Over the past several decades, as old-fashioned defined-benefit pensions have been fading away, employees have had to learn a new skill: managing their company-sponsored retirement plans. If you are covered by one of these 401(k) plans—named for a paragraph in the federal tax code—it’s important to understand how to make it work best for you.

In simple terms, a 401(k) is a tax-sheltered investment account to which an employee makes contributions, often matched by the employer. Over time, the account should grow as the securities in it, usually mutual funds, gain value and pay dividends. On retirement, the account owner can begin to make withdrawals without penalty and possibly at a beneficial tax rate.

But unlike traditional pensions, which put the investment risk on the company (or its professional money managers), a 401(k) puts that risk on the employee. In simple terms: your account’s value can fluctuate according to the ups and downs of the financial markets s depending on the investments you choose.

That’s a key point: as the account’s owner, you have choices. Let’s start with the most basic: should you participate in your company’s plan?

The simple answer is “yes.” Most people will need more income in retirement than Social Security will provide. A 401(k) is an excellent way to ensure you’ll have that income, and, if your company kicks in too, that’s “free money.” But in most cases, it doesn’t come automatically. You’ll need to sign up to participate. Your employer’s Human Resources department will tell you when and how to do this. When you enroll, you can decide how much of your salary you want to put into your account. That can be any amount up to $19,500 a year. You can change that contribution amount, by the way.

Your employer will make it easy to contribute by deducting the amount you choose from your paycheck. Whatever amount you choose; it won’t be taxed. Not right away, anyhow. Income tax won’t be due until you start to withdraw from your 401(k) and, most likely, you’ll be in a lower tax bracket.

For many workers, it gets even better. About half of the companies that provide 401(k) plans will put their own money into your account. Often that’s a match of 50 cents from the employer for every dollar an employee invests. Sometimes it’s more, even dollar for dollar.

Some 401(k) plans are simple: the company offers just one type of investment, which might be a mutual fund or a particular portfolio of investments. But more typically, you’ll have some choices. Just as with any other long-term investment decision, you’ll need to weigh your tolerance for risk against your wish for potentially bigger gains. When choosing among the options your company’s 401(k) offers, it’s an excellent idea to get advice from qualified investment experts.

This isn’t the place to get into the pros and cons of aggressive growth funds versus conservative funds, managed versus index funds, and the like. But you will almost certainly face choices among those and other investment options your company offers.

One more point about how much you can put in: If you are an older worker and haven’t put as much into your retirement account as you think you’ll need, a special “catch-up” provision may help you. If you’re 50 or older, you can add another $6,500 a year to the normal contribution limit.

But now come some complications. Because a 401(k) is tied to your employment, you may well need to make some decisions if you lose your job or change jobs. It’s possible, if you’re happy with your investments, to stick with the previous employer’s plan. But if your balance is less than $5,000, you may be required to cash out. It’s perfectly legal, by the way, to have more than one 401(k) account.

Whether it’s your choice or the former employer’s, when you withdraw money from that old 401(k) it’s important to promptly roll it over into another “qualified” plan. Otherwise, you’ll be on the hook for significant income taxes, and maybe penalties, too. A “qualified” plan may be your new employer’s 401(k) or your own Individual Retirement Account (IRA.) When you do this, by the way, let your company’s HR department or the company that manages your IRA arrange for a direct rollover. Taking a check from the old 401(k) will subject you to taxes and penalties.

One final issue about 401(k) plans is important to understand: whether (and how) to borrow or withdraw from your account before you’re eligible to retire. That’s defined as age 59½ unless your employer lets you (or forces you to) retire earlier. You can also withdraw money from your account, without penalty, if you become disabled. Your heirs can do so if you die. Some specific “hardship” exceptions are also available. This year, the CARES act added a special coronavirus hardship provision.

As an alternative to a withdrawal, your 401(k) may allow you to borrow up to 50 percent of your account’s value or $50,000. Whether that’s permitted is up to the employer that set up the plan. Loans usually have to be repaid within five years, unless used to buy a home. There’s a real advantage to this if you need cash quickly: interest rates are usually better than you can get from a bank, and when you pay back the money, you’re paying yourself!

Beware, though: if you don’t manage to repay the loan on time, the unpaid amount will be considered a withdrawal and subject to taxes and penalties.

Bottom line: The many advantages of a 401(k)-plan mean participating is a good deal for most employees. But you’ll still have to make decisions about how much to save, which investment options to choose, and how to manage rollovers, loans and withdrawals. Even within a single company’s plan, one size does not fit all.

To help you navigate those choices, and make sure your 401(k) fits your overall investment and retirement strategy, we recommend consulting with Old North State Trust’s retirement experts.
They can help you make the best of the possibilities your employer’s plan offers you.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.

Retirement planning can be complex.  Let us make it simpler.

