Maintaining a healthy relationship with your spouse can be a great reason for why retirement planning is important. 6. Forced early retirement won’t be so scary Retiring at 55 is great when it’s part of your plan; being forced out of your job early isn’t. Unfortunately, nearly half of all current retirees aren’t retired by choice. Most were laid off or forced to leave their jobs, and a smaller number had to leave work prematurely to care for an ill or aging parent or spouse. If you have to leave work before you’re expected retirement age, you’ll be in a much better position if your retirement plan is already in place. You might not have your nest egg completely built up, but having money set aside for retirement gives you more options and time to adjust your plans if you need to retire early. 7. You won’t worry about being a burden to your kids Have you heard of the “ sandwich generation?” That’s the name for the group of people who are simultaneously supporting their children and one or both parents. About 44% of middle-aged adults with children at home have at least one living parent who could potentially need care; 15% are full-fledged members of the sandwich generation who financially support both parent(s) and children. A comprehensive retirement plan includes saving for medical costs and potential long-term care costs. When you know your expenses are covered, you won’t have to rely on your family to fill the gap. 8. You can be a really cool grandparent A good retirement plan not only keeps you from being a burden to your kids, it gives you the resources to be an amazing grandparent. Wouldn’t it be nice to take the entire brood on an annual trip or host your whole family at your spacious vacation home every year? Even if your grandparenting goals are a bit more modest, having adequate income means you can visit more often and be present for all their milestones and special events. It gives you the resources to buy those special birthday gifts or help cover the costs of their college tuition. Money won’t be an obstacle to a close relationship with your grandchildren. 9. Continue your legacy of charitable giving Most people cut their living expenses in retirement but continue their habits of charitable giving, according to a recent study. We see this a lot with our clients. If you’ve been a generous giver during your working years, it’s probably important to you to continue supporting your church and favorite charities once you leave your job. Financial planning for retirement can optimize your charitable giving three ways: It helps provide the income you need for charitable giving throughout your life It ensures your estate plan aligns with your legacy goals. It allows you to reduce your tax burden, if appropriately structured. While beyond the scope of this article, a qualified charitable distribution strategy can be a powerful strategy to help maximize your charitable donations and reduce taxes ! Get Your Free Retirement Roadmap to Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Bonus: Avoid running out of money in retirement Few things are more frightening than the thought of outliving your resources. Even a seemingly adequate portfolio can be inadequate for your needs if it’s not managed properly, especially if market conditions change. Retirement planning is important because it can help you avoid running out of money in retirement. Your plan can help you calculate the rate of return you need on your investments, how much risk you should take, and how much income you can safely withdraw from your portfolio. Working with a financial advisor who specializes in retirement income planning means you’ll have the right amount saved when you finally leave work—and that your assets will be managed in a way that protects you against the unexpected so you’re never caught short in a downturn. That’s the ultimate peace of mind. Conclusion As you can see, there are many reasons why retirement planning is important . Achieving your retirement goals takes a proactive approach. If you start planning for retirement early, the better off your retirement will be in the future. If you are nearing retirement, there literally dozens of strategies available to help you make the most of your next 25 years or more. At Covenant Wealth Advisors, we believe retirement planning is an essential part of your financial wellness. Working together, we help you clarify your expenses, prioritize your goals, and build a portfolio of assets that sustains a long and fruitful retirement. We are independent, fee-only Certified Financial Planners, which means you get unbiased advice and recommendations that align with your values. We are independent Certified Financial Planners who operate on a fee-only basis; meaning we never receive commissions for product sales. Additionally, we serve as a fiduciary which means we are required by law to always put your best interests and objectives at the forefront. We can help you find the right retirement strategies to conserve your wealth and the right investments to achieve your goals. We specialize in helping individuals age 50 plus with retirement income planning and investment strategies. If you’re not sure where you are when it comes to retirement—or want to refocus your efforts — Schedule a free retirement assessment to see how we can help make your life better. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures: Covenant Wealth Advisors is a registered investment advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. The RVA25 is an annual survey performed by Richmond BizSense. Companies profit and loss statements were reviewed by an independent accounting firm, Keiter CPA, and analyzed for three year revenue growth end December 31st, 2019. The top 25 fastest growing companies were chosen as recipients of making the RVA25 list. No fee or compensation was provided to Richmond BizSense or Keiter CPA for participation in the survey. Registration of an investment advisor does not imply a certain level of skill or training.

Are you ready to retire? Of course you are! The only problem is that you have one chance to make your money last nearly twenty five years or more. That‘s no easy task which is why you've decided to work with a financial advisor to help you retire. But the work doesn't stop there. Download Now: Free Guide to Avoid Costly Mistakes in Retirement [Free Cheat Sheets] You want to make sure the relationship continues to serve you and your finances for the long haul—up to and through retirement. To help accomplish that goal, you’ll need to ask the right questions. You may be wondering, “ What are the best questions to ask a financial advisor about retirement ?” There is so much to know and the best place to start may be by downloading our free retirement cheat sheets . They're packed with little known insights about retirement. Here's a quick video I created to help cover crucial questions around retirement. While there is no definitive list of the perfect questions to ask, we've compiled a list of some of the most powerful questions based upon our experience in helping hundreds of clients plan for retirement. Here are some important questions to consider in your financial planning journey. 1. “Am I On Track To Reach My Goals?” Regardless of your stage in life, you need to know if you are on track to reach your goals. If your advisor can’t answer this question, then you can’t expect that they will actually help you reach your destination. This question is crucial because it prompts your advisor to ask you clarifying questions so that they can assess your likelihood of achieving your goals. For starters, your advisor should be well versed in your top financial goals. You should feel confident and comfortable expressing your goals to your advisor, even if they change. What goals should you consider in retirement? Goals can be challenging to define, so it can help to have a checklist. If you don't have a checklist of goals to consider for planning purposes, you can download a master list of goals for retirement and other financial goals here. Whatever your goals are, ensure you put them in writing and prioritize them. Again, your advisor should be able to help with this task. Some goals may be easier to define than others. When you can, it’s best to keep the following acronym in mind while listing your goals: SMART . Specific, measurable, achievable, relevant, and time-bound goals bring more intention and purpose to the process. For retirement planning, here several questions to ask a financial advisor as it relates to your goals : When can I retire? How much will my monthly fixed expenses be in retirement? How much do I need to plan on spending on healthcare before turning 65? How much should I plan on spending on healthcare upon turning age 65 (Medicare)? How much can I spend on travel each year? How many years of travel should I plan on? Can I afford the new home improvement plan? What’s the best way to continue giving to charity or church? What's the best way to give to my kids/grandkids? Can I afford to purchase new cars through retirement? How much and how often? What costs should I expect for long-term care later in retirement? What type of estate planning measures should I take? 2. “When Should My Spouse and I Take Social Security?” The decision of when to claim your Social Security benefits is often one of the first long-term decisions you’ll make when you retire. Nearly everyone starts by asking themselves which age is best to start: 62, full retirement age, or 70. The answer that’s right for you depends on a myriad of factors, including your other income sources, financial need, spousal considerations, health status, and more. Asking your advisor this question will show you if they take the time to develop the best answer since it’s not the same for everyone and shouldn’t be made in a vacuum. For example, here's a hypothetical social security stress test that we often run for clients. As you can see, Robert and Elizabeth see a $505,045 additional lifetime benefit by delaying taking social security until age 70 vs. taking social security as soon as possible. But this is only part what you need to know. You also need to consider other areas of your retirement income and your decision’s impact on taxes. Your decision can have a significant effect on whether or not your money will last throughout retirement. The right social security timing decision can potentially provide hundreds of thousands of dollars or more in benefits depending on how long you and your spouse live. Proper social security planning could also extend the life of your savings by several years. Be sure to ask your financial advisor about social security when it comes to your retirement planning. 3. “How Can I Gain Control of Taxes in Retirement?” Perhaps one of the best questions to ask your financial advisor is: " How can I reduce taxes in retirement? ". A financial advisor with tax experience should be able to provide you with immense value in retirement through sound tax planning. Tax planning isn’t just about lowering your tax bill for the sake of lowering your tax bill either, although that’s certainly a benefit. Taxes in retirement constitute a significant component of making your money last because reducing your tax bill directly mitigates the strain on your savings. If you ask your advisor about managing retirement taxes, they should be able to discuss specific strategies with you. Proactive tax planning is a critical area that can’t be brushed off. Download Now: Free Guide to Avoid Costly Mistakes in Retirement [Free Cheat Sheets] Some of our fundamental tax and retirement planning techniques involve strategies to: Avoid Medicare Income-Related Monthly Adjusted Amount (IRMAA) surcharges, and Optimize retirement withdrawal strategies by creating a tax-free retirement income bucket through Roth IRA contributions and Roth conversions. Identify tax reduction strategies for state and federal taxes. Another one of our favorite tax planning techniques is to strategically reduce taxable income before 65, to help you qualify for Affordable Care Act subsidies to pay for healthcare. It’s vital to start early when planning for your healthcare costs because this particular one is a multi-year process. 4. “What Adjustments Should I Make To My Retirement Investment Portfolio? Your advisor should also discuss all the essential elements of investment advice—including how, when, where, why, and what to invest in. An advisor should have a solid investment strategy and a clear history of healthy investment management. Before working with them you should know if their ideas and practices align with your investment philosophy. Additional questions to ask a financial advisor about your retirement portfolio may include: What's the right mix of stocks and bonds/fixed income? How much should I have allocated to U.S. vs. Non U.S. stocks? What types of bonds should I own? What's the best location for specific investments across types of accounts? For example, should U.S. stocks be located in my Roth, IRA, or taxable brokerage account? How can I reduce taxes on my investment portfolio? A qualified advisor can identify if you hold the proper asset allocation (mix between investments like equities and fixed income) for your goals and risk tolerance and whether or not your investments are appropriately diversified. Your advisor should also be able to provide investment strategies and suggestions for improvement. If your portfolio isn’t as diversified as you’d like, what will the advisor do to alter it to best fit your long-term investment needs? During this process, your advisor should also review your investment expenses and, unless you already have low-cost choices, provide you with solutions for reducing those expenses like investing in low-cost mutual funds and ETFs. All of your financial decisions build on one another, so you want to create a strategic long-term plan. Any response from your financial team should also include a specific plan of investing for retirement income, including creating a concerted and strategic withdrawal plan that seeks to maximize your retirement income . 5. “What Non-Financial Goals Do I Want to Accomplish?” It's time to put the "personal" in personal finance. Your personal goals are just as essential as your financial ones. You want to work with an advisor who genuinely cares about both because each is critical to your financial future. Diving into your professional and personal goals will clearly demonstrate if your advisor is a good long-term fit. After all, your money should support the people, places, and things that mean the most to you. Perhaps you are passionate about giving back to causes you care about. Your advisor should help you create a strategic charitable giving plan like utilizing qualified charitable distributions, contributing to donor-advised funds, donating appreciated stock to offset capital gains tax , among other initiatives. You may choose to pick up new hobbies in retirement or even embark on an encore career. Or you might decide you want to move closer to family so you can spend more time spoiling your grandchildren. Whatever your non-financial goals are, be sure you can discuss them with your advisor and that they have a vested interest in helping you use your money to put you on a path to reach those goals. Discussing these goals also gives your advisor better insight into your personality, directly affecting how you plan. It may uncover something you may not have thought to mention that you need to address. 6. "Should I Take My Pension as a Lump Sum?" While being offered a pension through work is becoming increasingly rare, workplace pensions can often contribute a sizable amount to your retirement income. If you have the option of choosing a lump sum payment or a lifetime stream of income from your pension benefits, then you'll want to make sure that you make the right decision. Several factors must be analyzed around pension decisions to help you maximize your benefit and/or make your retirement savings last as long as possible. Key considerations around understanding your pension options may include: How long are you expected to live? What's the likelihood your employer will be able to continue payments if they go bankrupt? What is your current risk tolerance and immediate need for guaranteed cash flow? How does a pension vs. lump sum impact my heirs? 7. "What Issues Should I Consider When Reviewing My Tax Return in Retirement?" For most people, reading a tax return is as about enjoyable as going to the dentist, maybe even worse. But smart retirees understand that a successful retirement should incorporate your total tax picture. That's why it's important to ask your financial advisor tax return related questions including: How can I reduce my federal taxes? How can I reduce my state taxes? How can I increase my itemized deductions? If your financial advisor won't review your tax return, find someone who will. Get Your Free Retirement Roadmap to Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Work With A Trusted Retirement-Focused Fiduciary Advisor There are thousands of financial advisors out there—but, finding a financial professional you can trust to help you through retirement isn’t easy. But there are a few things you can look out for: Are they a fiduciary? Fiduciaries provide advice that's always in your best interest. They are also obligated to disclose any conflicts of interest, so you know they only give advice that aligns with your financial picture, not their firm's bottom line. We are passionate to operate as a fiduciary firm and love helping you craft plans best for your retirement journey. If you aren't sure if an advisor is a fiduciary, that can be a red flag. Do your due diligence to ensure you're getting the best advice possible. Do they have the credentials and designations to best help you? With us, your financial team will include both a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional and a CPA. How many years of experience do they have? Designations are great but you want an advisor with real experience, too. For example, at my firm, the average advisor has over 10 years of experience. Do they have specialized knowledge, training, or industry experience to serve your needs? For example, does the advisor specialize integrating tax planning with retirement planning? Taking a few minutes to ask some poignant questions and learn whether or not you're working with the right financial advisor for your financial situation could save you a lot of trouble in the long run. After all, you’re entrusting your hard-earned money, so it’s a decision worth devoting your time and energy to. If you are aged 50 plus and have over $1 million in savings and investments, request a free retirement assessment , and we evaluate your personal situation to find out how can better align your retirement plan with your life plan. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

