OORAH...I'm excited to announce that I've been selected to provide lectures on Financial Planning for Transition to USMC Senior Leaders at Camp Lejeune. I've already conducted two classes and will be returning throughout the remainder of the year.
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Financial StrategiesPlanning Techniques, Procedures and Guidance for Military Professionals
| Greetings! |
Welcome to this month's edition of Financial Strategies. I hope your summer is off to a good start. There is an old saying in the investment world that one should "Sell in May and Go Away". This indicates that not much happens in the market during the summer. I'm not sure that I believe that, but I guess it doesn't matter because I don't worry about what the market is going to do in the next 3 months, but rather the next 10 to 20 years. And as always, I believe that owners will be rewarded.
In this edition I decided to re-look at the Strickland Decision and how it applies to those military members who are retired and rated 50% or greater disabled by the VA. There are definitely a couple of different scenarios.
My quick comment covers the USAF and the ability to delay your "last" move after retirement. Not sure if it has to do with budget cuts or the improving economy.
Target Date Funds are a popular option in 401(k) plans. If you are going to chose them make sure you know what you are buying. The third article covers the basics of target date funds. Remember, target date funds almost always have higher fees than other funds (a lot of times they are funds of funds). Fees matter.
This edition wraps up with a couple of articles from the Financial Presses that I found interesting. The first article talks about Diversification and how it can reduce risk and sometimes increase returns. The second article talks about tax schemes....both those to watch out for and those to make sure you are not doing yourself.
Have a great June and enjoy the summer!
Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703)542-400 or (800) 928-1820
|The Strickland Decision
I received a question the other day from one of my tax clients that got me thinking about the Strickland Decision and tax calculations. I also thought it might be a good time to revisit the Strickland Decision and how it applies to those military retirees who are rated 50% or more disabled. Your tax consequences can vary a great deal depending on how your "offset" is made up. But we should start with a review.
The Strickland Decision. What is It?
The Strickland Decision is a court case where a retired servicemember sued the IRS/Federal Government claiming the right to retroactively reduce his income by the amount of VA Offset that should have been taken from his retired pay. The result of the court case is Internal Revenue Ruling (IRR) 78-161. IRR 78-161 allows a retired veteran to reduce retirement benefits by the amount of VA offset that should have been taken (assuming a delay in receiving a VA Disability rating...a pretty good assumption).
US Code essentially says that you must reduce retirement benefits by the amount of VA Disability received. This is still the case for those less than 50% disabled. For every dollar received in VA Disability Compensation, Military retired pay is reduced by one dollar. Where it becomes complicated is for those rated 50% or more disabled. In 2004 Congress changed the law to allow retirees rated more than 50% disabled to receive both VA benefits and military retirement. Concurrent Receipt is being phased in and will be fully implemented in 2014. From a government accounting standpoint though, your pay is still reduced and then is replaced by CRDP or CRSC and this can significantly affect your taxes.
CRDP vs. CRSC
Now, remember, we're talking about government accounting so logic doesn't necessarily apply. To review...
- Your retirement pay will be reduced by the amount of your VA benefit (even if you are 50% or more disabled)
- If you are 50% or more disabled then the reduction will be replaced by
- Concurrent Retirement and Disability Pay (CRDP) or
- Combat Related Special Compensation (CRSC)
The major difference between the two from a financial planning standpoint is that CRDP is taxable to the retiree while CRSC is not.
Beyond that CRDP is "automatic" if you are rated 50% or more disabled, then you will automatically received CRDP. To receive CRSC you must apply to your Parent Service and your disability must be Combat or Combat Training related (you also can qualify for CRSC with 10% or greater disability)
What is the Bottom Line?
For those recently retired, if you are 50% or greater disabled and receive CRDP in most situations applying for relief under IRR 78-161 will most likely NOT result in a significant tax reduction. For those receiving CRSC for a significant disability and if the delay in receiving your VA rating was more than a month or two, it is definitely worth the time to refigure your taxes and see how much you could save.
For the recent past, the USAF has allowed retirees to extend their Home of Selection move based on decreased values for their homes. That is no longer the case. I recently found out that the USAF is "no longer able to grant requests for extensions based upon the decreased value of your home. Your home must be presently on the market OR under construction."
Not sure (but I'm checking) if this applies to other services or not.
Anyone want to buy a house? (not sure if that counts as "on the market")
Are They Right for You?
Target-date funds provide investors with the ability to simplify their financial and investment lives.1 With target-date funds, your portfolio's asset allocation is automatically rebalanced on your behalf over the years by professional investment managers, generally growing more conservative as the identified target date approaches.
Unlike lifestyle funds, target-date funds do not require investors to reassess their priorities and transfer money to a different fund as goals approach and priorities change. Generally speaking, the name of each target-date fund includes a specific year, such as "2030" or "2045." All you need to do is choose a fund named for the year closest to the year of your projected retirement. From that point on, professional investment managers make all the investment decisions.
Understanding the Investment Strategy
Target-date investments follow what is known as a "glide path." The glide path maps out the investment's asset allocation over time -- the way it is divided between the principal asset classes of stocks, bonds, and cash. How your assets are allocated among these investments is a major factor in determining portfolio volatility and risk.2 As you approach retirement, a target-date investment typically reduces its holdings of stocks, while increasing its exposure to less risky bonds and cash. Target-date investments provide investors with instant diversification into different asset classes.2
The illustration above shows you the glide path of a hypothetical 2045 target-date investment. Note how it begins investing primarily in stocks, then, over time, gradually decreases its stock component and increases its bond and cash components.
A target-date investment's goal is to make the investing process simple. This "set it and forget it" style also makes investors less likely to allow short-term market fluctuations to adversely affect their investment decisions.
A "New Generation" of Target-Date Investments
The principal value of many target-date investments cannot be guaranteed at any time, including the target date, and may decline at any time. However, there are newer models that offer a way to protect all or some of your portfolio from market declines. These newer options are often tied to a feature that offers a lifetime income guarantee upon retirement.
Target-date options may be ideal investments for those participants who have a long time horizon and for those who don't feel comfortable investing on their own. Be sure to review the glide paths of the target-date investments offered through your plan. If you have any questions, ask your plan administrator or financial professional.
1The principal value of target-date funds is not guaranteed at any time, and you may experience losses, including losses near, at, or after the target date, which is the approximate date when investors reach age 65. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. There is no guarantee that the funds will provide adequate income at and through your retirement.
Target-date funds invest in a broad range of underlying mutual funds that include stocks and bonds and are subject to the risks of different areas of the market. Target-date funds maintain a substantial allocation to stocks both prior to and after the target date, which can result in greater volatility. The more a target-date fund allocates to stock funds, the greater the expected risk. For further details on the risks associated with investment in a target-date fund, please refer to the fund's prospectus.
2Asset allocation and diversification do not ensure a profit or protect against a loss.
3Source: S&P Capital IQ Financial Communications. Example is hypothetical and does not represent any specific target-date investment.
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.
From the Financial Presses
An Example Of The Power Of Diversified Portfolios
When it comes to investing your hard-earned dollars, the recipe you use can be more important than the ingredients you use. In other words, how you allocate your funds into different asset classes can have a bigger impact on your returns over time than what you put into your portfolio...(To Read More Click Here)
IRS Reveals The Dirty Dozen Tax Scams For '13
In what has become an annual rite of spring, the IRS has released the "Dirty Dozen" tax scams to watch out for in 2013. The list for this year is essentially the same as last year's, with a few minor tweaks....(Read More Here)
|Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
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