Average life expectancy continues to increase, and many people are now living into their 80’s and 90’s. It is important to review your asset allocation on a regular basis and adjust as your goals and lifestyle change.  A portion of your account should be in growth assets to maintain purchasing power over time.    

Comprehensive retirement planning and careful investment management are more important than ever! There are some simple steps you can take to tip the scales in your favor. 

1. Reduce your investment expenses.   Any costs related to your investments reduce your return. The easiest way to increase what you earn is to simply reduce your costs.  Mutual funds and exchange-traded funds, (ETF’s) have fees you may not be aware of or familiar with.  A fund’s expense ratio represents the management fee that is paid to the fund company. This fee does not appear on your mutual fund statements, so you have to look for it. This fee is in addition to what you pay your financial advisor.

There can be other fees, too, such as transaction fees and loads. Always take these fees into consideration when choosing mutual funds and ETFs. With so many products out there, it’s likely there is a lower-cost, similar option.

If you have a financial advisor, ask him or her to review your funds, the management fee associated with each one, and the reason for choosing that particular fund.  There may be a valid reason for not utilizing the lowest cost option, but it should be explained.  A small difference in fees, compounded over time, can have a large effect on the value of your portfolio.   

It’s also important to know how your financial advisor is paid.  Does he or she get paid commission or a percentage of assets under management?  Does the manner in which he or she gets paid match how you’d like to partner with your advisor?

2. Invest in Tax Deferred Vehicles. It’s not what you make, it’s what you keep that matters. Also, reduce the amount of taxes you have to pay, for example, make sure your investments with the highest potential tax liability are in your tax-deferred accounts (such as a 401(k) plan or a traditional IRA).    Assets that generate income or short-term capital gains may be best held in these accounts because the tax is deferred.    Other accounts may hold more tax-efficient assets such as long-term growth stocks or municipal bonds.   These small adjustments may decrease your taxable income which keeps more money in your pocket. 

3. Make Catch-up contributions. Investing in tax-deferred vehicles can make a significant difference over time for wealth accumulation.  The limit for a qualified plan contribution is currently $19,500 with a catch-up amount of $6,500 for those age 50 or older by year-end.   Over time these contributions can make a tremendous difference in life during retirement. Annual contributions are limited so you need to be aware of the changes in limits every year.  The compounding effect over time is significant and one should make as much of a contribution as possible. I’ve never spoken to anyone who regretted making consistent and substantial contributions early, but I have spoken to those who regret NOT doing so!     

3.  The HSA Account.  Another tax saving vehicle is the Health Savings Account (HSA). If you are enrolled in a high-deductible health plan, you are eligible to contribute to an HSA with pre-tax money.  For 2020, Limits are $3,550 for individuals and $7,100 for families; Catch-up contribution is $1,000 for age 55 and older. This money can grow tax free and be held in the account to be used for qualified health care expenses in retirement.   It’s also portable which adds to the flexibility to this type of account.

4. Increase your Social Security benefit by waiting.  For every year you delay claiming Social Security past your full retirement age, which is typically 66 or 67, you can get an 8 percent per year increase until you are 70.  This is a significant difference over time and probably worth seriously considering.   Ask your financial advisor to assist you with the options.  

We educate and collaborate with our clients.  Clients should always feel they can ask questions, be involved, and continue to learn through the process of planning for their financial future with someone they trust.  

Susan W. Beard, Vice President, CRPC®, CTFA

Senior Wealth Advisor

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

A world-wide pandemic and widespread unemployment have a way of concentrating our minds on the subject of health insurance. So, between current circumstances and the approach of the annual insurance marketplace enrollment period, now is a good time to be thinking about how to choose the best coverage for your family.

Often overlooked in debates about health coverage is the fact that Americans’ reliance on employer-provided insurance is something of a historical accident. It’s one of the reasons that our system differs so sharply from how many other nations pay for medical care.

If you get health insurance as a benefit from your job, as a majority of American families do, this is an indirect result of wage controls imposed during World War II. Unable to attract workers with higher pay, some war industries decided to offer health insurance—what was called a “fringe benefit” in those days. Among the first to do this were Henry Kaiser’s shipyards, which was the origin of the huge West Coast-based Kaiser Permanente network of hospitals and insurance plans. Other employers followed suit, and in the postwar decades corporations and unions help spread employer-based health insurance throughout the economy.

But those employee plans left millions out: the self-employed, workers in many small businesses, the unemployed, people with disabilities, and many retirees. Attempts to create a full-blown national health insurance program during the Truman administration stalled, blocked by opposition from doctors and fears about “socialized medicine.” I won’t get too deep into more history, other than to mention that Medicare and Medicaid, enacted in the 1960s, created a system of governmental coverage for the elderly, the disabled and many poor people.