As an S Corp owner, you have likely invested significant time, effort, and resources into building your business. However, there may come a time when you need to consider selling your S Corp. Whether it's to retire, pursue new opportunities, or for other reasons, selling an S Corp is a complex process that requires careful planning and consideration. In this article, we will discuss seven key considerations to keep in mind when selling an S Corp. Download Now: Important Numbers Every Tax Savvy Business Owner Should Know [Free Report] For business owners who want a more detailed understanding on what life will like like after you sell your company, downloading our free retirement cheat sheets can help - they're free! We help can help you determine how much you need to get from the sale to maintain financial security and help you navigating how to invest the proceeds. Let's dive into it. Table of Contents: Valuation of the S Corp Tax Implications Confidentiality Timing of the Sale Finding the Right Buyer Due Diligence Contracts and Negotiations Conclusion 1. Valuation Prior to Selling an S-Corp Valuing an S Corp is an essential first step when considering selling your business. A proper valuation can help you determine the fair market value of your S Corp and set a realistic asking price. There are several methods to value an S Corp, including asset-based valuation, income-based valuation, and market-based valuation. Each approach has its advantages and disadvantages, so it's essential to choose the right method for your business. Consider consulting with a business valuation expert to ensure that your S Corp is valued correctly. An asset-based valuation involves determining the fair market value of your business's assets, including equipment, property, and inventory. This approach is useful for businesses that have a significant amount of assets. In contrast, an income-based valuation uses the S Corp's cash flow, profitability, and revenue to estimate its value. This approach is appropriate for businesses that generate significant revenue and have consistent cash flow. A market-based valuation compares your S Corp to similar businesses in your industry, using multiples of earnings, revenue, or assets. This approach is ideal for businesses with a lot of competition. 2. Taxes on Sale of Business S Corp Capital Gains Tax Capital gains tax is a tax on the profit made from the sale of your business. When you sell your S Corp, and if the deal is structured correctly, you will likely have a capital gain or loss on the majority of the sale, depending on the difference between your basis in the business and the sale price. Basis refers to the value of your investment in the business, including your initial investment and any additional investments or losses. The capital gains tax rate varies based on how long you've owned the S Corp. If you've owned the business for more than one year, the sale will be considered a long-term capital gain, and the tax rate will be either 0%, 15%, or 20%, depending on your income level. Net Investment Income Tax (NIIT) And, don't forget about t he 3.8% Medicare surtax, also known as the Net Investment Income Tax (NIIT), which is a tax on certain investment income. It was introduced as part of the Affordable Care Act (ACA) and applies to individuals, estates, and trusts with high levels of investment income. The NIIT is calculated as 3.8% of the lesser of an individual's net investment income or their modified adjusted gross income (MAGI) over certain thresholds. For individual taxpayers, the threshold amounts are: $250,000 for married couples filing jointly $200,000 for single taxpayers $125,000 for married taxpayers filing separately Net investment income includes income from sources such as interest, dividends, capital gains, rental income, and passive income from businesses. If you've owned the business for one year or less, the sale will be considered a short-term capital gain, and the tax rate will be the same as your ordinary income tax rate. It's important to note that the tax code allows for a step-up in basis for inherited S Corps, which means that the value of the business at the time of inheritance becomes the new basis. This can reduce or eliminate the capital gains tax owed if the business is sold shortly after the inheritance. Double Taxation via the Built-In Capital Gains Tax When selling an S Corporation, the built-in capital gains tax is the tax liability that arises from the appreciation of the S Corporation's assets before it converted to an S Corp. This tax liability is based on the difference between the fair market value of the assets at the time of conversion to an S Corp and their original cost basis. When a C Corporation converts to an S Corp, the C Corp's assets are deemed to have been sold at fair market value, and any gains on those assets are subject to the built-in capital gains tax. This tax liability remains with the S Corp even if the assets are sold at a later date. The built-in capital gains tax rate is typically the highest capital gains tax rate in effect at the time of the sale of the assets. For example, if the built-in gain occurred in 2019, and the assets were sold in 2023, the built-in capital gains tax rate would be the rate in effect in 2019. However, there are certain circumstances in which the built-in capital gains tax may be reduced or eliminated. For example, if the S Corp has held the assets for a significant amount of time and the assets have appreciated significantly, the built-in gain may be offset by losses incurred after the conversion to an S Corp. Installment Sale An installment sale is a potential option for reducing the tax impact of selling an S Corp. In an installment sale, the buyer pays the purchase price over a period of time rather than all at once. This allows the seller to spread out the capital gains tax owed over several years, which can reduce the tax burden. However, there are specific rules for installment sales, and they may not be appropriate for all situations. Consult with a tax expert to determine if an installment sale is the right option for your business. 3. Confidentiality Maintaining confidentiality during the selling process is critical to protecting your business's value. If competitors, customers, or employees find out that you're considering selling your S Corp, it could damage your business's reputation and hurt its value. Consider creating a non-disclosure agreement (NDA) to ensure that potential buyers keep information about your business confidential. An NDA is a legal document that prohibits the recipient from disclosing confidential information about your business. The document outlines what information is confidential and what the recipient can and cannot do with that information. An NDA is typically signed before any information about your business is shared with potential buyers. 4. Timing of the Sale Choosing the right time to sell your S Corp can significantly impact its value. Factors to consider include market conditions, industry trends, and the financial health of your business. The timing of selling your S-Corp may also depend on how much you to receive in order to retire and allow for you to maintain your lifestyle upon retirement. Preparing your business for sale can take several months if not years, so plan ahead and give yourself plenty of time to get your business ready. It's essential to keep in mind that the selling process can take a long time, sometimes up to a year or more. So, it's essential to prepare your business for sale in advance. Ensure that your financial records are up-to-date and that your operations are running efficiently. S-Corps that have clearly defined processes and well documented procedures and workflows often fetch higher prices. Address any potential issues or red flags that may arise during the selling process, and address them before you put your S Corp on the market. This could include resolving any legal disputes or addressing any customer complaints. Download Now: Important Numbers Every Tax Savvy Business Owner Should Know [Free Report] 5. Finding the Right Buyer Finding the right buyer for your S Corp is essential to ensuring a smooth transition of ownership. Consider working with a business broker or investment banker to identify potential buyers. You should also qualify potential buyers to ensure that they have the financial resources and experience to successfully run your business. When looking for a buyer, consider the buyer's experience, financial strength, and reputation. You want to ensure that the buyer has the necessary resources and knowledge to maintain and grow your S Corp. A buyer with a strong reputation in your industry can also help ensure the continued success of your business. 6. Due Diligence Due diligence is a critical step in the selling process. It involves a thorough investigation of your business's financial and legal records, as well as an assessment of its operations, assets, and liabilities. Preparing for due diligence can take several months, so make sure you have all the necessary documents and information ready in advance. During the due diligence process, potential buyers will examine your financial records, contracts, customer relationships, and other key aspects of your business. Be prepared to answer questions and provide detailed information about your business. Consider hiring an accountant or lawyer to assist with the due diligence process and ensure that you are providing accurate and complete information. 7. Contracts and Negotiations The purchase agreement is the final step in the selling process. It outlines the terms and conditions of the sale and specifies the rights and obligations of both parties. Negotiating the purchase agreement can be a complex process, so it's important to work with a qualified attorney to ensure that your interests are protected. The purchase agreement should include details on the purchase price, payment terms, and any contingencies that may be involved in the sale. Be prepared to negotiate on these terms, and don't be afraid to walk away from a deal if the terms aren't favorable. A good attorney can help you negotiate the best possible deal and ensure that the purchase agreement protects your interests. Get Your Free Retirement Roadmap to Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Conclusion Selling an S Corp is a complex process that requires careful planning and consideration. By following these seven key considerations, you can increase your chances of a successful sale and maximize the value of your business. Don't hesitate to seek professional advice and guidance throughout the process to ensure that you make the best decisions for your business and your future. With the right preparation and approach, selling your S Corp can be a positive and rewarding experience. Are you selling an S-Corp? Do you need help reducing taxes on the sale or planning on what to do with your proceeds to make your money last? Contact us for a free retirement assessment where we will discuss taxes, investments, and your retirement. About the author: Scott Hurt, CFP®, CPA Senior Financial Advisor Scott is a Financial Advisor for Covenant Wealth Advisors , a CERTIFIED FINANCIAL PLANNER™ practitioner and a Certified Public Accountant (CPA). He has over 17 years of experience in the financial services industry in the areas of financial planning, tax planning, and investment management. Schedule your free retirement assessment today   Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view.

Knowing how to avoid estate taxes with a trust is paramount to successfully transferring your hard earned wealth to your heirs. The estate tax is a significant barrier if you are an accredited investor or successful business owner who wants to leave a legacy for your family members. While only a small percentage of U.S. residents are impacted by the federal estate tax, the levy impacts more than just the ultra wealthy. Download Now: Important Numbers Every Tax Savvy Investor Should Know [Free Report] For example, if you are a farmer, family business owner, or successful career professional, you may want to reduce the size of your estate as well. After all, the tax is on net-worth, not just investable assets. Of course, you could avoid the tax altogether by moving to Canada, New Zealand, or one of the other countries that has no federal estate taxes. But for most people, reducing the size of your estate is the most effective way of reducing or eliminating the estate tax. These free cheat sheets will help you better understand estate, tax, and investment considerations in retirement. We use them with clients all the time. There are several ways you might reduce your estate, including spending assets, giving assets away, buying life insurance and putting assets in trusts. For most people who are impacted by the estate tax, trusts are integral to reducing an estate’s size and may help to reduce estate taxes. Estate Taxes Reduce Individual’s Abilities to Leave Legacies Estate taxes are a final tax bill that’s assessed on estates exceeding a certain size. They’re one of the final payments made when an individual passes away (along with probate fees and final income taxes). Since the 2018 tax reforms, the federal estate tax exemption will be $11,180,000 for individuals and $22,360,000 for married couples filing jointly in 2018. Estates exceeding these values are subject to a 40-percent tax bill on the excess amount, for the tax is no longer graduated. In most cases, the estate tax must be paid in a timely fashion after death and it must be paid in cash. If you’ve ever calculated your net worth, you can easily estimate the current value of your estate. Simply add up the value of your assets and subtract all your liabilities. Assets may include, but aren’t limited to: Personal residence Bank accounts Investments Properties Business interests Life insurance death benefits Any other assets that would be passed on to heirs Spouses can pass on all of their assets and any unused estate tax exemption to their surviving spouse tax-free if one spouse dies. In the past, A/B trusts or marital trusts were utilized to accomplish the same task. Luckily, this may no longer be necessary depending upon your situation. A strategy for reducing the value of an estate is still needed in this situation, however, because death is impossible to predict with certainty. It’s possible your estate will still be taxed if it exceeds the allowed exemption by growing over time. The estate tax exemption is actually a unified gift and estate tax exemption, so any gifts exceeding the annual allowed amount generally counts against the exemption. Exemptions and rates may change again in the future, and all of this is in addition to any individual state’s estate tax . Virginia doesn’t currently have a state-assessed estate tax. Trusts Can Effectively Reduce the Taxable Size of Estates As mentioned, trusts are one of the most reliable and effective ways to legally reduce the size of an estate. When set up properly, trusts can either greatly reduce how much of an estate is taxed at the 40-percent rate or eliminate the estate tax burden altogether. A trust is essentially a financial arrangement between three parties in which assets are held for a beneficiary. The assets are turned over by the trustor and managed by the trustee. The trustee has a fiduciary responsibility to manage the trust assets for the advantage of the beneficiary. For the purposes of reducing your estate, trusts are effective because they take assets out of your name and put them in the name of the trust. Every dollar that’s moved from your name to a trust matters. For every dollar moved, that’s a dollar that either doesn’t count toward the exemption or isn’t taxed at the 40-percent rate. The process is legal and can result in a major reduction of your end-of-life taxes. You Have Multiple Trust Options Available for Use There are several types of trusts, including living trusts and irrevocable trusts, that you might use to reduce the size of your estate. Often, people use a combination of the various options. Qualified Personal Residence Trust for Your Home Qualified personal residence trusts (QPRTs) are primarily used to eliminate the value of a personal residence from the total value of an estate. Assuming you have a nice home, this single move could greatly reduce how much your estate is worth. Qualified Personal Residence Trust Diagram A QPRT works by transferring your residence from your name to the trust’s. The home remains in the trust for a predetermined amount of time, after which it goes to the trust’s beneficiaries. The beneficiaries would be your chosen heirs. Successfully setting up a QPRT requires forethought and honest conversations, but it’s certainly a viable option. Should you pass away before the trust expires, the residence goes back to your estate and the transfer is for naught. Usually, people who establish this type of trust make it so that they can live in their house while the trust is in effect. Then, they either accept that a move will be in order after the trust expires or set up a rental arrangement with the beneficiaries who receive the residence. Irrevocable Life Insurance Trust for Your Death Benefits Irrevocable life insurance trusts (ILITs) typically help reduce the value of life insurance policies’ death benefits from an estate. Do you have permanent life insurance? If so, transferring your policy to an ILIT could reduce your estates’ value by a seven-figure sum or more depending on the value of your policies. An ILIT moves your life insurance into the trust and makes the trust the beneficiary of any death benefits that the policy will pay. The payments are then distributed to your heirs, usually over time. As long as you live at least three years after the transfer to the trust is completed, the death benefits aren’t included in your estate. Image showing how an irrevocable life insurance trust works. If relevant to your situation, an ILIT can have the added benefit of disbursing funds over time to discourage irresponsible spending. It also may shield death benefits from creditors whom you owe. Grantor Retained Annuity Trusts for Income Generating Assets Grantor retained annuity trusts (GRATs) and grantor retained unitrust (GRUTs) are very similar to one another. They’re both used to shelter income producing assets such as business interests, stocks, bonds, or real estate. GRATs are used when assets produce consistent incomes, and GRUTs are for when the assets’ income fluctuates. Image showing how an irrevocable life insurance trust works. Either of these trusts works, similar to how a QPRT functions. The income-producing asset is placed into a trust for a set amount of time, and you receive the asset’s income during that time. When the trust expires, the asset (and it’s income) go to the heirs who are named as beneficiaries. Download Now: Important Numbers Every Tax Savvy Investor Should Know [Free Report] This strategy doesn’t fully reduce your estate by the value of the asset. However, it does reduce the taxable value of the asset by delaying when the transfer to heirs occurs. Charitable Remainder Trusts for Appreciated Assets Charitable remainder trusts (CRTs) are often used for highly appreciated assets, because they help divert capital gains taxes as well as estate taxes. They may be a good choice for real estate, stocks, mutual funds or other assets that have been in a portfolio for some time. A CRT transfers your asset into an irrevocable trust and by doing so, removes your asset from your estate. The trust then sells the asset at fair-market value. The proceeds from the sale can be used to provide you with income during your lifetime, and the trust principal is given to the charity upon death. In addition to reducing your estate’s value, a CRT has two other tax benefits. It provides an immediate charitable tax deduction when assets are transferred, and no capital gains are paid on the assets that the trust sells. It’s the capital gains benefit that makes this a particularly attractive option for highly appreciated assets. Charitable Lead Trust for Good Will Charitable lead trusts (CLTs) are used to direct funds toward charities without detracting from heirs’ future inheritances. These trusts function almost opposite of how CRTs work. A CLT transfers your asset to a trust and thereby, reduces your estate by the value of the asset. The trust then makes payments to one or more chosen charities, either for a set amount of time or until your passing. When the trust terminates, the asset is given to heirs who are the trust’s beneficiaries. A CLT may be an appropriate choice if you want create an income stream for your favorite charity during your lifetime. Just know that your heirs won’t receive the principal until after your death. Intentionally Defective Grantor Trust for Appreciating Assets Intentionally defective grantor trusts (IDGTs) are normally used when assets are expected to appreciate significantly. One of their main purposes is to let an asset grow outside an estate so that the appreciation isn’t included in the estate’s value. An IDGT transfers your asset to a trust, but it’s set up so that you continue to pay income tax on whatever income the asset generates. The trust will provide some payments for a defined amount of time, and the assets are transferred to beneficiaries upon termination. The payments, of course, must be listed on your income tax return. Without income tax eating away at the asset’s value, the asset in this type of trust can see significant growth. None of that growth is included in your estate since it occurs in a trust. Get Your Free Retirement Roadmap to Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Explore the Trusts Available to Help You These are just some of the trusts that you might use to reduce the size of your estate and future estate tax liability. If you are a high-net-worth individual, a trust can be a great tool for tax reduction. However, for individuals with less than $11,180,000 or married couples with less than $22,360,000 you may be at risk too! After all, if invested prudently, your net-worth should grow over time, and potentially surpass these numbers for many. That's why it's so important to have a wealth advisor who understands trusts while also specializing in tax-managed investing. Ultimately, in order to be effective, trusts must be properly identified, established, and funded. You should also project the growth of your wealth over time to ensure your estate plan is built for today and tomorrow. Schedule a free, no-obligation consultation today. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosure: All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. This article is not advice and you should always consult with a financial advisor, tax advisor, or estate planning attorney. Registration of an investment advisor does not imply a certain level of skill or training.

