Broker Check

September 2018

Back to $chool $eason is Upon Us

As financial advisors we get to help you organize your lives and plan for what is coming down the pike. We talk to you about retirement, insurance, simple estate planning, and charitable giving strategies all to help you prepare for the expected, the unexpected, and the inevitable.

August was back-to-school month. New books, new teachers, new friends, new schools, etc., offer the promise of turning the page and starting new chapters in our lives. 

And while there is certainly an emotional component in sending your kids to school, there is a very real and tangible financial component to those of us with kids in college. We all set aside money for retirement, insurance, rainy days, but of all those “grown-up” things we try to address, college funding usually hits first—and if you don’t start planning early, it
can hit hard.

I’m taking that walk myself now. In August, I sent my two oldest kids to college. This wasn’t the first “grown-up” thing I’ve done, but it’s certainly on the Knutson Family Mount  Rushmore of achievements.


Anyone with kids in college knows how expensive it can be, but everyone also has about eighteen years to plan for it. Throw in some planning, a good ACT/SAT score (parent to parent tip: skip summer camp and send your kid to ACT/SAT camp), a decent GPA and you can cobble together a way to slay the tuition dragon without experiencing too much pain.

One of the most popular college funding vehicles is the 529 Plan. Named for Section 529 of the Internal Revenue Code, these plans offer tax-free growth if used for qualified education expenses.

Plans are state-specific; the biggest thing to look for is whether or not contributions are deductible from your state income taxes. Kansas is one of the few states to offer a state tax deduction regardless of which plan you contribute to; most states only offer state tax deduction if you use the state-specific plan. So, if you buy the Kansas plan, your kid can still use those funds to go to Missouri. Though why anyone would want to go to Mizzou is anyone’s guess.

Money inside 529 plans grows tax-deferred and if the proceeds are used for “qualified” educational expenses, the earnings come out federally tax-free. These expenses are pretty standard; books, tuition, room, board, etc. There are some exceptions, but generally speaking college expenses are easily identifiable and therefore exempt from federal taxes.

An “eligible institution” can be traditional colleges, graduate, professional, and trade schools, among others. This includes most international schools, and I heard there are PGA Tour and culinary academies that qualify to use 529 funds. If you’re not sure, we can find out for you.

As a result of the Tax Cut and Jobs Act of 2017, you can now use up to $10,000 from your 529 plans to cover private elementary and high school tuition, but you cannot use the 529 for other fees or activities.

Most plans have overall contribution limits; they are generally between $235,000 and $520,000. It is mathematically possible to fully fund just about any college regardless of tuition.

When you open a 529 plan you are designated as the owner and your designated beneficiary is the student. What most people like about 529 plans is the owner still controls the money. I have 529 plans for each of the kids, but if one of them doesn’t need the money (or if I am just in a bad mood) I can change the beneficiary to one of the kids that I like better. There is no cost or taxable event to do this but it allows for some flexibility for those of us with more heirs than others. Before the 529 plan, many parents used Uniform Gift to Minors (UGMA) accounts for kids’ college. These UGMAs are actual gifts to the student, so if Junior wants to take the money out after (usually) age 21 and buy a car with it, he could do that, and there would be nothing the parent could do about it. We like 529 plans a whole lot more than UGMAs for taxation, flexibility, financial aid, and ownership reasons.

Last thing to mention here is documentation. It is up to you to document that the money was used for a qualified expense. The IRS is unlikely to go on a 529 crusade, but be sure you have a paper trail if the IRS does want to know.

That’s about it. You people with young kids hear me now: college is expensive. The more you can save the earlier you can save it, the lower your blood pressure will be when it’s time to send kids to college.

-Peter D. Knutson, CFP®, CLTC



Market Commentary: Is The Turkish Flu Contagious?

Written August 21, 2018

An article about turkey?  Is it November already?! I know what you’re thinking. To brine or not to brine? Can I really cook a turkey inside a dishwasher?   Not quite. I’m here to talk with you about Turkey with a capital “T.”  (I’ll get to the other kind of turkey later.)

Source: Google Maps. Map data 2018. GeoBasis-DE/BKG (©2009). Google, Mapa GISreal, ORION-ME

If you’re puzzled, allow me to summarize the issue. Turkey is undergoing what many are calling an economic collapse of its own making. The annual inflation rate is spiking over 16% ¹ and in less than a month, the Turkish lira lost over a third of its value relative to the US dollar. 


Source: Graph created by Google. Google cannot guarantee the accuracy of the exchange rates displayed. You should confirm current rates before making any transactions that could be affected by changes in the exchange rates.

How has Turkey reached this terrible tipping point?  To make a long story short, to force economic growth, Turkish President Recep Tayyip Erdoğan has spent billions of borrowed dollars through infrastructure spending and making special deals with Turkish corporations. What’s important is that at Turkey now owes about 53%² of its Gross Domestic Product (GDP) in foreign currencies.  Worse still, the country’s foreign-currency reserves only cover about 75% of upcoming debt payments.