Since then, rapidly rising medical costs have driven up health insurance premiums, most sharply for those who had to buy their coverage on the open market. After several more failed attempts at comprehensive health-insurance reform, Congress finally passed the Affordable Care Act – “Obamacare” after its presidential sponsor – in 2010. And despite various setbacks and some whittling away at the program by courts and Congress, the ACA is still the source of health coverage for millions. Besides setting certain rules for insurers – best known is the requirement that coverage can’t be denied because of pre-existing medical conditions – the ACA provides a government subsidy for eligible insurance buyers.

To qualify for an “Obamacare” insurance subsidy, your income must fall within a specified range, which varies depending on whether you are single or applying for your family. If you are above the top limit, even by a few dollars, you may not be eligible for any ACA subsidy.

At the lower end of the income scale, Medicaid covers many families, but some states including North Carolina have chosen not to take ACA-provided federal dollars to expand their Medicaid programs. That means that some families that earn too much for Medicaid but not enough for an Obamacare subsidy must search for their own options for health coverage.

Ordinarily, it’s just at the end of each calendar year that you can apply for a policy and subsidy for the following year. But a very important exception provides for a “special enrollment period” if you experience a significant life event. Examples include birth of a child, a death in the family, or most pertinent this year, loss of a job.

So whether you are applying right now because you have lost employer-sponsored medical coverage, or if you will be signing up during the normal application period starting in November, you will need to work through the online federal “exchange” at HealthCare.gov. The website will ask you to identify the members of your family who will be covered. That can include adult children up to age 26. The site will then walk you through the process of documenting your income. That includes the tricky task of predicting whether the numbers in your most recent tax return are likely to remain the same into next year.

When you have completed the income part of the process, you will be presented with a daunting array of choices among insurance companies and policies. Those are grouped in three categories based on levels of coverage. And now it gets really tricky!

Your out-of-pocket costs – the premium minus the federal subsidy – will be higher if you choose a “gold” plan, which requires smaller co-pays and deductibles than lower-priced “silver” or “bronze” plans. Coverage details, including such important matters as prescription drugs, will also vary. So how to choose from the dizzying array of options?

It’s important to think through what your actual health-care spending is like. Do you have a chronic condition that frequently requires you to see medical professionals? Do you depend heavily on specialists? Need a steady supply of expensive medications? Then you may find that lower co-pays and deductibles are worth the higher monthly premiums. On the other hand, if you and your family are healthy and expect to need medical care just for routine check-ups and emergencies, then a plan that requires higher out-of-pocket payments may make better sense. For some families, the lower premiums of a “bronze” plan that mainly protects against huge costs from a “catastrophic” illness or injury may make best sense.

You may find it useful to add up all your medical expenses for a year. Compare that with your current insurance premiums so you’ll have an idea of your total medical spending. When you know that baseline it will be easier – though not easy! – to evaluate how various policies may affect both your health and your finances.

If you’re in the unhappy position of having lost a job, and with it your company’s group coverage, that does at least give you a starting point. Compare what that previous policy provided and what you paid for it, if anything, with the benefits and premiums of the individual policies you’re considering through the ACA.

Whatever your decision, don’t stumble into one very dangerous pitfall. If your income changes substantially after you initially qualify for a subsidy, it’s likely to change your eligibility. The law requires you to report that change. If you don’t, you may find yourself on the hook, required to pay back some or all of your ACA subsidies!

What if your income is too high for a subsidy? You’ll still have to choose from competing policies, at every level of coverage, on the open market. The same considerations apply to your choice as if you were shopping in the ACA “marketplace.”

Needless to say, all this represents a significant burden, if only on your time and attention. The costs and complexities are why debates about the best approach to a national health care policy have been such a central part of recent political contests. Space does not permit me to touch on the challenges of matching supplemental coverage with Medicare, of long-term care insurance, and other health coverage concerns for retirees. I will address some of those in a future article.

 Helping you make sense of the medical insurance marketplace and fitting your health care into the rest of your financial planning, is something that knowledgeable experts can help with. The financial-planning experts at Old North State Trust can offer assistance about how to navigate these treacherous waters.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Today in this world we are currently living in, we as parents worry about the Fall and if our kids are going back to school and what kind of education they will be receiving. Since that is still up in the air as to how, when, and where they will be learning, we as parents will be partnering with the teachers and how to educate our children. While some of us don’t have a teaching degree, we can teach them an invaluable lesson on life, budgeting, saving, and investing.

Parents worry about kids from the time they’re born whether they will be safe, will they be liked by peers, what college they’ll be accepted in to, and the list can go on and on.  Do we worry about their value of money and how they will handle their finances as they get older?   What about preparing them for the eventual transfer of wealth if we are all so lucky enough to leave a legacy to give to our children? It’s difficult to get children to spend time learning about money at a young age, but it’s important.  The better money management skills they have by the time they graduate from high school, the better off they will probably handle it in college and down the road. 