As you approach the age of 60, the question of whether you can retire with $5 million might loom large. In this article, you’ll gain insight into retirement income planning and the feasibility of retiring at 60 on a $5 million nest egg.  We'll walk you through three hypothetical case studies that incorporate common expenses and different lifestyles to help answer the question: Can I retire at 60 with $5 million? Download Now: 15 Free Retirement Cheat Sheets to Help You Preserve Your $5M+ Plus Portfolio [Free Guides and Checklists] If you want a more detailed plan that addresses specific planning strategies for your portfolio in retirement, consider requesting a free retirement plan from our firm, Covenant Wealth Advisors. What Is Retirement Planning? Retirement planning  involves laying out the financial goals that you have for your golden years and setting a concrete strategy to achieve them. Mainly, this requires creating a plan that helps you transition from the “accumulation” phase to the “distribution” phase so that your portfolio can turn into a source of income during your retirement.  Retirement planning involves a deep assessment of your current lifestyle goals, finances, and future expenses to create a roadmap that ensures a comfortable retirement. This helps ensure that you’ll have financial stability and peace of mind during the later stages of life. A common belief is that you need to save up a specific sum of money in order to be “prepared” for retirement.  However, this is not always the case. Instead, your main goal for retirement planning should be to align your financial resources with your long-term goals to help maintain your desired standard of living during retirement.  For example, retiring on $2 million could be more than adequate for some pre-retirees based on our in depth case study . Other individuals may require $5 million or more to maintain their pre-retirement lifestyle.  Retirement planning is a personalized process that evolves over time as you – and the world around you – continue to change. And, what might be good for your neighbor, may not be appropriate for you.  Let’s dive into to find out if you can retire at 60 with $5 million. Can I Retire at 60 With $5 Million? Whether you’re planning to retire soon or still have a few more years left, it’s natural to ask how much you need. This retirement question can come up often, even if you have a hefty nest egg.  A common retirement goal is to plan to live on 70-80% of your pre-retirement income. But, this is not a one-size-fits-all strategy. As you might expect, the answer to this question depends significantly on the lifestyle that you lead. To start, your location and its respective cost of living play a crucial role in your retirement planning. If you plan to move to an exotic vacation destination then you’ll need to generate more income to account for higher prices and rent prices.  For example, if you plan to move to Hawaii then you can expect to need an income of $121,228 annually  or more. On the other hand, cheaper states such as Florida only require about $68,109 to live comfortably. Your retirement location is just one aspect to consider. There are plenty of other factors that come into play like healthcare, debt, lifestyle, travel, charitable giving goals , and leisure.  Additionally, you’ll also want to take into account the longevity of your retirement, potential inflation, and unexpected costs. The number of factors to consider is why finding a financial advisor who specializes in retirement  can also be a prudent choice, as they can ensure that your retirement funds align with your goals. This can help provide the foundation for a comfortable and fulfilling post-work life. To best answer the question “Can I retire at 60 with $5 million?” we’ve put together three scenarios for “John and Mary” – a hypothetical couple with $5 million in savings: Each scenario is stress tested 1,000 times using Monte Carlo analysis  and includes three primary spending categories: Fixed living expenses  - These are necessary expenses that include day-to-day expenses such as home, food, utilities, clothing, etc… Healthcare expenses  - These are total out of pocket expenses for the cost of healthcare premiums both before and after going on Medicare. This also includes out of pocket expenses. Variable Expenses  - These expenses typically enhance lifestyle and include travel, new car purchases, charitable donations or family gifts, and nursing care at the end of life.  Important:  For purposes of the three case studies, we have adjusted the fixed living expenses in each case study to account for different lifestyles. Healthcare and variable expenses remain the same for all three case studies. Each of the following scenarios assumes the following healthcare and variable expenses in addition to fixed living expenses: Pre-Medicare Health Care Expense : $23,473 for healthcare costs until going on Medicare at age 65. Post-Medicare Health Care Expense : $10,259 for healthcare costs after going on Medicare at 65. Travel Expense : $20,000 per year for 15 years. Car Expense : $50,000 every five years for a new car after trade-in value. Donations : $5,000 in annual gifts or donations through life expectancy. Nursing Care : $120,000 per year for nursing care for the last three years of life. The following social security income is assumed: Estimated Social Security for John : $43,524 in today's dollars starting at FRA (Full Retirement Age)  Estimated Social Security for Mary : $21,762 in today's dollars starting at FRA (Full Retirement Age) The following return and inflation rates are assumed: Annualized Rate of Return:  4.00% Inflation Rate:  2.50% Let’s dive in to see if our hypothetical couple is able to retire at 60 with $5 million.  Scenario 1: John and Mary spend $96,000 per year in fixed living expenses If this couple spends $96,000 per year on basic living expenses in addition to healthcare, travel, automobile purchases and charitable giving, then their probability of not running out of money is 94% (based on 1,000 Monte Carlo simulations). (Source: View Supporting Documentation for Scenario 1) Scenario 2: John and Mary spend $120,000 per year in fixed living expenses If this couple spends $120,000 per year on basic living expenses in addition to healthcare, travel, automobile purchases and charitable giving, then their probability of not running out of money is 83% (based on 1,000 Monte Carlo simulations). (Source: View Supporting Documentation for Scenario 2) Scenario 3: John and Mary $144,000 per year in fixed living expenses If this couple spends $144,000 per year on basic living expenses in addition to healthcare, travel, automobile purchases and charitable giving, then their probability of not running out of money is 65% (based on 1,000 Monte Carlo simulations). (Source: View Supporting Documentation for Scenario 3) So, can I retire at 60 with $5 million? Based on our study, we find that $5 million should be enough for couples who spend $120,000 per year after-taxes  on fixed living expenses, plus the cost of healthcare, travel, a periodic vehicle purchase, charitable giving, and affording nursing care later in life.   However, $5 million may not be enough for individuals or couples who have a more extravagant lifestyle. But, everyone is different and there are many variables and assumptions that need to be evaluated to get the best answer for you. We do not recommend that you base your retirement planning on this one article alone. Contact us for a free retirement assessment and more personalized road map to find out if your $5 million portfolio is enough to retire. With these case studies in mind, let’s examine how retiring at 60 with $5 million could play out by taking a closer look at the different factors to consider when planning for retirement. Download Now: 15 Free Retirement Cheat Sheets to Help You Preserve Your $5M+ Plus Portfolio [Free Guides and Checklists] Factors to Consider When Planning for Retirement Even if you have plenty of cash, it’s still important to have a detailed plan for retirement. Retirees face many decisions when planning for their post-work life. Here are a few common factors retirees should consider when planning for retirement: Living Expenses:  Evaluate and budget for essential living costs, including housing, utilities, and other expenses. Healthcare Costs:  Anticipate and plan for healthcare expenses, factoring in insurance, potential medical needs, and long-term care. Income Sources:  Assess retirement income  from sources such as Social Security, pension plans, and investments. Investment Strategy:  Develop investment strategies that align with your risk tolerance, time horizon, and financial goals. Inflation:  Consider the impact of inflation on your purchasing power over the course of retirement. Lifestyle Choices:  Align your retirement lifestyle, including travel and leisure activities, with your finances. Debt Management:  Address and manage your debts to reduce financial stress during retirement. Emergency Fund:  Maintain an emergency fund for unexpected expenses, providing a financial safety net. Tax Strategy:  Be sure to have a detailed tax strategy to help avoid tax bracket creep, medicare surtaxes, and other “hidden” taxes traps.  Strategies to Turn Your $5 Million Into an Income Stream in Retirement Now that you know the major factors influencing your golden years, you can begin looking at investment strategies for your $5 million portfolio.  The art of retirement planning involves turning your hard-earned dollars into a comfortable income stream for your future self. Here are some of the most common strategies to keep in mind as you get closer to leaving the workforce: Roth Conversions:  A Roth conversion is a financial maneuver where you take money from a traditional IRA (Individual Retirement Account) or 401(k) and transfer it into a Roth IRA. In simple terms, a Roth conversion is like paying the tax bill now on your retirement savings to avoid a potentially larger tax bill later, allowing you to enjoy tax-free withdrawals in your golden years. Diversification:  Diversification is important no matter what age you are. But, as you get closer to retiring, it’s important to reevaluate your holdings with an investment portfolio review . Most commonly, you may want to transition your portfolio from higher-risk assets to lower-risk ones.  Emergency Fund:  In addition to your nest egg, it’s usually a good idea to have an emergency fund on hand. This way, you won't need to dip into your nest egg early and can avoid any early withdrawal penalties.  Income-Generating Investments:  In the same vein as diversifying your holdings, you’ll also want to shift to income-producing assets. This typically includes dividend-paying stocks, bonds, and real estate. This can help replace your income as you prepare to quit the workforce. Order of Withdrawals:  The order in which you withdraw funds from your retirement accounts can significantly impact how long your savings last and how much tax you pay. It’s like a game of financial chess: with thoughtful moves, you can make the most of your savings and enjoy a more comfortable and secure retirement. Asset Location:  Asset location for retirement is a bit like organizing a toolbox. Just as you'd put different tools in different drawers depending on their use, you put your investments in different "accounts" based on how they are taxed. This strategy is all about increasing your wealth after-tax and making your money work harder for you. Many individuals forget about this important strategy. Social Security Timing:  Social Security timing strategies in retirement are like playing a strategic game with your retirement income. The goal is to maximize the amount of money you get from Social Security over your lifetime. It’s possible to save hundreds of thousands of dollars over time with the right strategy  Cash Flow Management:  Tracking your cash flows in retirement is paramount and should be automated to make it easy. If done correctly, correctly managing your spending can have make the difference between maintaining financial security and losing your home.  Again, these are just general financial tips for those who are nearing retirement age with approximately $5 million in savings and investments.  If you have specific questions or want a more tailored strategy to your specific situation, take our retirement quiz to request a free retirement assessment .  The 4% Rule: Is it Still Relevant? The 4% rule is a common retirement rule that suggests that retirees can withdraw 4% of their retirement savings each year. By sticking to the 4% rule, you should be able to avoid outliving your savings.  However, in recent years retirees have questioned the 4% rule , mainly due to lower expected returns from stocks and bonds. Here are some aspects to consider in regards to the 4% rule: Market Conditions:  The 4% rule is based on historical market conditions. But, in reality, it should fluctuate based on market conditions. For example, if economic conditions favor one asset class over the other then it can be prudent to adjust your retirement strategy as opposed to rigidly adopting the 4% rule. Longer Lifespans:  With increasing life expectancies, retirees might need to plan for a longer retirement than they have in decades past. The 4% rule is a good rule of thumb. But, it might not account for longer lifespans.  Flexibility:  Some financial planners advocate for flexible withdrawals. During years of strong market returns, retirees can withdraw more, and during downturns, they can tighten their belts. Given these considerations, some retirees and financial planners now plan for a more personal approach to withdrawals. It's essential to stay informed about economic conditions, regularly review your financial plan, and adjust your strategy as needed. Monte Carlo Stress Test for Income In retirement planning, it’s important to assess and adjust your investment strategy. One way to go about this is the Monte Carlo Stress Test .  The Monte Carlo Stress Test is a financial planning method to assess risk. It allows you to predict retirement income in the face of potential market scenarios. Monte Carlo Stress Testing  can provide a better analysis of retirement income strategies. Here's how a Monte Carlo Simulation works: Run different scenarios using samples of historical market returns : This accounts for the uncertainty of investment returns over time and gives a range of possible future returns based on historical data. Run this test with different portfolio allocations:  Running different portfolio tests can give you an idea of what allocation might be best for you. With retirement income planning, stress testing projects a financial plan with adverse conditions to see how resilient it is. This could include scenarios like a prolonged bear market, high inflation, or unexpected healthcare expenses. The goal of a Monte Carlo Stress Test is to evaluate the probability that a retirement income plan will succeed (i.e. not run out of money) under different market conditions. It provides an approach to better predict and manage financial risk in retirement. Get Your Free Retirement Roadmap to Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Achieving a Comfortable Retirement With $5 Million at Age 60 Achieving a comfortable retirement with $5 million requires a strategic approach to financial planning. While the nest egg provides a solid foundation, considering various factors is essential. Begin by assessing your expected living expenses, factoring in housing, healthcare, and lifestyle choices. Develop an investment strategy that balances risk and return. This can increase the growth potential of your savings. Find a financial advisor to build your retirement plan, ensuring it aligns with your goals and circumstances. Beyond money, embracing a purpose-driven retirement can also help with the satisfaction of your post-work years. Still not sure what steps to take next? Get a retirement assessment  from Covenant Wealth Advisors with one of our trusted advisors today.  We specialize in advising individuals with over $2 million in savings and investments plan, invest, and enjoy retirement with confidence.  About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice. Registration of an investment advisor does not imply a certain level of skill or training.