Is there a solution?  There are a few.  Turkey could either hike interest rates substantially or get financing from the International Monetary Fund (IMF) in return for some promises of reform.  Hiking interest rates is a long shot; unlike the U.S., which has a highly regulated central bank, Erdoğan has full control of Turkey’s monetary policy.  He also believes that higher interest rates lead to high inflation, an erroneous idea that is turning out to have dire consequences for Turkey.  

Financing appears to be the only viable solution, but the IMF will likely require Turkey to meet their strict measures.  Of course, there is an option to let the country implode, which begs this question: would a complete default of Turkey’s debt be contagious to the rest of the global economy?

Stop everything you’re doing! Watch “Dramatic Chipmunk” on YouTube³ and then come right back. I’ll wait.

The opinion of most economists is that Turkey’s financial problems
 won’t affect the broad global market.  But they could have negative ramifications for other emerging markets and, to a lesser extent, those European banks that have lent money to Turkey.  While such a default would be more than a rounding error for those banks, it wouldn’t put them out of business.

Turkey’s current situation is different from the Greek debt crisis back in 2012.  Greece is a member of the Eurozone and its currency is denominated in euros.  Because of that, their woes became a problem for the entire Eurozone.  By contrast, Turkey is not a member of the European Union or the Eurozone. Turkey has its own currency and for the most part, an isolated economy.  This insolation helps prevent its debt crisis from spreading to other countries.

This Turkish crisis may, in fact, create opportunities in the emerging market space once nervous investors exhaust their selling.  Other than that, we don’t expect the overall U.S. or global economies to be impacted. 

I wouldn't put a turkey in my dishwasher, but let me know if you try that! And if you have any questions regarding your accounts, please call your financial advisor.  We’re here for you!

  - Victoria Bogner, CFP®, CFA, AIF
®


¹ “Turkey Inflation Rate”: https://tradingeconomics.com/turkey/inflation-cpi

² Whittall, Christopher. “Turkey Needs Foreign Funds as Short-Term Debt Looms.” The Wall Street Journal, Dow Jones & Company, 2 Aug. 2018, www.wsj.com/articles/turkey-needs-foreign-funds-as-short-term-debt-looms-1533221473

³ https://www.youtube.com/watch?v=a1Y73sPHKxw

Reviving Your Charitable Deductions

A lot of groaning is going on over the new tax law and the loss of charitable deductions. For those of you who have reached the age of 70.5 and have started taking required minimum distributions (RMDs), a qualified charitable contribution (QDC) can offer you a tax break if you don’t need your RMDs for current living expenses.

How does this work? Rather than taking receipt of your RMD, you redirect that amount to a qualified charity. You will have satisfied your RMDs for the year while benefitting your charity of choice. You also won’t have to count the RMD as part of your adjusted gross income! That means potentially lower taxes and Medicare insurance premiums.

Remember, this only works if you make a donation directly to a charity. It doesn’t count if you take your RMD yourself and then write a check to charity.

If you want to learn how this strategy might work for your particular situation, don’t hesitate to give us a call.

- Jude McDaniel, CLU, ChFC

McDaniel Knutson Advisors Sharpen Their Skills

Last month the other advisors at McDaniel Knutson and I hit the road to San Antonio. While there we attended a hot conference. I’m not just talking about the heat, though I think some records were broken. The Cetera Financial Group provided us with a conference that was ablaze with education geared to help us serve your ever-shifting needs.

Two of the most informative sessions I attended were on advanced Medicare strategies and the Economic Outlook. Both provided invaluable insight for me to use as I develop long-term strategies for my clients. We’re never content with settling here at MKFP and we relentlessly seek to increase our knowledge and pass that along to our clients. This Cetera conference is one of the many opportunities I look forward to each year to sharpen my skills and stay current with trends.

- Brad Lanpher, Financial Advisor

September is Life Insurance Awareness Month

Don’t take an unnecessary risk by not protecting your loved ones with life insurance. We are always happy to discuss the importance of life insurance and help you get the coverage
your family needs.

Disclaimers and Notes

All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.

All information provided has been prepared from sources believed to be reliable, but is not guaranteed by Cetera Advisor Networks and/or McDaniel Knutson and is not a complete summary or statement of all available data necessary for making an investment decision. All information provided is for informational purposes only and does not constitute a recommendation.

Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. 

Please Note:  The information being provided is strictly as a courtesy.  When you link to any of the websites provided here, you are leaving this website.  We make no representation as to the completeness or accuracy of information provided at these websites.  Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information or programs made available through this website.  When you access one of these websites, you are leaving our website and assume total responsibility and risk for your use of the websites to which you are linking.