First, it is never too young to begin wealth education with your children. The first-time children learn to manage money is usually through an allowance. Once the amount is established for an allowance, talk about the goals that have been discussed and practice these skills with their allowance. They will learn how to save their money, budget it for things they may want, or give a portion to charity. In terms of saving and investing, a very important concept for them to understand is the power of compounding and how that makes such a difference over time!  The time value of money is an invaluable lesson.  Just like trying to “catch up on sleep.”  You can’t.  The sleep you’ve lost is gone.  No one can gain time back – for sleep or investing!   And surprisingly, items usually cost a lot more than children realize.  A good practice may be to have your child guess what the bill is next time you visit a restaurant.  Perhaps they will think harder about going out when they start becoming responsible for paying the bill! As the younger children become tweens and teenagers, have a discussion on taxes– items really cost about 30% more than what you pay for them because you are paying for them in after-tax dollars. When a child enters the work force and receives his or her first paycheck, it’s usually a rude awakening! 

The next step in the process of educating your children is to have a family meeting where all participants would be invited. This would be the opportunity to be completely open and honest and to discuss your family values about money, saving, and investing in the future. After defining your family values, develop a Family Mission Statement with input from all the family members that would be affected by the family wealth.  (The suggested age for the youngest child to become involved in the family discussions would be between the ages of ten to twelve.)

There are three important goals to consider when discussing financial education with your children.

1. To help your children to lead a purposeful and fulfilling life

2. To give them the tools and skills to be knowledgeable

3. To help them practice and become involved in the family’s 100+ year plan

All parents want their children to be set for life once they are no longer able to financially care for them. However, we need to caution them on how to lead a purposeful satisfying life. To tell your children that they will never have to worry about money is setting them up to be uneducated about finances and potentially lazy. We want them to avoid the pitfalls that could come in the future in the way of manipulation from unwanted sources, which could be future spouses, friends that want to help, and business opportunists wanting to gamble with their inheritance.  If your children are educated early, they will be able to weed through and know who is looking out for their best interest. It is always good to surround yourself with trusted advisors. Once the family mission statement has been established, then it is time to develop the financial expectations for your children to realistically uphold, depending on their ages.  These goals could range from how to talk about money, saving and investing money, what a budget is used for (short term and long term), retirement plans, and how to protect your financial investment.  Again, special emphasis should always be placed on your specific family values.

For those that have older children that are working and going to school, you can discuss the importance saving and putting away for retirement. Some of our young clients are still paying off school debt and ask if they should pay off loans before contributing to their company 401-k plan. We share the importance again of the time value of money so it’s important to do both; contribute as much to the 401-k as possible while chipping away at the debt.  Many companies match contributions, and that is free money!  

Many kids are visual and especially when they are young, these concepts are foreign.  David Bianchi, a Miami attorney, created a book “Blue Chip Kids: What Every Child (and Parent) Should Know about Money, Investing, and the Stock Market.”   He and his wife wrote the book when they realized their 13-year-old was not learning anything about money and investing in school.  Unfortunately, that is usually the case for most of us.   So, that’s one resource that is not too textbook-like for a teen.   As parents, we somehow need to stress the importance and satisfaction of building up savings and investments so that they are financially comfortable later in life.  Preparing children for the future should be a continuous endeavor. If you follow these steps, hopefully, they will become financially secure and be able to make good financial decisions.Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Amid the current unprecedented crises in public health and the economy, charitable organizations are under strain, asked to meet a multitude of vital needs. Many charities themselves are hurting. So now may be a perfect time to think about how to set up charitable trusts that can do good in the world, but also help your family and provide you with tax benefits.

I’m going to talk about four related types of trusts, all of which share the “split interest gift” feature. That means the income earned by the trust’s assets is directed toward one beneficiary, and the principal toward somebody else – or something else.

Now for the ugly acronyms. The four chief types of split-interest trust are called CRUT, CRAT, CLUT and CLAT. Before looking more closely at them, let’s define some terms. The initial “C” stands for “charitable.” Simple enough so far.

The second letter is either “R” for “remainder” or “L” for “lead.” Under a CRUT or CRAT, the charity of your choice gets the remainder: what’s left after the trust’s income is distributed to the other beneficiaries. Typically, that would be to members of the trust creator’s family. To approach this in reverse, with the charity taking the lead and getting the income, and the family beneficiaries eventually collecting the principle, you would want a CLUT or a CLAT. Income in this case, by the way, means primarily the interest and/or dividends from investments held in the trust. But any other form of income, such as rent on real estate, might also be included.

