March Financial Planning Tip

The credit landscape can be complex, confusing, and it can be difficult to know where to even start. It impacts every major financial purchase and decision a person can make. But what all goes into that three-digit number? There are five main factors that contribute to your FICO score, one of the most popular scores used by lenders today: payment history, utilization rate, age of credit history, recent credit inquiries, and types of credit used. The two most important of these factors to manage your credit are your payment history and your utilization rate.

1. Payment history makes up 35% of your credit score.
  • Your history of on-time or missed payments is the single most powerful factor in determining your credit score. Any lender will want to know whether or not you’ve paid others who loaned you money on time in the past.
  • You’ll be rewarded for making consistent, on-time payments. A single late payment can take 60 to 110 points off your score.
  • Negative public record and collection information — like bankruptcies, foreclosures, debt collection lawsuits, etc. — are considered part of your payment history, too. Most negative information stays on your report for about seven years, although older blemishes and smaller amounts count less than newer marks or those with larger amounts.

2. Your utilization rate makes up 30% of your credit score.

  • Your utilization rate is simply how much debt you are using versus how much debt you have available. The lower your utilization rate is, the better your score will be.
  • Your utilization rate is calculated by adding up all of your credit balances and dividing the total by your total credit limit. For example, let’s say you have three credit cards with a total available credit card limit of $5,000. You are currently carrying $50 on one card, $200 on the second card, and $250 on the third card. In total, you are using $500 of your available $5,000 credit limit, and your utilization rate would be 10%. What’s a good utilization rate? Ideally, you want your rate to be below 30%.
Understanding the underlying mechanics and components of your credit score and the actions you can take to improve it will help you become better positioned to unlock your full credit potential and achieve your financial goals.
February Financial Planning Tip

When planning your IRA withdrawal strategy, you may want to consider making charitable donations through a Qualified Charitable Distribution, or a QCD. In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare. In order to qualify to be able to make a QCD there are a few rules and guideline to adhere to:

  • The IRA owner must be at least age 70 ½ to do the QCD…not merely turning 70 ½ that year.

  • Maximum dollar amount of a QCD is limited to 100,000 per year per taxpayer.  Married couples could each do 100,000 from his/her respective IRA’s.

  • Only distributions from IRA are eligible (can’t do SEP/ Simple IRA if still “active” or other retirement plans).

  • The Distribution must go to a public charity (can’t go to charitable supporting organization or donor advised fund.

  • Can’t receive any kickback or other “quid pro quo” benefits for the donation.

  • The charity should ideally cash the QCD check by 12/31.

  • In order for the QCD to satisfy the RMD obligation, the QCD should be the first distribution for the year.  The first distribution that comes out of an IRA for the year is presumed to satisfy the RMD.  So it doesn’t have to be the first of the year, you just need to make sure you still have an RMD obligation that the QCD can satisfy.  For example, If you had an RMD of $10,000 and you took a distribution at the beginning of the year to satisfy it and then realized it would have been better to do a QCD instead, you can’t undo the prior distribution.

  • The QCD can be used to satisfy all or part of the RMD.  Any QCD’s over the RMD amount cannot satisfy future years RMD’s.

  • The check must be made payable to the charity.

  • The IRA custodian is not required to specially identify the QCD on your annual 1099-R so the responsibility is on you to inform your taxpayer that you performed a QCD.

The benefits to completing a QCD can help in several aspects of your financial plan including but not limited to:

  • The distribution comes out of the IRA without any tax consequences (excluded from income altogether) No charitable deduction.

  • The QCD satisfies the RMD.

  • Ordering Rules – any QCD from an IRA is deemed to come from the taxable portion of the account first (as opposed to the typical pro rata rule.  All IRA accounts are aggregated together to determine the total taxable amount.

  • It could reduce the taxability of Social Security benefits if the QCD drops your combined income to less than 44k (AGI + nontaxable interest = ½ of Social Security benefit)

If you take the standard deduction and you do distributions from an IRA to make the charitable contribution then QCD makes sense.
As always, a tax advisor can help you determine if both your IRA and charity qualify for QCDs. We are more than happy to also discuss how a QCD fits into your current financial plan and can help you determine the best course of action!
January Financial Planning Tip

Get ready to save more for retirement in 2019! The Treasury Department has announced inflation-adjusted figures for retirement account savings for 2019, and there are a lot of changes that will help savers stuff these accounts.

If you have any questions on these new limits or want to talk about how additional savings can impact your overall plan, give us a call at the office to review your situation and savings strategy!

Contact us for a free consultation!