Choosing the right financial advisor can be one of the most important decisions you make for your financial future. A great advisor can help you optimize your portfolio, minimize taxes, and achieve your retirement goals. But with so many options out there, how do you find the best financial advisor in Richmond VA to meet your unique needs? As Megan Waters, CFP® at Covenant Wealth Advisors in Richmond, VA explains, "Working with an experienced, fiduciary financial advisor can make a world of difference, especially as you near retirement. But it's crucial to find an advisor who is the right fit for your specific situation." In this article, we'll share insider tips on how to identify and select the top financial advisor in the Richmond area for you. Need additional help with your retirement planning? Be sure to  download our free retirement cheat sheets to potentially help you save money, reduce taxes, and optimize your portfolio for retirement. Best Financial Advisor Richmond VA: Key Takeaways Look for a financial advisor who is a fiduciary, putting your interests first Verify the advisor's experience, credentials, and specialization in serving clients like you Understand the advisor's fee structure and minimum investment requirements Evaluate the advisor's communication style, process, and technology Ask for referrals from friends or read online reviews, but ultimately meet with advisors yourself Table of Contents What to Look For in a Financial Advisor Identifying Qualified Financial Advisors in Richmond Evaluating a Financial Advisor's Experience and Specialization Understanding a Financial Advisor's Fee Structure Assessing an Advisor's Service Model and Communication Tips for Interviewing Financial Advisors Red Flags to Watch Out For Making Your Final Decision FAQs About Choosing a Financial Advisor Conclusion What to Look For in a Financial Advisor When evaluating financial advisors in Richmond VA, we believe these are some of the most important factors to consider: Fiduciary Duty As a fiduciary, a financial advisor is legally and ethically required to put your best interests first at all times. A fiduciary financial advisor must provide advice and recommend investments that are in your best interest, not theirs. Always check that your advisor will be serving you in a fiduciary capacity. When in doubt, make them put in in writing and make sure it's written in their firm brochure ADV part 2B. Credentials Look for a financial advisor with respected credentials like the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. Certified financial planners have the educational training to provide comprehensive financial planning solutions, ensuring all aspects of your financial life are considered. CFP® professionals have extensive training, experience, and are held to high ethical standards. Other reputable designations include Chartered Financial Analyst (CFA) and Certified Public Accountant (CPA). Pro Tip:  Verify an advisor’s credentials and background using FINRA’s BrokerCheck tool  or the SEC’s Investment Adviser Public Disclosure database . Experience Ideally, work with a financial advisor who has at least 10 years of experience, including experience navigating different market environments and serving clients in situations similar to yours. For example, if you’re nearing retirement, look for advisors who specialize in retirement income planning, like our firm, Covenant Wealth Advisors. Fee Structure Understand how an advisor is compensated - fee-only, commissions, a combination? We believe working with a fee-only fiduciary advisor is best to minimize conflicts of interest. Fee-only advisors are only paid by you and don’t receive commissions for recommending certain products. If you aren’t sure if the advisor is fee-only, just make them putting in writing. “At Covenant Wealth, we believe transparency is key, which is why we are fee-only fiduciaries. Our clients always know exactly how much they’re paying and that we only work in their best interest,”  notes Scott Hurt, CPA, CFP® at Covenant Wealth Advisors in Richmond, VA . Service Model Consider how often you want to meet with your advisor and through what channels (in-person, phone, video chat). You’ll also want to make sure their communication style and process aligns with your expectations. Will the advisor proactively meet with you once or twice a year? Will they meet with you for one off needs? These are important factors to consider. Ask how the advisor leverages technology for communicating with clients and tracking progress. Personality Fit Ultimately, you want an advisor you feel comfortable communicating with and that you trust to manage your finances. Meet with potential advisors to gauge your comfort level and personal connection. Identifying Qualified Financial Advisors in Richmond To start your search for the best financial advisors in Richmond VA, consider: Using online tools like NAPFA’s Find An Advisor  tool to search for advisors by location and specialty. However, don’t just go by an advisor’s online profile. Be sure to evaluate them thoroughly yourself. It is crucial to choose a registered investment advisor for credibility and regulatory compliance. Reading online reviews on Google, Yelp and other review platforms for insights on working with specific advisors. Look for unbiased reviews from clients who share your demographic and needs. For example, here are Google reviews for our Richmond office location *. Look for objective recognition of an advisor’s quality such as a spot on esteemed lists like Newsweek’s Top Financial Advisory Firms .* However, always verify selection criteria and note that making an awards list does not guarantee your future experience. Evaluating a Financial Advisor's Experience and Specialization in Retirement Planning Experience and specialization are key when choosing a financial advisor. Look for advisors with proven track records serving clients like you. Consider factors like: How many years of experience does the advisor have? Have they navigated challenging markets and economic environments? Do they specialize in serving your unique needs and goals? For example, do you need an advisor who specializes in retirement planning? Or, do you have a career specialty, such as dentistry, and require an advisor who specializes in advising dentists only? Or, perhaps you are a business owner, and you need to work with an advisor who specializes in working with business owners. What is their approach to financial planning and investing? Is it a good fit for you? Investment advisory services are crucial as they provide specialized investment strategies tailored to your financial goals. How many clients like you do they work with? “I believe experience and specialization are invaluable when guiding clients through pivotal life transitions like retirement,” explains Megan Waters, CFP® at Covenant Wealth Advisors in Richmond, VA . “You want an advisor who has helped many others in your shoes successfully navigate their finances.” Pro Tip:  Ask a prospective advisor to walk you through case studies or examples of how they’ve helped clients like you. Better yet, ask them to create a personalized plan for you for free . This provides valuable insight into their experience and process. Understanding a Financial Advisor's Fee Structure Compensation structure can significantly influence an advisor’s recommendations. Here are the most common fee models: Fee-only The advisor charges a flat fee, hourly rate, or percentage of assets under management. They do not earn commissions or kickbacks. Fee-only advisors have fewer conflicts of interest. This fee structure is often, though not always, associated with investment management services, where clients are charged based on a percentage of assets under management. Commission-based The advisor is paid through commissions earned on product sales or transactions. While no advisor is void of conflicts, this model can create additional conflicts of interest and incentives to recommend certain products. Fee-based A hybrid model where the advisor charges fees and earns commissions. While fee-based advisors are often fiduciaries like fee-only advisors, commissions can still influence their advice. We believe that working with fee-only advisors helps to minimize conflicts of interest and ensure your needs come first. Ask prospective advisors: Are you fee-only, fee-based, commission-based? What is your fee structure? What will I pay all-in? Do you have asset minimums? What are they? Do you receive referral fees or other kickbacks? Get the specifics in writing before signing on to work with an advisor. Assessing an Advisor's Service Model and Communication In addition to credentials and fees, consider an advisor’s service model and communication style. Financial planning services offer a comprehensive approach to managing clients' financial needs, including tax planning, estate planning, retirement planning, and insurance analysis. Ask questions like: How often will we meet? What is your communication style and process? Will I work only with you or with a team? What technology do you use for financial planning, portfolio management, and client communication? How will you keep me informed about my progress? What is your typical client response time? An advisor’s communication skills, process and tools can make a big difference in your experience as a client. Make sure their approach aligns with your expectations. Tips for Interviewing Financial Advisors Choosing the right financial advisor is a big decision. We recommend interviewing at least 2-3 advisors before deciding who to hire. Here are some tips: Come prepared with a list of questions that matter most to you . Focus on their experience, specialization, service model, fees and communication style. Ask for specific examples of how they’ve helped clients like you, their process, and their communication cadence. Discuss your goals, needs, and concerns openly. Pay attention to how well they listen and if their responses instill confidence. Emphasize the importance of risk management in financial planning and investment management to ensure they can navigate potential uncertainties and enhance your financial security. Take notes during the meeting and reflect on the conversation afterwards. Did you feel heard, understood and comfortable with them? Don’t feel pressured to make a decision on the spot. An advisor should be happy to answer follow-up questions and give you time to reflect. Trust your gut - if something doesn’t feel right, keep looking until you find an advisor you can trust and feel confident about. Red Flags to Watch Out For While there are many fantastic financial advisors out there, there are also some crucial red flags to watch out for: Advisors who guarantee investment returns or seem to promise too-good-to-be-true results. Advisors who are vague about their fees, don’t put them in writing, or brush off your questions. Advisors who pressure you to make snap decisions or aren’t open to your questions. Advisors who speak in jargon, don’t make an effort to explain things, or make you feel unintelligent. Advisors who can’t demonstrate experience serving clients like you or navigating challenging markets. Advisors who immediately start talking about annuities or other products, rather than advice. Advisors who do not integrate tax planning into their comprehensive financial services, which is crucial for minimizing tax liabilities and enhancing overall financial well-being. Advisors who do not have a clearly articulated investment philosophy. Pro Tip:  Be cautious of advisors whose credentials you can’t verify or who have disclosures on their regulatory records. Always check an advisor’s background on FINRA’s website. If an advisor’s claims seem too good to be true, they probably are. Take your time to find an advisor that meets your needs and earns your trust. Investment Management Understanding Investment Strategies Investment management is a cornerstone of effective financial planning. It involves crafting a personalized investment strategy that aligns with your unique financial goals and risk tolerance. A well-thought-out investment strategy considers your time horizon, income needs, and personal preferences. At Covenant Wealth Advisors, our experienced financial advisors in Richmond VA work closely with clients to develop tailored investment plans that are tied to their life plan. These plans prioritize the right mix of investments to help you achieve your financial objectives while managing risk effectively. Active vs. Passive Investment Management When you sit down with a financial advisor for investment advice, one of the things you'll want to understand is their approach to managing your money. Think of it like choosing between a hands-on gardener who's constantly pruning and replanting (active management) versus setting up an automated sprinkler system (passive management). Active management is like having a chef who's constantly tweaking recipes - managers frequently buy and sell investments trying to beat the market. While this hands-on approach might lead to bigger returns, it usually means higher fees, and remember - investing involves risk. Passive management is more of a "set it and forget it" approach, typically using exchange traded funds (ETFs) or mutual funds that track market indexes. It usually means lower fees and can be more tax-efficient. Many investment services now actually use both approaches - think of it as having both an automatic sprinkler system and a gardener for your financial garden! Neither strategy is inherently better - it's about what helps you sleep at night while working toward your financial goals. When seeking investment advice, make sure to ask your advisor about their approach and how it fits your personal tax strategies and comfort level. Retirement Planning Estimating Your Retirement Savings Needs Retirement planning is a critical component of your overall financial strategy. It involves accurately estimating your retirement savings needs to ensure a comfortable and secure future. At Covenant Wealth Advisors, our financial advisors specialize in retirement planning, working diligently to determine if you are on track with your savings. We provide personalized recommendations to help you achieve your retirement goals. Our comprehensive retirement planning services include: Estimating your retirement savings needs based on your lifestyle and goals Identifying and optimizing your retirement income sources Creating a sustainable retirement income plan that adapts to changing circumstances Balancing tax planning with your income and investments Regularly reviewing and adjusting your plan to stay aligned with your objectives When it comes to retirement, your advisors goals should be to help you achieve a secure and comfortable retirement. We believe that proactive