The next important initial will be either “U” for “unitrust” or “A” for “annuity.” A CRUT or CLUT, as a unitrust, pays a percentage of the trust’s assets each year. A CRAT or CLAT, as you would expect from the word “annuity,” pays a fixed amount every year. In both cases, how long those payments continue is dictated by the trust’s terms. It might be set up for a fixed number of years. Or it could be pegged to a specific event, or to some combination of years and events.

For example, a trust might provide income for its creator’s widowed spouse. But that spouse’s death would end the trust, triggering the distribution of the principle to the designated charity.

The final “T” is easy again: “trust.” There is one additional important option: whether to create the trust during your lifetime, or have it set up through your will. If you create it so it begins during your lifetime, you have the option of naming yourself as a beneficiary, instead of or in addition to your heirs.

So besides determining how you want to divide your assets between family and charity, you have several other decisions to make. First of those may be whether any of these trust types makes sense for you. They are complex and can be expensive to set up. So, unless your estate is in the neighborhood of $1 million or more, the administrative costs may not be worth the benefits. But million-dollar estates are quite common these days, and so this may well be worth considering.

The next choice is how to manage the split. In simple terms, who gets money first? If you want the charity to get funded for, say, twenty years after your death, but your grandchildren to collect whatever is left in the trust, then a CLAT or a CLUT is your best choice.

If, instead, you want to provide for a spouse or children first, and then let a charity collect the remainder later, then CRAT or CRUT make better sense.

Finally, consider whether to specify a fixed annual payout or a percentage. That is, choose between the “annuity” or “unitrust” approaches. A useful guideline about which to pick: If the trust’s assets are mostly safe investments, highly likely to perform well, then a unitrust approach may be best. The annual payments may vary somewhat but will still remain largely consistent or even grow. Riskier investments may dictate the annuity approach, ensuring that annual payouts don’t change even if the value of the trust’s assets fluctuate wildly.

One reason to choose a lead trust is that it can be better for the heirs during times of low interest rates. The lower return on investment will diminish the charity’s share, not the beneficiaries. Conversely, at times of high interest rates, a remainder trust will shift that greater income to the beneficiaries and leave the charity to collect whatever is left later on.

So, what about the benefits for the creator? Well, as in so much of estate planning, taxes are a major consideration. Setting up a charitable trust reduces the value of your estate, which may well spare your heirs from estate taxes, or at least reduce them. There are also large potential savings in capital gains and income taxes.

The complexities of how these trusts affect taxes gets back to my earlier point: this is a complex business, and any attempt to generalize too much is likely to be confusing. That is why expert help, focused on your unique circumstances and objectives, is absolutely necessary.

So, what can you do if your estate isn’t big enough to justify a CLUT or a CLAT, a CRUT or a CRAT?

One possibility is a charitable annuity. It’s essentially an insurance contract by which financial assets are used to buy a guaranteed flow of income. The owner directs that money toward the charity of their choice. This can be cost-effective with estates even valued at less than $100,000. It still has benefits for the giver, notably hefty income tax deductions for the charitable donations. And whatever goes into the annuity is no longer part of the estate.

A second option is charitable life insurance. How it works: you make an annual gift to a charity, which uses your money to pay the premium on an insurance policy. On your life! Your gifts are charitable deductions. Then, when you’re gone, the charity of your choice collects on the life insurance policy.

If you are thinking about finding ways to benefit your favorite causes, while not neglecting your family, it’s worth educating yourself about charitable trusts, whether remainder or lead, unitrust or annuity. The investment and estate-planning experts at Old North State Trust are knowledgeable about the pros and cons and tax implications of these useful instruments.

We have heard it so often; it’s become a cliché. Whether it’s a hurricane on the horizon, a global pandemic, or a meltdown in the markets, the experts always assure us: “This is not the time to panic.” But in the genuinely unprecedented emergency that we’re enduring now, it’s helpful to have some good advice on what we should do while we’re not panicking.

Our focus right now is on what to do if the economic crisis that’s followed the coronavirus crisis has left you in a cash-flow bind. For many people, retirement accounts are a tempting source of emergency money, but one that’s normally considered off limits. Now, however, financial reality may dictate a violation of that formerly ironclad rule: do not tap your retirement fund in an emergency.

Fortunately, part of the emergency legislation that Congress has recently passed provides some relief from the normal rules governing retirement account.

So here are some step-by-step suggestions about how to think through your need for short-term cash.

First: ask yourself, “How badly do I truly need this?” Remember that many entities, including banks, mortgage companies and utilities, are offering help to their customers. These may take the form of payment holidays, deferred interest, or the waiver of penalties for those who are temporarily out of work or have had to shut down their businesses. If you can postpone some regularly scheduled payments by a few months, it may be better to catch up later, when things return to normal, than to tap into your IRA or 401(k) now.

Second: if you truly do need cash now, and you have a taxable investment fund, it’s best to draw it from that source first, rather than deplete your retirement assets.