retirement planning should be a priority, and the advisor you choose should work with you to create a personalized plan that meets your unique needs and aspirations. Making Your Final Decision After meeting with several advisors, it’s time to reflect on your options. Consider: Which advisor has the most relevant experience and specialization for your needs? Which fee model aligns best with your goals and creates the fewest conflicts of interest? Whose communication style and process make you feel most comfortable? Who took the time to really listen and understand you? Which advisor do you trust to give you objective, personalized advice? Wealth management services often include comprehensive financial advisory, investment management, and retirement strategies, all aimed at building trust and transparency. Take your time evaluating your options, following up with questions, and discussing with loved ones. Choosing the right financial advisor is a significant decision that can impact your financial future. Make sure you feel fully confident before moving forward. See How Our Financial Advisors Can Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... FAQs About Choosing a Financial Advisor Q: What’s the difference between a financial advisor and financial planner? A: While often used interchangeably, financial advisor is a broader term that typically refers to any professional offering financial guidance, whereas financial planners specialize in building holistic financial plans. Not all financial advisors are CERTIFIED FINANCIAL PLANNER practitioners. Q: How do I know if a financial advisor has my best interests in mind? A: One of the best ways to ensure an advisor has your best interests in mind is to work with a fee-only fiduciary. Fiduciaries are legally and ethically bound to put their clients’ interests first. Understand that advisors who earn commissions may have additional bias in their advice. Still not sure? Ask the advisor to sign a fiduciary oath. Q: How much does it cost to work with a financial advisor? A: Costs vary depending on an advisor’s fee model and your investable assets. Fee-only advisors often charge a flat fee, hourly rate, or 1.25% or less of assets under management annually. Commission-based advisors are paid through the investments they sell. Always clarify all-in costs. Q: What should I expect from my first meeting with a financial advisor? A: The first meeting is typically a get-to-know-you session  where the advisor tries to understand your financial situation, goals, risk tolerance and concerns. You’ll also learn about their background, process and fees. Come prepared with your financial docs and questions. The advisor will also discuss the importance of asset allocation in developing tailored investment strategies to maximize returns, manage risk, and ensure diversification. Conclusion Choosing the best financial advisor in Richmond VA for your needs is one of the most important decisions you can make for your financial future. Look for experienced, fiduciary advisors who specialize in serving clients like you. Prioritize advisors whose communication style and fees align with your expectations. Always interview multiple options before making your final decision. We hope this article has equipped you with the knowledge to find your ideal financial partner in the Richmond area. If you'd like help designing a personalized financial plan, our fee-only, fiduciary advisors at Covenant Wealth would love to learn more about your unique situation. Contact us today to schedule a free retirement assessment . Together, we can chart your path to and through retirement. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER ™ professional  with the assistance of AI.  No  advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

There are several ways your investments create taxable income—including interest, dividends, and capital gains. The profits you make from selling your stocks can be a huge factor in your capital gains taxes and income tax. Making money is great. but understanding how to reduce capital gains tax on stocks will be an important step to keeping your wealth. A financial advisor with capital gains tax expertise may be able to help you create a plan to navigate capital gains taxes on your portfolio. Many investors seek to control their capital gains liabilities so as not to increase their tax burden. Today, we’ll evaluate a few strategies that may help you avoid paying heavy rates when selling your stocks, and filing your tax return. Here‘s how to reduce capital gains tax on stocks . If you want to know how the capital gains tax is calculated, go here . Control Your Asset Location To start, let's give a quick refresh on capital gains tax. Capital gains tax is a specific type of federal tax incurred on the sale of the investment. There are two types: Short-term capital gains tax Long-term capital gains tax If you hold an investment for less than a year, your investments will be taxed at short-term capital gains rates, which end up being the same as ordinary income tax rates. But holding assets can come with significant tax benefits. By holding an asset for a year or more, you qualify for long-term capital gains tax rates, which are much more favorable (and often lower rates), either 0%, 15%, or 20% depending on your income for the year. Now, let's begin to look at how taxpayers can mitigate them. The first and most critical part of mitigating capital gains (and ordinary income) tax is to ensure your assets are in the right accounts. This strategy is known as asset location or putting different securities in the most tax-efficient accounts for that particular investment. Tax-advantaged accounts, both pre-tax and Roth, like 401(k)s, IRAs, HSAs , and other retirement accounts, are powerful tools for shielding your investments from capital gains taxes and lowering your taxable income— but you don't want your entire portfolio squirreled away within them. Given that each type of tax-advantaged account has contribution limits, you may not be able to put your entire savings into them anyway. Whatever the case, you’ll likely hold some of your investments in a taxable brokerage account. With your savings split between taxable and tax-advantaged accounts, you should be mindful of which assets are in each account type. Where Should You House Your Securities? So, where should you start? You’ll want to evaluate the tax efficiency of your investments. A good rule of thumb is to use tax-advantaged accounts for more actively traded positions or less tax-efficient investments and direct your more tax-efficient and non-U.S. investments into taxable brokerage accounts. Best Practice 1: Keep High Return Investments In Tax-Exempt Accounts You should generally hold investments with the highest expected returns in Roth IRAs and HSAs. That’s because you can withdraw money from these accounts tax-free, so all that growth won’t drive up your tax bill in future years. Best Practice 2: Investments With Short-Term Capital Gains Are Often Best In Tax-Deferred Accounts If you hold active mutual funds, bonds, or engage in active stock trading, it’s often best to keep these investments in tax-deferred accounts like traditional IRAs. Why? These investments are more likely to create short-term capital gains that are taxed as income. Since distributions from tax-deferred accounts are taxed as income anyway, you aren’t really giving anything up, but you won’t be taxed along the way. Best Practice 3: Stable, Tax-Efficient Investments Work Well In Taxable Accounts And lastly, try to hold your most tax-efficient investments in your taxable brokerage account. Index stock funds and stocks that you do not plan to trade frequently are great examples. Taxable brokerage accounts have a distinct advantage: shares receive a step up on the cost basis when you pass, meaning the gain will be reduced, and your heirs will keep more of their value. As a result, you may be able to transfer more after-tax money to your heirs. Consider Donating Appreciated Stock If you have significantly appreciated stock since the time you purchased it, you have a potential tax liability when you ultimately sell those shares. However, did you know that filers can avoid that capital gain tax altogether? If you donate appreciated stock to a qualified charity, you are not subject to capital gains tax on those shares. This idea can be beneficial if you regularly donate to charities. Donating appreciated stock benefits the charity since they don’t have any tax liability on the gift, and it can help you allay a future tax burden. In this case, the charity now owns an asset that has the potential to increase in value, making your gift worth even more. You can also consider this option in conjunction with a portfolio rebalance. If you donate appreciated shares, you reduce your holding of that asset class, and then you can use the cash to purchase underweighted investments to bring your portfolio back in balance. You could even donate the shares to a donor-advised fund (DAF) to receive the same benefit. Then, you can direct payments from the DAF to a qualified charity at a later date. Donating stock can be a great avenue to itemize deductions. Given the massive increase to the standard deduction via the Tax Cuts and Jobs Act, you may need to pick and choose years where you want to itemize, and donating could be a great way to get there! Use Tax-Loss Harvesting You can calculate your capital gains tax in three simple steps: Determine your cost basis (the price you paid including fees) Calculate your realized amount (price you paid minus sale price) Subtract your cost basis from your realized amount While you may always want your stocks to earn money, sometimes it makes sense to sell a stock at a loss to reduce your net capital gain for the year. If you made significant gains in one stock, you can sell another at a loss and reduce your net profit It’s possible to use tax-loss harvesting to reduce your net capital gain all the way to zero. If you have more capital losses than capital gains, you’ll have a net capital loss for the year. When that happens, you can even deduct up to $3,000 in capital loss from your income, reducing your taxes even further. Any capital loss over $3,000 can be carried forward to later years. Watch for the wash-sale rule. If you write off capital losses, you have to wait at least 30 days after the sale before you can repurchase it, or the loss will be disallowed for tax purposes. Here's a deeper dive into how the capital gains tax is calculated . Try Qualified Opportunity Funds The IRS designated certain geographical areas as “opportunity zones” due to economic distress. An opportunity fund invests in real estate or business development in these areas. To encourage investors to help spur economic growth, investors can receive tax breaks for investing via an opportunity fund. Specifically, you can defer the tax due on gains that are reinvested in opportunity funds. The exact amount of your benefit depends on how long you hold the opportunity fund. However, be aware that there are inherent risks associated with investing in an opportunity fund such as loss of principal or tax rate changes. Remember, the whole premise is to help economically stressed areas, which can be more volatile environments. These are also relatively new options, so there isn’t a lot of history to know how these investments fare over the long term. An investment in an opportunity fund may be best for someone looking for additional ways to diversify their money, receive a tax deduction, and feel good about the help they are providing. Know Your Tax Brackets (And Use Them to Your Advantage) It’s no secret that the income and capital gains tax brackets are both progressive, meaning the higher your income, the higher the tax rate. Download our powerful tax, investment, and savings cheat sheet for more helpful tax tips and insights - new for 2024! Worried about capital gains taxes? Here's how to reduce capital gains tax on stocks. You should consider where you are in a given tax bracket before you decide to harvest gains or losses. If you are in a lower tax bracket than average, it may make sense to realize capital gains while your tax rate is lower. If you think your income will be lower shortly (such as when you retire), then consider waiting until then to sell your stock and realize the gain. If you are in a higher bracket than usual or close to the top of your current bracket, it may make sense to wait and sell your stocks next year to avoid pushing yourself into the next bracket. You can also accelerate deductions by doing things like making two years’ worth of charitable contributions in a single year. Investors with significant capital gains should also watch out for the net investment income tax. The IRS levies a 3.8% tax on investment income including capital gains (and others) for those who make over $200,000 if filing single or $250,000 married filing jointly. Keep this tax in mind when looking at what gains to realize in a given tax year. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Add Stock Into Your Estate Plan The surest way to avoid capital gains tax on stocks is not to realize a capital gain! If you don’t sell your stock during your lifetime, you don’t have any capital gain to pay. Your heirs may be able to avoid that tax burden too by claiming the step-up in basis. A step-up in basis means that your heirs' basis in the stock will be the value they receive it, regardless of the value you purchased it. That basis is the starting point for determining taxable capital gains. Realize Capital Gains With A Unified Strategy Capital gains taxes reduce the value of your investments by lowering the portion of returns that you get to keep. Retaining more money in your pocket can do wonders for your retirement plan, giving you more flexibility and freedom with your spending. Need help reducing taxes on your investment portfolio? We're passionate about tax planning around here. For us, tax planning is a crucial component of financial planning. Let Covenant Wealth Advisors help you navigate these strategies to determine which ones are most beneficial to you and keep your taxes as low as possible. Schedule a free consultation with a CERTIFIED FINANCIAL PLANNER ™ professional to see how we can help you. About the author: Scott Hurt, CFP®, CPA Senior Financial Advisor Scott is a Financial Advisor for Covenant Wealth Advisors , a CERTIFIED FINANCIAL PLANNER™ practitioner and a Certified Public Accountant (CPA). He has over 17 years of experience in the financial services industry in the areas of financial planning, tax planning, and investment management. Schedule your free retirement assessment today   Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Registration of an investment advisor does not imply a certain level of skill or training.

If you have investments outside of tax-advantaged retirement accounts (401k, IRA, etc.), it’s critical to consider how the gains on those investments are taxed. But, understanding how capital gains tax is calculated isn't always straightforward. The tax rules aren’t as simple as a Roth or tax-deferred retirement account, where you only have to pay tax on the front end or the back end. Gains earned along the way are potentially subject to capital gains tax, which is different from ordinary income tax. Understanding the nature of capital gains tax—what it is, how it affects you, and how it is calculated —could help you plan a more comprehensive investment strategy. Taxes are critical year-round, but there are particular rules you should consider before year-end. Download our free tax cheat sheet for important tax numbers every investor should know. What impacts capital gains taxes, and how do you calculate your rate before tax time? Here’s what you need to know about how capital gains tax is calculated by the IRS. What Is Capital Gains Tax? Understanding Short and Long Term First, it is essential to understand what a capital asset is before calculating its tax burden. Capital gains can apply to investments such as stocks, bonds, real estate, cars, boats, cryptocurrency, collectibles, home sale, and other tangible items. If an investment is worth more than your cost basis (typically, your basis is what you paid for it) then, you have a capital gain in that investment. If an investment is worth less than your cost basis, you incur a capital loss. While you still own that investment, the gain is said to be unrealized. Presently, you do not incur a tax liability on unrealized capital gains. For example, if you paid $100 for a stock that is now worth $125. You have an unrealized gain of $25. However, if you sell the investment, the gain transitions from unrealized to realized; realized capital gains drive capital gains taxes. Your tax bill is based on the realized gain and not simply the amount of your investment. So, if your purchase price was $100 and the sale price was $125, you’d have to pay capital gains tax on $25. The length of time you hold the investment before you realize the gain makes a significant difference in your tax bill, too. Your gain can be taxed as either a long-term or short-term capital gain. Long-term capital gains tax: Favorable long-term capital gains tax rates apply only to profits from the sale of assets held for more than a year. The rates are 0%, 15%, or 20%, depending on the taxpayer's taxable income and filing status (single, married filing jointly, head of household, etc.) for that year. Short-term capital gains tax: Short-term capital gains tax applies to assets held for a year or less and are taxed as ordinary income. For many taxpayers, that is a higher tax rate than the capital gains rate. Here are the 2024 Federal tax brackets that apply to short-term capital gains in 2024: But, a lot of people don't realize that capital gains can trigger additional taxes on top of long-term and short-term capital gains tax. You'll need to understand two more tax triggers to really understand how to calculate capital gains tax on your investments. For those with significant capital gains (and high-income families), you may also be subject to the 3.8% net investment income tax and a very sneaky tax called the income-related monthly adjustment amount or IRMAA. The IRMAA tax is an added cost to Medicare premiums in retirement and many retirees miss this entirely before it's too late. Both the net investment income tax and IRMAA can potentially cost you tens of thousands of dollars in additional taxes if you aren't careful with how you calculate capital gains taxes. Ultimately, understanding the difference between short and long-term capital gains, and planning accordingly, can help you pay less in taxes. This can go a long way toward increasing the after-tax return on your investments. How to Calculate Your Capital Gains Taxes Now that you understand what a capital gain is and the difference between long and short-term capital gains, let’s look at how the capital gains tax is calculated. The key here is to understand that your tax liability rests on your net capital gain. First, list out all the money you made by selling investments (like stocks, bonds, cars, other tangible items). If you held any assets for a year or less, mark those up to short-term capital gains and know they will be taxed at your standard income tax rate. If you held any assets for more than a year, they would be subject to taxation at the lower long-term capital gains rate. However, you won’t necessarily pay capital gain taxes on that entire amount. The next thing to do is tally up all of your realized investment losses for the year. That amount is taken out of your realized capital gains, and the result is the final amount that will be taxed. For a simple example, assume you realized a $10,000 gain by selling a stock but lost $3,000 selling another; the difference would be $7,000. That difference is called your net capital gain, and you’ll owe taxes on that number. Does Realizing Long-term Capital Gains Push You Into A Higher Tax Federal Bracket? The short answer? No. Capital gains and ordinary income are taxed on separate systems, so realizing capital gains won’t increase the amount you need to pay in ordinary income tax. But, what realizing capital gains can do is boost your adjusted gross income, a critical figure used to determine your eligibility for tax credits and tax deductions , ability to contribute to a Roth IRA, and more. And as we outlined above, higher adjusted gross income can also trigger the net investment income tax and IRMAA. Just like income tax brackets, capital gains tax brackets change slightly from year to year. You can check brackets each year in helpful tax cheat sheets such as the one here . Because long-term capital gain tax rates are generally lower than income tax rates, and you can control when you realize gains, it makes sense to incorporate tax-planning strategies around your taxable investments. If your net capital gain is under a specific dollar amount (depending on how you file), your tax rate could even be 0%. If you have taxable investments, you may want to try out one of the strategies below. How to Avoid Capital Gains Tax on Stocks or Other Assets So how do you use what you now know about how to calculate the capital gains tax to lower your tax bill ? There are several ways you can avoid higher capital gains taxes. 1. Don't Sell Your Assets. The most straightforward? Don't sell your assets. If you never realize gains, you never incur a tax liability. Of course, it’s impractical to think you’ll never realize gains. After all, that's the whole point of investing, right? But it is reasonable in many cases to hold on to investments for at least one year. By adhering to the holding period, you'll be taxed at the long-term capital gains rates, not your average income rates. Of course, it’s pivotal to understand that taxation shouldn’t always be your primary concern either. If you have concentrated stock or need to rebalance your portfolio, don’t let a tax liability keep you from adjusting your allocation to avoid taking too much investment risk. 2. Consider Selling Your Investment Over Time It's common for us to advise clients who have highly appreciated stock that is heavily concentrated in a handful of positions. This means that they have a potentially large tax liability if they sell, but if they don't sell the position the are putting their assets at risk. We've seen countless scenarios where investors have too much money in a single stock, they don't sell for tax reasons, and then they subsequently lose 50% or more of their investment when the company doesn't perform as hoped. So what can you do to reduce the impact of capital gains tax on low-cost basis stock position? Consider selling the position over time . Timing the sale of your investment over several years can help keep your capital gains tax low while also reducing the risk of having too much money in a single position. 3. Use Tax Sheltered Investment Vehicles When possible, use tax-advantaged accounts like Traditioonal IRAs, Roth IRAs, and 401(k)s to the fullest. Since these accounts are sheltered from taxes until you withdraw funds (Roth IRAs are not taxed upon withdrawal), you won’t incur capital gains taxes if you sell investments within them. The longer you hold assets, the more significant the impact the tax shield will have. 4. Wait Until You Retire When You're In a Lower Tax Bracket If you are near retirement, consider waiting until you stop working to sell profitable assets . If you expect your taxable income to drop in retirement when your paychecks stop, the capital gains tax bill might be reduced. This could be an excellent strategy to help reduce taxes in retirement . 5. Consider Tax-Loss Harvesting Lastly, consider selling an investment at a loss that you wanted to get rid of anyway. Doing so can offset your profits and reduce your net taxable gain. This strategy, known as tax-loss harvesting, can be a valuable tool in offsetting capital gains taxes elsewhere in your portfolio. But, be careful as the rules are complex and we always recommend that you talk to a tax planning advisor prior to implementing any tax strategy. Conclusion Understanding how capital gains tax is calculated is paramount for any investor who wants to preserve wealth prior to and during retirement. Once you know how to calculate the tax on your capital gains, you'll be better equipped to identify strategies that help reduce the taxes you have to pay. Strategies such as holding the investment long-term, selling the investment over time to spread out the gains, and owning investments within tax sheltered investment vehicles may help reduce your tax liability. You may also want to consider taking advantage of lower tax brackets upon retirement to realize capital gains. Knowing how the capital gains tax is calculated is a great first step to lowering your tax bill each tax year. But there is a lot more to tax strategy when it comes to your investments. Understanding how capital gains will impact you often requires expert tax advice and powerful long-term capital gains tax calculators to help make the best decision for your situation. If you need help understanding and planning around capital gains taxes, we can help. Covenant Wealth Advisors can help you calculate your capital gains tax, as well as discuss the best strategies to help reduce taxes on your investment portfolio. Give us a call , and we will be glad to help you get started. In the meantime, download our free tax cheat sheet for important tax numbers every investor should know . About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER ™ professional  with the assistance of AI.  No  advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

"Information is an investor's biggest ally." If we were to give you just one piece of financial advice, it would be this - "Ask Questions." With inflation at its highest in 40 years, uncertainty clouding the global markets, and a high volatility index - it's high time you review your financial plans to secure your future. Just like you visit your GP for an annual health screening, you need to check in with your financial advisor at least once a year to refine and optimize your investment goals and portfolio to match your life stage and changing needs. A financial advisor should help you select investments that align with your financial goals. For example, at my firm, Covenant Wealth Advisors, we offer a free retirement assessment that provides a thorough analysis of your portfolio. This can be especially helpful if you are looking for a second opinion. We've encountered many individuals who could have avoided making the wrong decisions if they had asked the right financial planning questions. →Free Download: 25 Most Important Questions to Ask a Financial Advisor Before You Hire [Access Now] It doesn't matter whether you're new to financial planning or have been investing for several years; it's never too late or too early to start asking questions about your portfolio. Remember, there are no wrong or dumb questions. After all, it's your hard-earned money that you're investing. So, don't feel intimidated or shy to ask questions to your financial advisor about your portfolio. An informed client is an asset and not a liability. The best financial advisors welcome and encourage their clients to ask questions, no matter how basic. In this post, we share a list of questions to ask your financial advisor about your portfolio. Print out this list or bookmark this page so you can refer to it later. Make sure to take a pen and notepad to your meeting with your financial advisor. Take note of their answers so you can discuss them later if needed. Key Questions To Ask Your Financial Advisor About Your Portfolio 1. What rate of return do I need to ensure my money will last in retirement? Everyone has varying income needs in retirement. While some prefer taking it easy after decades of hustling, others view retirement as a golden opportunity to give wings to their encore careers. Retirement planning takes time and research and needs to be reviewed periodically to keep up with changing market conditions and lifestyle requirements. Checking the performance and returns of your retirement plans with your advisor can help you identify its weak points and make the necessary changes to keep them solid and steady over the years. Factors like age, when and where you wish to retire, and what you want to do in your golden years determine your " perfect retirement number ." To know whether you're on track to reach your retirement goals , you can ask your financial advisor to provide you with a report of three things: The overall money you have saved in your retirement and non-retirement accounts How long will that money last you in retirement, factoring in pensions, annuities, social security, taxes, healthcare, and other sources of income, if any If there is a shortfall or surplus based on your current investments and return projections This can help you get a clear picture of your current standing regarding retirement so that you can ramp up contributions or make changes to your investment portfolios in case of a shortfall. Finally, once you know the return you need to target for your money to last based upon your lifestyle, you can adjust your portfolio accordingly to help improve the likelihood of accomplishing that return long-term. Ultimately, this may help you to avoid taking on more risk than necessary to accomplish the goals that are important to you. 2. How much should I allocate toward stocks and bonds? When investing your money, one of the first (and crucial) decisions you'll make is deciding how to divide your portfolio between bonds and stocks . Like with other investment decisions, there is no single answer that suits all investors. The right mix depends on age, experience level, risk appetite, investment philosophy, and the target return you are pursuing on your money. Your financial advisor analyzes all these factors to identify the right proportion of stocks and bonds to include in your portfolio. For instance, the advisor might suggest an ultra-aggressive or moderately-aggressive allocation strategy if you're a young earner with a long-term investment plan. On the contrary, as you approach retirement, your goal changes from growing returns to building a steady income. In this phase of life, the advisor might suggest you allocate a bigger portion of your wealth to bonds that may help you preserve your capital and a smaller percentage to stocks to allow some room for growth. And don't be fooled by what you read in the media, bonds still play a major role in maintaining preservation for your portfolio as outlined in our bond investing guide . 3. How much should I allocate toward U.S. and international stocks? Investing in international stocks through mutual funds or exchange-traded funds is an excellent way to diversify your portfolio . The biggest advantage of investing in global markets outside the U.S. is that these markets do not rise and fall simultaneously as domestic markets, potentially helping you soften the blow if and when the domestic markets take a hit. This brings us to the pressing question - how much of your funds should you allocate to foreign investments? A good place to start may be to look at current market cap weights of different international stock markets. Global stock market capitalization is the total global value of all stocks traded on public exchanges. It has become a very important indicator for individuals investors. For example, the chart below shows the percentage of money invested in stocks across different global stock markets: Understanding global stock market weights can help you better determine how much you should allocate your investments toward U.S. and non U.S. companies. Asking this question to your financial advisor helps you evaluate if your portfolio has a properly balanced exposure to international investments across Europe, Asia, and emerging markets. Vanguard recommends that between 20 to 40% of your stock exposure be invested in global stocks, though that number varies depending on your risk appetite, age, and other factors. Ultimately, the answer may depend on the length of your investment horizon, risk profile, and your comfort with investing in non U.S. companies in the first place. →Free Download: 25 Most Important Questions to Ask a Financial Advisor Before You Hire [Access Now] 4. Am I taking on too much risk? Your risk appetite depends on age, life stage, and investment goals. The more you're willing to take risks, the higher your potential returns (and losses). Everyone wants great returns, but if you can't tolerate the ups and downs of the market, you may never achieve the returns you need to make your money last. Your financial advisor should help you identify how much risk you can handle and build an optimized portfolio that matches your risk appetite. Stock markets can be volatile and understanding how much risk you should take is one thing, but knowing how much risk you can actually tolerate is another. The chart below illustrates this point by showing the intra year declines of the S&P 500 index every year since January 2nd, 1980. Each decline is represented by the red dot on the chart. As you can see, markets fall temporarily every year and you may not be comfortable with losing nearly half your portfolio (2008), especially in retirement. One tool that can help you analyze your appetite for risk is a risk assessment questionnaire. Most financial advisors will use a risk assessment as a starting point to help guide you. 5. Should I follow an active or passive management approach? Active investing requires you to take a more hands-on approach to your investments, watching the market and trying strategies to beat average returns by taking advantage of short-term price fluctuations. That said, active investing is not suitable for all - as it requires you to dedicate more time to monitor your investments. The truth is, we're not big fans of active investing because there is not much evidence to support it long-term. If you want to learn more, you can read our article on how to invest in retirement . Passive investing, on the other hand, is about letting markets work for you long-term. Passive investors generally don't believe that stock markets can be timed or that it's possible to accurately select winning stocks consistently. Instead, passive investing focuses on what you can control such as diversification, keeping costs low, and tax efficiency. This method limits the amount of buying and selling happening in your portfolio, making it incredibly cost-effective and potentially more profitable in the long run. →Free Download: 25 Most Important Questions to Ask a Financial Advisor Before You Hire [Access Now] This, arguably, more disciplined and hands-off approach may allow you and your your financial advisor to better handle the big questions around retirement, taxes, and getting the most out of life with your existing resources. 