Third: If you do have to draw on retirement funds, don’t do so willy-nilly. It’s better to take money from a Roth IRA than a conventional IRA. And if you have a 401(k) or similar employer-sponsored plan, consider whether borrowing against your balance is a better option than simply selling off assets. (Borrowing is not an option for an IRA.)

So, let’s examine these points one at a time.

Maximum withdrawal: The “CARES Act” relaxes the rules on tapping retirement accounts, but only up to a $100,000 cap. If you take more than that, you will be subject to the old familiar tax and penalty rules.

Roth IRA first: If you have a Roth IRA, you have already paid income tax on that money, so any withdrawal won’t be subject to taxes now. In other words: get “post-tax” money before you tap into any “pre-tax” money.

No early withdrawal penalty: Whether it’s from a Roth or conventional IRA, premature withdrawals—if you are younger than 59 ½ years and are normally subject to a special 10 percent tax. That has been suspended for the time being.

To summarize: if you take less than $100,000, you will not pay any penalty. If it’s from a Roth IRA, you will not pay income tax, either.

Here is one other very welcome provision. While normally any money you put into your Roth IRA counts as a contribution (thus subject to tax), the emergency legislation has opened a three-year tax-free window, starting in 2021, during which you can repay anything you took out of that account—and not have it count as a new contribution. So, if you want to build that Roth IRA back up, replenishing what you have to withdraw this year, it will be as if you’d never taken it out—at least for tax purposes.

Should you decide to pay yourself back, that can be done in whole or in part; it can be done in installments or in a lump sum. And while this might not be the best strategy, it doesn’t have to be done at all.

Now for those whose retirement money is in an employer-sponsored plan, most commonly a 401(k): You may, depending on how the plan is set up, be able to borrow against your plan’s balance. And the CARES Act has raised the maximum loan amount to $100,000. (Sorry, IRA owners: borrowing is not an option for you.)

I won’t try to get into detail about how this all works, because each plan has its own rules for how to borrow against your assets. You’ll need to contact your company’s HR department or your plan’s administrator for details. One important detail that you should factor into your calculations is the interest rate you’ll be paying. Yes, you’re borrowing your own money. But because it’s no longer available to be invested on your behalf, you will have to pay interest on that loan. The good news: you’ll be paying that interest back to yourself.

In something of a parallel to the reinvestment provision for Roth IRA owners, the CARES Act has given 401(k) borrowers a five-year window in which to repay their loans. That begins in 2021.

In a worst-case scenario, your final option for accessing funds in an employer-sponsored plan is to take advantage of the new Hardship Withdrawal rules, mandated in the CARES Act. A “Coronavirus-Related Distribution” is defined by the bill as any distribution from an eligible retirement plan made on or after January 1st, 2020 and before December 31st, 2020 to an individual. A Coronavirus-Related Distribution qualifies for anyone who is diagnosed with the virus SARS-CoV-2 or Coronavirus 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention. Qualifying Hardships also include any spouse or depended who has been diagnosed.

One final note: Everything up to this point has concerned those who aren’t yet taking regular distributions from their retirement accounts. For those who are retired, the good news is that job losses, business shutdowns and similar income shocks are less likely to be a problem. Your retirement income won’t be interrupted.

But there is one concern that’s familiar to anyone who has weathered previous market downturns. Whether IRA or 401(k), almost every retirement account has been hit, and will continue to be hit, by the drops and volatility in stocks and other equity investments. If you are concerned about depleting your investments when their value is depressed, it may be worth considering whether a temporary reduction in your monthly distributions is something you can manage.

The fewer dollars you draw from your assets when their value is depressed, the more will remain to gain value again when, as they always do, the markets rebound.

Managing assets and planning for a comfortable retirement are challenges at any time. Now, more than ever, making wise decisions without panicking is important for everyone. The investment and retirement-planning experts at Old North State Trust understand the ins and outs of the markets and of the regulations that govern retirement accounts. They can offer accurate, trustworthy guidance to help you get through troubled times.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Among the many demands of managing a trust, some new and daunting problems are posing fresh challenges to trustees. It’s always been true that trustees have to put their beneficiaries’ needs first, but that fundamental duty sometimes conflicts with those people’s wishes and even demands.

That’s now truer than ever, with such factors as addiction and new technologies adding to the challenges. I’d like to touch on some of the challenges that trustees face today and offer some ideas about how to manage them responsibly. The demands are the same, whether the trustee is a professional or just a well-meaning relative.

Beneficiaries may ask for loans. This is an alternative to taking a taxable distribution, and often possible under a trust’s terms. While sometimes it might be a good idea, there are pitfalls to beware of.

One important guideline is that any loan must be made and documented in the same way outright distributions are handled.

That gets to the matter of requiring collateral. Collateral requirements don’t have to be as strict as a commercial lender would require—otherwise, the beneficiary would just borrow from a bank—but do need to be sufficient to back up the loan. That collateral will become one of the trust’s assets, for which the trustee will be responsible. That trustee has to answer for that loan to all the trust’s beneficiaries, and sometimes even a court.

The trustee must have evidence that the beneficiary can actually repay the loan. If not, the IRS may conclude the “loan” was actually a distribution, and that could impose unwelcome tax liability on the beneficiary. One other important technicality a trustee needs to get right is to set an interest rate that’s beneficial to both borrower and trust and complies with tax laws.

Finally comes the matter of how a loan is repaid. If the trust provides for regular distributions, a beneficiary may choose to forego them; the money that should have been payable is applied against the loan balance. That’s one more thing a trustee has to manage.

All of this can be overwhelming, easily beyond a trustee’s expertise. That is why a professional trustee with solid grounding in tax law may be much better positioned to make lending decisions and handle all the necessary procedures. Even an amateur trustee should seek solid professional advice to avoid making serious mistakes.

A beneficiary may have an addiction problem. This raises obvious challenges. If a trust puts money in the hands of somebody who would promptly use it up buying drugs, alcohol, gambling, etc., it defeats the purposes its founder had in mind.

Sometimes a trust is created precisely because the founder doesn’t want to leave money directly to an addicted family member. It may give the trustee broad discretion to provide, or withhold, funds. Depending on the trust’s language, a trustee might be able to use the trust’s assets to pay for rehabilitation or pay third parties to ensure the beneficiary is supplied with such necessities as food and housing. A similar option might be for the trustee directly to buy necessities such as furniture or clothing.

One approach is to require evidence the beneficiary has been “clean,” not abusing drugs or alcohol, for a specified period such as six months after rehab. Only then would the trust begin, or resume, making direct cash distributions. Monitoring this may require expert help. Addicts are notoriously good at fooling or even bullying well-meaning family members, and at evading rules such as drug-screening tests, unless they are carefully managed by savvy experts.

If the trust doesn’t allow the discretion of withholding payments to a self-destructive beneficiary, the trustee faces a difficult choice. It may be necessary to appeal to a court or a trust protector to revise the trust’s provisions. Obviously, something so drastic requires expert legal (and likely medical and/or psychological) advice. It’s not a task for an amateur to take on solo. That doesn’t even address the emotional toll of acting as a trustee for an addicted relative, which may be too great for a family member to handle.

One additional wrinkle: an addicted beneficiary may depend on government or insurance benefits that are tied to income. The trustee needs to be careful that any distributions, even after successful completion of rehab, don’t jeopardize needed benefits.

Prudent investing must be balanced with beneficiaries’ needs. It’s no easy task to put a trust’s assets to work in a way that both provides current income and also preserves principal for the future. As anyone knows who has tried to balance yield against safety in their own investing, this can be a serious challenge.

A trustee must make the same sorts of decisions, such as allocating money between stocks and bonds, foreign and domestic securities, growth, and value investments, etc. There’s also the reality that beneficiaries may have very different needs. For example, a single trust may require current income to support a disabled child, but also call for long-term investments to benefit grandchildren after they come of age. It’s no small thing to design a portfolio that accomplishes both objectives.

This is yet another argument for having experienced, qualified help. That might be getting an investment advisor to work with an amateur trustee or putting everything in the hands of a professional trustee with expertise in structuring a portfolio.

A trust may include digital assets that require management. An estate is likely to include such things as email and social-media accounts and other digital assets. Examples are electronic financial or medical records, digital photos, or anything else stored in “the cloud.” Whether they have monetary value or not, those parts of an estate still require attention, if only to shut them down after their owner’s death. These assets may also contain highly sensitive content that could affect the privacy of living persons.

Fortunately, the law has caught up with this issue. States including North Carolina have enacted model legislation to give executors and trustees the power to take over these assets. Even so, a trustee may still have to cope with “terms of service” contracts with companies like Facebook or Google. Unless the account’s original owner specified who should take them over after death, getting control could still be a hassle.

So, who should be concerned with these challenges? Certainly, anyone who’s been named as a trustee should be aware of the many complexities that require expert advice. But anyone who is setting up a trust should also consider whether it makes best sense to burden a family member with these headaches or designate a professional as trustee. The trust and estate experts at Old North State Trust have expertise in law, finance, government benefit program rules, and even interpersonal relationships, to ensure that a trust reliably accomplishes its creator’s goals.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Careful estate planning is inextricably linked to family relationships, and marriage comes first among those. That’s why it’s essential to be thinking about your estate plan if you’re involved in a divorce, ideally before, during and after the legal proceedings.