6. How much am I paying to manage my investments? You need to ensure that the advisor's fees are feasible so that it's not eating into your returns. Financial advisors are compensated in one of the following ways: fee-only, commissions, or a combination of both. Fee-only advisors are becoming increasingly popular as they are more transparent, charge no hidden fees, and have no or reduced conflicts of interest to sell or push a particular investment product or company to earn commissions. Don't feel uncomfortable discussing the fees with your advisor. Most advisors expect clients to ask this question, and they would be able to give you an answer easily so that you can decide if you can afford their services. 7. How often do you implement tax-loss harvesting in my portfolio? It's impossible for any financial advisor - amateur or seasoned professional - to avoid losses altogether. What differentiates the pros is that they take proactive measures to turn lemons into lemonade when your portfolio is down. Example 1: Martha invests $1 million with her financial advisor. One year later, a recession hits and her investment holdings are down $100,000 or 10%. While both Martha and her financial advisor believe the market decline is temporary, her advisor wants to take advantage of the losses for tax purposes. As a result, he sells her investments, thus realizing a loss on paper of $100,000, and immediately reinvest the cash into similar investments (but not substantially similar). Six month later, her portfolio rebounds back to $1 million, but Martha now has a $100,000 loss that she can use to partially offset future capital gains on her tax return. Tax loss harvesting should be something that your financial advisor continuously monitors within your portfolio . 8. How much can I withdraw from my portfolio in retirement on an annual basis? You've worked hard for years to save for a comfortable retirement. Now, it's time to reap the benefits of your hard work and diligence. If you spend too much early on, you risk being left with nothing in your later years. On the other hand, spending too little could leave you with no room to enjoy your retirement as you planned. That said, the golden standard of retirement income - the 4% withdrawal strategy might not work for everyone. Ask your financial advisor to create a customized withdrawal strategy that helps you enjoy your golden years in comfort without worrying about running out of money. 9. Which accounts should I withdraw from first in retirement? The optimal order for withdrawing from different accounts varies for each person. Before you decide which accounts to draw from, you must learn how to make the most of your asset types. Work with your financial advisor to understand your accounts and assets and decide the proper order of withdrawals that extend the longevity of your portfolio and lower your tax bills. The traditional rule of thumb of withdrawing from taxable accounts first, then tax deferred, then tax free accounts is rarely the best strategy in real life. Depending on your financial goals and strategies, your financial planner might suggest a combination of withdrawals from taxable brokerage accounts, traditional IRA, 401(k), and Roth IRA. →Free Download: 25 Most Important Questions to Ask a Financial Advisor Before You Hire [Access Now] 10. How can I reduce capital gains taxes on my portfolio? It's easy to get so caught up in maximizing your investment returns that you forget the tax consequences - especially the capital gains tax . Remember that any profits you make on your investments reach you only after tax deductions. Figuring out the right tax strategy is crucial to getting the maximum out of your assets. The taxes you pay will depend on your income. This means that it's important to understand your taxable income when making tax decisions on your portfolio. Work with your financial advisor to reduce capital gains taxes by using tax-advantaged retirement accounts like traditional IRA, Roth IRA, etc., investing for the long-term to reduce realizing gains unnecessarily, and offsetting capital gains with capital losses. The best financial advisors should be able to speak to you confidently on how to reduce capital gains taxes on your portfolio. If your financial advisor doesn't look at your tax return and provide fully integrating tax planning strategies, give them the boot. There are better advisors out there. 11. How much can my portfolio potentially fall during a bad stock market? All investors live with the risk of a bad stock market. It has happened before, and it will happen again. Asking this question helps you evaluate if the amount of risk you are taking is commensurate with what you can sleep with when markets get volatile. After all, we all want great returns but if you can't tolerate the ride, you'll likely jump off the wagon before you reach your destination. Our founder and financial advisor, Katherine Fonville, was interviewed by Financial Advisor IQ about this exact question. Be sure that your financial advisor frames the answer both in dollar terms and percentages. Why? Because a $100,000 loss can seem a lot different than a 10% loss. It's all a matter of semantics and it's a good exercise to walk through to make sure you are prepared for future volatility within your portfolio. As you can see below, the hypothetical portfolio with 100% stocks performs the best long-term. But, it also experiences the most volatility during times of stress. Preparation and diversification are the two key weapons that help you weather a bad economic hurricane. Check if your financial advisor has a contingency plan to protect your portfolio from these major events. See How Our Financial Advisors Can Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Be a Smart & Informed Investor Building the right portfolio starts with asking the right questions to your financial advisors. When it comes to growing and protecting your wealth and assets, there is no "one-size-fits-all" approach. The key is finding trusted financial advisors who can pinpoint your blind spots and help create a tailored financial strategy that works best for you. When asking these questions, let your financial advisor know you're taking notes. Write down the answers shared by the investment professional so that if something goes wrong down the line, you can refer to your notes to establish what was said and done. The best financial advisors will send you a follow up email after your meeting outlining the conversation to help save you time. Holding regular and consistent dialogues about your portfolio with the advisor helps spot issues early and take proactive measures to minimize negative impacts. When it comes to long-term planning for retirement, the earlier you spot and eliminate problems, the greater the potential for a safer and bigger retirement nest egg. Our team of financial planners and fiduciary investment advisories at Covenant Wealth Advisors are specialized in retirement planning and portfolio management leading up to and through retirement. We can help you maximize your wealth to ensure you retire on your terms, paying as little taxes as possible. Need help getting building a better portfolio that helps manage risk, reduce taxes, and improve your expected returns? Our financial advisors can help you answer your most important portfolio questions. Talk to a financial advisor today. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

As a retiree, one of the most crucial aspects of financial planning is ensuring you have enough cash on hand to cover your expenses and emergencies. While having a well-diversified investment portfolio is essential, it's equally important to maintain an adequate cash reserve. You just never know what life will throw your way. As a result, you'll want to make sure that you manage your cash prudently. This begs the question, how much cash should retirees have on hand? The broad answer can range from six months to two years or more. But, the right answer for you depends on your monthly retirement expenses, sources of income, and what level of cash allows you to sleep at night. Downloading our free retirement cheat sheets should be your next step. These powerful tools can help put you in a stronger financial position. If you want help making the most of your cash and investments in retirement, be sure to download them now. Here's what you need to know. Why Having a Substantial Cash Reserve is Crucial in Retirement Having an adequate cash reserve is crucial for several reasons: Emergency fund : Unexpected expenses can arise at any time, such as home repairs, car maintenance, or medical bills. These costs can be more frequent and substantial during retirement. Having a larger cash reserve ensures you can cover these expenses without having to dip into your investments or take on debt. Market fluctuations:  The stock market can be volatile, and during a downturn, you may not want to sell your investments at a loss to cover your expenses. A larger cash reserve allows you to ride out market fluctuations for a longer period without jeopardizing your long-term investment strategy. This is especially important in retirement when you have less time to recover from market losses. Liquidity:  Cash is the most liquid asset, meaning it can be easily accessed and used for any purpose. In contrast, investments such as stocks, bonds, or real estate may take time to sell and may not always be sold at a favorable price. Having a larger portion of your assets in cash ensures you have easy access to funds when needed. Retirement lifestyle:  In retirement, you may have more flexibility to travel, pursue hobbies, or enjoy other leisure activities. Having a larger cash reserve allows you to comfortably engage in these activities without worrying about the short-term performance of your investments. How Much Cash Reserve Should Retirees Have On Hand? Let's explore this question through the examples of two hypothetical clients. Example 1: Sarah, 65, Single Sarah is a 65-year-old single retiree with a $1.2 million investment portfolio. She has no pension and relies primarily on her investments and Social Security for her income. Sarah's monthly expenses are around $5,000, including her mortgage payment, utilities, groceries, and leisure activities. For Sarah, a reasonable cash reserve would be to have 1.5 to 2 years of living expenses in cash. This would amount to $90,000 to $120,000. This cash reserve would provide Sarah with a substantial cushion to cover her expenses in case of a prolonged market downturn, unexpected expenses, or any unforeseen circumstances that may arise during retirement. Example 2: John and Mary, 70, Married John and Mary are a 70-year-old married couple with a $2 million investment portfolio. They both receive modest pensions and Social Security benefits, which cover most of their monthly expenses. Their total monthly expenses are around $7,000, including their mortgage, utilities, groceries, travel, and healthcare costs. For John and Mary, having 1 year of expenses in cash might be a good game plan. This would amount to $84,000. They have more stable sources of income from their pensions and Social Security, and thus don't relay as much on their portfolio for living expenses. However, having a 1 year cash reserve provides them with added financial security and peace of mind during their retirement years. It also allows them flexibility from a tax perspective in the even they need to purchase a vehicle on go add a patio to their home. Where to Keep Your Cash Reserve When it comes to storing your cash reserve, you'll want to choose accounts that are safe, liquid, and easily accessible. Some options include: High-yield savings accounts: These accounts offer higher interest rates than traditional savings accounts, allowing your money to grow while still being readily available. For example, we provide access to Flourish Cash for our clients to help them get a competitive yield on their cash. Money market accounts: Similar to savings accounts, money market accounts offer competitive interest rates and easy access to your funds. Short-term certificates of deposit (CDs): CDs typically offer higher interest rates than savings accounts but require you to lock up your money for a set period. Short-term CDs (e.g., 3-12 months) can be a good option for a portion of your cash reserve. It's important to note that these accounts are FDIC-insured (or NCUA-insured for credit unions) up to $250,000 per depositor per institution [1], ensuring the safety of your cash reserve. There are options available to increase FDIC insurance beyond the standard $250,000 limit. Talk to a financial advisor at Covenant Wealth Advisors in Richmond, Williamsburg, or Reston VA to learn more. Determining Your Optimal Cash Reserve The amount of cash you should have on hand depends on several factors, including your monthly expenses, sources of income, risk tolerance, and overall financial situation. A financial advisor, such as those at our firm, Covenant Wealth Advisors, can help you determine the appropriate cash reserve for your unique circumstances. At Covenant Wealth Advisors, we offer free retirement assessments to help you evaluate your financial readiness for retirement. Our experienced advisors can analyze your income, expenses, investments, and other factors to determine if you have an adequate cash reserve and make recommendations based on your specific needs. See How Our Financial Advisors Can Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Conclusion Having an appropriate cash reserve is a critical component of a solid retirement plan. It provides a buffer against unexpected expenses, market volatility, and ensures you have readily accessible funds when needed. For most retirees, having 1 to 2 years of expenses in cash is a prudent guideline, offering greater financial security and flexibility during retirement. If you're unsure if you have the right amount of cash reserves or want a comprehensive review of your retirement plan, consider reaching out to Covenant Wealth Advisors for a free consultation. Our knowledgeable advisors are here to help you navigate the complexities of retirement planning and ensure you have the resources you need to enjoy a comfortable and secure retirement. About the author: Scott Hurt, CFP®, CPA Senior Financial Advisor Scott is a Financial Advisor for Covenant Wealth Advisors , a CERTIFIED FINANCIAL PLANNER™ practitioner and a Certified Public Accountant (CPA). He has over 17 years of experience in the financial services industry in the areas of financial planning, tax planning, and investment management. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER ™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

As you approach or enter retirement, managing your investment portfolio becomes more crucial than ever. One key aspect of this management is portfolio rebalancing - the process of realigning your investments to maintain your desired asset allocation . But, " how often should I rebalance my portfolio in retirement?" , you ask. This question plagues many retirees, and today, we're going to dive deep into this topic to help you make informed decisions about your retirement investments. Before you keep reading, be sure to download our free retirement cheat sheets to help you save money, reduce taxes, and optimize your portfolio for retirement. Key Takeaways Portfolio rebalancing is crucial for maintaining your desired risk level and investment strategy in retirement. The frequency of rebalancing depends on various factors, including market conditions, personal risk tolerance, and life changes. Common rebalancing strategies include time-based, threshold-based, or a combination of both. Regular monitoring of your portfolio is essential, even if you don't rebalance frequently. Tax implications and transaction costs should be considered when rebalancing in taxable accounts. Working with a financial advisor can help optimize your rebalancing strategy and overall retirement plan. Understanding Portfolio Rebalancing in Retirement Portfolio rebalancing is the process of buying or selling assets in your portfolio to maintain your target asset allocation. As market conditions change, some investments may grow faster than others, causing your portfolio to drift from its original allocation. This drift can expose you to more risk than you're comfortable with or reduce your potential returns. For retirees, maintaining the right balance is particularly important. You need your portfolio to generate income while also preserving capital and keeping up with inflation. Let's explore why rebalancing matters and how often you should consider doing it. The Importance of Rebalancing for Retirees Potential for Improved Returns: The results of this research paper illustrated that a rebalanced portfolio outperformed the traditional buy-and-hold strategy by more than 100 basis points annually over a 5-year period within the S&P 500 universe. Risk Management: Rebalancing may help keep your portfolio aligned with your risk tolerance. As you age, you might want to reduce your exposure to riskier assets like stocks. The SEC's guide on risk tolerance  can provide further insight. Income Generation: A balanced portfolio may help provide a steady income stream, crucial for retirees who rely on their investments for living expenses. You may also consider exploring dividend stocks or bonds for income in retirement. Longevity Protection: Proper rebalancing is one factor to consider to help your portfolio lasts throughout your retirement years by managing sequence of return risk. Opportunity Capture: Rebalancing allows you to capitalize on market movements by potentially selling higher and buying lower. Factors Influencing Rebalancing Frequency Several factors can influence how often you should rebalance your portfolio in retirement: Market Volatility: In times of high market volatility, more frequent rebalancing might be necessary to maintain your desired asset allocation. You can track market volatility using tools like the CBOE Volatility Index (VIX) . Personal Risk Tolerance: If you're highly risk-averse, you might prefer more frequent rebalancing to ensure your portfolio doesn't drift too far from your comfort zone. Life Changes: Major life events, such as health issues or changes in family circumstances, might necessitate portfolio adjustments. Taxable Income: Higher income investors might require less frequent rebalancing due to the potential tax impact of rebalancing. Investment Costs: Transaction costs including custodian and market impact costs should also be considered when determining rebalancing frequency. Common Rebalancing Strategies Time-Based Rebalancing This involves rebalancing your portfolio at set intervals, such as quarterly, semi-annually, or annually. Pros: Simple and easy to implement Helps maintain discipline in your investment strategy Cons: May lead to unnecessary transactions if the portfolio hasn't significantly drifted Might miss opportunities to rebalance during significant market movements Threshold-Based Rebalancing This strategy triggers rebalancing when your asset allocation drifts beyond a predetermined threshold, typically 5% or 10%. Pros : Responds to market movements Can help capture opportunities and manage risk more actively Cons: Requires more frequent monitoring May lead to more frequent transactions, increasing costs Combination Approach This strategy combines time-based and threshold-based approaches, rebalancing at set intervals or when thresholds are breached, whichever comes first. Pros: Balances the benefits of both strategies Provides a good compromise between active management and simplicity Cons: Requires more attention than a purely time-based approach May still result in suboptimal timing in some market conditions Matt Brennan, CFP® at Covenant Wealth Advisors in Reston, VA, shares his perspective: "While not always the case, retirees may benefit from a combination approach to rebalancing. We typically review client portfolios periodically throughout the year but only rebalance when allocations have drifted beyond a certain percentage beyond their targets. This strategy may help manage risk while minimizing unnecessary transactions and potential tax implications." Case Study: The Importance of Regular Rebalancing Let's consider a hypothetical retiree, Sarah, who is 68 years old and has a $1.5 million portfolio with a target allocation of 60% stocks and 40% bonds. In 2020, due to the market volatility caused by the COVID-19 pandemic, Sarah's portfolio experienced significant fluctuations. By March, her stock allocation had dropped to 50% of her portfolio. If Sarah had rebalanced at this point, buying stocks when they were low, she would have been well-positioned to capture the market recovery that followed. However, Sarah was unsure about rebalancing during such a volatile time and decided to wait. By the end of 2020, as the market rebounded, her stock allocation had grown to 70% of her portfolio, exposing her to more risk than she was comfortable with. This fictional example illustrates why regular monitoring and timely rebalancing are crucial, especially during periods of high market volatility. Tax Considerations in Rebalancing For retirees, tax implications are a significant factor to consider when rebalancing. Here are some tax-smart strategies: Use New Contributions: If you're still adding money to your portfolio, consider directing new contributions to underweight asset classes to minimize the need for selling. Rebalance in Tax-Advantaged Accounts: Consider prioritizing rebalancing in tax-advantaged accounts like IRAs to avoid triggering taxable events. Use Tax-Loss Harvesting: In taxable accounts, consider selling investments at a loss to offset gains from rebalancing. You can learn more about how tax-loss harvesting works here . Consider Asset Location: Hold tax-inefficient assets in tax-advantaged accounts and more tax-efficient investments in taxable accounts. The Role of Professional Advice While some retirees may feel comfortable managing their own portfolios, many find value in working with a financial advisor . A professional can provide objective advice during market volatility, help optimize your rebalancing strategy, ensure your portfolio aligns with your overall retirement plan, and assist with tax-efficient rebalancing strategies. Scott Hurt, CPA, CFP® at Covenant Wealth Advisors in Richmond, VA, emphasizes: "Rebalancing is more than just maintaining a specific mix of stocks and bonds. It's about ensuring your portfolio continues to serve your retirement goals. A financial advisor can help you navigate complex decisions, especially when it comes to balancing income needs, tax impact, and risk management in retirement." When to Rebalance Your Portfolio? Imagine you're building the perfect pizza. You've got your favorite toppings all spread out just the way you like them. But as the pizza bakes, some toppings slide around or bunch up. That's kind of what happens with your investment portfolio over time - things can get a bit messy! When we talk about "rebalancing" your investments, it's like rearranging those pizza toppings to get back to your ideal mix. But how do you know when it's time to do this financial rearranging? Let's break it down: When markets get out of whack: Sometimes, certain investments grow way faster than others. If your tech stocks suddenly skyrocket, they might take up a bigger slice of your portfolio pie than you originally planned. Threshold breaches: Rebalancing when asset classes drift beyond predetermined thresholds, like ±5% from target allocations. This method combines the benefits of regular rebalancing with responsiveness to market changes. Regular check-ups: Some people like to give their investments a once-over every month, quarter, or once a year, just to keep things tidy. Life events: Big stuff like getting married, having a baby or grandbaby, or thinking about retirement might change how you want to handle your money. New asset classes surface: Sometimes, new types of investments or asset classes pop up that might fit well with what you're trying to do. Remember, there's no one-size-fits-all answer to when you should rebalance. It's all about what works best for you and your money goals. Just like how everyone likes their pizza a little different, your perfect investment mix is unique to you. Technology and Rebalancing While proper portfolio rebalancing can be very complex, modern technology has made portfolio rebalancing easier than ever for simple portfolios. Many robo-advisors and online platforms offer automated rebalancing services. While these can be helpful tools, it's important to ensure that any automated strategy aligns with your specific needs and goals as a retiree. At Covenant Wealth Advisors, we've found that when investments and savings begin to exceed $1 million, it's important to have a more customized approach to rebalancing your portfolio. Considerations such as taxes, income, and risk can make the portfolio rebalancing process a lot more complicated. FAQ Section Q: Is there an ideal frequency for rebalancing my retirement portfolio? A: There's no one-size-fits-all answer. Many financial experts recommend rebalancing at least annually or when your allocation drifts by 5% or more. However, the ideal frequency depends on your individual circumstances, risk tolerance, and market conditions. Q: Should I rebalance differently in a bull market versus a bear market? A: While your overall strategy shouldn't change dramatically, you might need to rebalance more frequently during volatile markets to maintain your target allocation. In a strong bull market, this might mean selling some of your better-performing assets, while in a bear market, it could involve buying assets that have declined in value. Q: How does rebalancing impact my retirement income? A: Proper rebalancing can help ensure a steady income stream by maintaining a balance between growth-oriented and income-producing assets. It can also help manage sequence of returns risk, which is particularly important in the early years of retirement. Q: Are there any situations where I shouldn't rebalance? A: While rebalancing is generally beneficial, there might be times when the costs outweigh the benefits. For instance, if your allocation is only slightly off target or if rebalancing would trigger significant taxable gains in a non-retirement account. Q: How does rebalancing fit into my overall retirement planning strategy? A: Rebalancing is a crucial part of maintaining your desired risk level and investment strategy throughout retirement. It should be considered alongside other factors like your withdrawal strategy, Social Security claiming strategy, and overall financial goals. See How Our Financial Advisors Can Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Conclusion Rebalancing your portfolio in retirement is a critical aspect of maintaining your financial health and ensuring your investments continue to serve your needs. While there's no universal rule for how often you should rebalance, a combination of regular monitoring and a flexible approach - whether time-based, threshold-based, or a combination of both - can help keep your retirement finances on track. Remember, your rebalancing strategy should be tailored to your individual circumstances, risk tolerance, and financial goals. It's not just about maintaining a specific asset allocation, but about ensuring your portfolio continues to support your retirement lifestyle and long-term objectives. As you navigate the complexities of retirement investing, don't hesitate to seek professional advice. A qualified financial advisor can provide personalized guidance, helping you make informed decisions about rebalancing and other aspects of your retirement financial strategy. Do you want to retire without running out of money? Contact us today for a free retirement assessment to see how we can help you. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER ™ professional  with the assistance of AI.  No  advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

As a grandparent, you want to make a meaningful impact on your grandchildren's lives. One powerful way to do this is through financial gifts that can help secure their future. But with so many options available, how do you choose the best strategy? This comprehensive guide will walk you through smart, tax-efficient ways to give financial gifts to your grandchildren, ensuring your generosity creates a lasting legacy. Before you continue, be sure to download our free retirement cheat sheets to help you save money, reduce taxes, and optimize your portfolio for retirement. Key Takeaways: Understanding the annual gift tax exclusion and lifetime gift tax exemption Exploring various financial gift options, including 529 plans, custodial accounts, and trusts Evaluating the pros and cons of different gifting strategies Considering the impact of financial gifts on college financial aid Importance of aligning gifting strategies with your overall estate plan Tax implications and potential benefits of different gifting methods The Power of Financial Gifts for Grandchildren Imagine Sarah and Tom, a couple in their early 60s with a net worth of $3 million. They have three grandchildren and want to give each of them a head start in life. By understanding the various gifting strategies available, Sarah and Tom can make informed decisions that align with their financial goals and values. Why Give Financial Gifts? Create a lasting impact: Financial gifts can provide opportunities for education, homeownership, or entrepreneurship that might otherwise be out of reach. Tax benefits: Strategic gifting can help reduce your taxable estate and potentially lower your overall tax burden. Teach financial responsibility: Involving grandchildren in the gifting process can impart valuable lessons about money management and financial planning. Strengthen family bonds: Financial gifts can be a way to express love and support, creating lasting memories and connections across generations. Understanding Gift Tax Rules Before diving into specific gifting strategies, it's crucial to understand the basic gift tax rules that apply in the United States. Annual Gift Tax Exclusion As of 2024, you can give up to $18,000 per person, per year, without incurring gift tax or using any of your lifetime gift tax exemption. For married couples, this amount doubles to $36,000 per recipient. Adam Smith, CFP® at Covenant Wealth Advisors in Reston, VA, explains, "The annual gift tax exclusion is a powerful tool for grandparents looking to transfer wealth to their grandchildren. By strategically using this exclusion each year, you can significantly reduce your taxable estate over time." Lifetime Gift Tax Exemption As of 2024, the lifetime gift tax exemption is $13.61 million per individual ($27.22 million for married couples). This means you can give away up to this amount during your lifetime or at death without owing federal gift or estate tax. It's important to note that any gifts exceeding the annual exclusion amount will count against your lifetime exemption. While this may not be an immediate concern for many families, it's crucial to keep track of these gifts, especially if your estate is likely to approach or exceed the exemption threshold. Popular Financial Gift Strategies for Grandchildren Now that we've covered the basics of gift tax rules, let's explore some popular strategies for giving financial gifts to grandchildren. 1. 529 College Savings Plans 529 plans are tax-advantaged investment accounts designed to help save for education expenses. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses. Pros: High contribution limits Potential state tax deductions (varies by state) Ability to change beneficiaries Grandparent-owned 529 plans don't impact financial aid eligibility in the initial years of college Cons: Limited investment options Penalties for non-qualified withdrawals Megan Waters, CFP® at Covenant Wealth Advisors in Richmond, VA, advises, "529 plans can be an excellent way for grandparents to contribute to their grandchildren's education while maintaining control of the assets. Just be sure to coordinate with the parents to avoid over-funding or negatively impacting financial aid eligibility." 2. UGMA/UTMA Custodial Accounts Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow you to transfer assets to a minor child, with a custodian managing the account until the child reaches the age of majority. Pros: Flexibility in how funds can be used Potential tax advantages for the child No contribution limits Cons: Child gains full control at age of majority Can impact financial aid eligibility Limited tax benefits compared to other options 3. Roth IRAs for Grandchildren If your grandchild has earned income, you can contribute to a Roth IRA on their behalf, up to the amount of their earned income or the annual contribution limit, whichever is less. Pros: Tax-free growth and withdrawals in retirement Flexibility for early withdrawals of contributions Teaches long-term saving habits Cons: Contribution limits based on earned income May not be suitable for very young children without earned income 4. Trusts Trusts offer a more complex but highly customizable way to gift assets to grandchildren. There are various types of trusts, each with its own benefits and considerations. Pros: Greater control over how and when assets are distributed Potential estate tax benefits Can provide asset protection Cons: More complex and costly to set up and maintain May require ongoing professional management Matt Brennan, a financial advisor with Covenant Wealth Advisors in Richmond, VA notes: "Trusts can be an excellent tool for grandparents who want to maintain control over how their gifts are used or who have more complex estate planning needs. However, it's crucial to work with an experienced estate planning attorney to ensure the trust is structured correctly." 5. Direct Payments for Education or Medical Expenses Payments made directly to educational institutions or medical providers on behalf of your grandchild are exempt from gift tax, regardless of the amount. Pros: No impact on annual or lifetime gift tax exemptions Can cover significant expenses without tax consequences Cons: Limited to tuition and medical expenses only Doesn't allow for future growth of the gift Aligning Gifting Strategies with Your Overall Financial Plan When considering financial gifts for grandchildren, it's essential to view these decisions in the context of your overall financial and estate plan. Here are some key factors to consider: Your financial security: Ensure that your gifting strategy doesn't jeopardize your own retirement or long-term care needs. Estate planning goals: Consider how your gifts fit into your broader estate planning objectives, including wealth transfer and tax minimization strategies. Family dynamics: Be mindful of how your gifts may impact relationships within the family. Open communication can help prevent misunderstandings or feelings of inequality. Your grandchildren's needs: Consider the age, financial situation, and individual needs of each grandchild when choosing a gifting strategy. Tax implications: Work with a financial advisor and tax professional to understand the tax consequences of different gifting methods for both you and your grandchildren. FAQs About Financial Gifts for Grandchildren Q: How much can I gift to my grandchild without incurring gift tax? A: In 2024, you can gift up to $18,000 per grandchild ($36,000 for married couples) without incurring gift tax or using your lifetime exemption. Q: Can I contribute to a 529 plan if my grandchild is already in college? A: Yes, you can contribute to a 529 plan at any time, even if your grandchild is already in college. The funds can be used for current or future qualified education expenses. Q: What happens if my grandchild doesn't use all the money in their 529 plan? A: Unused 529 plan funds can be transferred to another qualifying family member, used for graduate school, or withdrawn (subject to taxes and penalties on the earnings portion). Q: Are there any downsides to giving large financial gifts to grandchildren? A: Potential downsides include reduced control over the assets, impact on financial aid eligibility, and the possibility of enabling irresponsible financial behavior. It's important to consider these factors and communicate openly with family members. Q: How can I ensure my financial gifts are used responsibly? A: Consider using trusts with specific distribution criteria, providing financial education alongside gifts, or choosing accounts like 529 plans with restricted use of funds. See How Our Financial Advisors Can Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Conclusion Giving financial gifts to your grandchildren can be a powerful way to express your love, support their future, and create a lasting legacy. By understanding the various strategies available and carefully considering your options, you can make informed decisions that align with your financial goals and values. Remember, the best gifting strategy for you will depend on your unique financial situation, family dynamics, and long-term objectives. Working with experienced financial professionals can help you navigate the complexities of tax laws, investment options, and estate planning to create a gifting plan that maximizes the impact of your generosity. Do you want to integrate gifting for your grandchildren into your overall investment plan? Contact us today for a free retirement assessment to see how we can help you. About the author: Matt Brennan, CFP® Senior Financial Advisor Matt is a Senior Financial Advisor with Covenant Wealth Advisors  and a CERTIFIED FINANCIAL PLANNER™ practitioner. He has over 20 years of experience in the financial services industry in the areas of financial planning for retirement, tax planning, and investment management. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was created with the assistance of AI tools and reviewed by our team of financial professionals to ensure accuracy and compliance with regulatory guidelines.  No  advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.