As grueling, stressful and expensive as a divorce can be, it’s a big mistake to ignore the financial planning that has to accompany it. Your investment, retirement and estate-planning expert should be part of your team, right along with your divorce attorney. That’s not just for your own good, but for the long-term benefit of any children or other family members affected.

One obvious task that you don’t dare neglect is to make sure all your financial arrangements comply with the court’s orders enshrined in your divorce decree. Getting this wrong can be costly and painful, so it’s well worth investing in professional help to make sure it’s handled properly.

Here are some important matters to attend to. Some of these can be done during the divorce process; others have to wait until it’s finished. 

As soon as possible, you should remove your soon-to-be-ex-spouse’s name from such crucial documents as your health care power of attorney. The last thing you need in an emergency is to discover that someone you thought was out of your life can still make decisions for you!

Power of attorney designations can affect far more than just medical matters. You might also have granted your spouse the right to make decisions about your bank accounts, investments or insurance policies, too. Be sure you clean these all up!

Equally important, but not as simple, is changing beneficiary designations on life insurance policies and pension plans, including 401(k) and IRA accounts. The tricky part is that you may not be able to change beneficiaries while a divorce is in progress. That’s a legal provision meant to protect both parties; often, remaining a beneficiary of a spouse’s accounts is an important lifeline for the spouse who earns less, or who may have deferred a career to work as a homemaker.

Because the stakes are so high, it’s vital to get competent advice on this subject, both from an investment counselor and from your lawyer, before you agree to relinquish any rights as a beneficiary. Likewise, if you are the owner of these instruments, expect them to be a major point of negotiation—if not contention—while the divorce plays out.

Even after the divorce is final, you may not be able to cut your ex out of any life insurance settlements. The law in general, and your divorce decree in particular, may require you to maintain a policy for your ex’s benefit, especially if you are obligated to pay alimony or child support.

If you do intend to leave your ex as a beneficiary, whether of insurance or investment accounts, it’s a good idea to execute a new beneficiary statement once the divorce is final. That will make it clear that this was your intent, and not simply an oversight.

Your will, of course, will definitely need to be updated. Especially if your spouse is listed as executor. Another important provision of a will is who will become guardian of any minor children if you die. It may well be that their other parent is the best choice, divorce or no divorce. But in the worst cases, if there is evidence of serious misconduct, addiction or financial irresponsibility—a parent’s unfitness for custody is something a court will ultimately have to decide—it may be necessary to name an alternative guardian.

Now comes the matter of what your will leaves to the ex-spouse. The law doesn’t make it easy to disinherit an ex, on the grounds that both parties together contributed to the growth of a family’s assets. State laws can automatically revoke provisions in a will that benefit a former spouse or even the spouse’s relatives, but you should never rely on that. It’s an all-too-common mistake to assume that this means you don’t need to rewrite your will. That passive approach may create a tangle of unintended consequences. Better, by far, to tear up the old will (literally!) and write a new one. That way, there will be no ambiguity or confusion about what you want to happen after your death.

A little different from the will, which of course means nothing until your death, is how property is divided between living ex-spouses. Unlike so-called “community property” states, North Carolina law provides for “equitable distribution” of marital assets. “Equitable” means fair, based on the means and the needs of both parties, not necessarily an equal split.

A divorcing party must request an equitable division as part of the suit for divorce. The court will then identify which property is considered “marital” and subject to distribution. What each party owned before the marriage, or got by inheritance or gift during the marriage, is considered separate property. That’s not subject to a split. Be aware, though, that formerly separate property can become “marital” if it’s not kept distinct. So money from one spouse’s bank account, if rolled over into a joint account, loses its “separate” status. Likewise, if a new mortgage puts both spouses’ names on the deed of trust, a house that originally belonged to just one spouse will become marital property and subject to a court-ordered division.

A very important part of the process is assigning value to marital assets. That can be simple, as with investment accounts; or it can require appraisals, as with real estate.

As to what’s “equitable,” although North Carolina law assumes a 50-50 split is the default, the reality is that few divorces result in an even division. The court will consider factors including each spouse’s earning potential, prior obligations such as child support, age and health, and other needs. If you helped support a spouse who was working toward a degree or during a period of unemployment, don’t neglect to make your attorney aware of your contribution to the other’s career. That can be important in how assets are divided.

Don’t expect, however, for a judge to award additional assets because of any bad behavior by the other party. That may be relevant in some aspects of a divorce, but it’s not considered when property is being divided.

If you made a prenuptial agreement with your spouse, of course that will come into play with a divorce. Whatever changes you make in your estate plan; they must conform with what you’d agreed to in the pre-nup. On the same subject: if you get married again, you should strongly consider a prenuptial agreement with your new spouse. It may help avoid many of the pitfalls you might have encountered when the previous marriage ended.

Along with the will, you’ll have to review any revocable trusts. Does a trust leave money to the ex or members of the ex’s family? You may want to revise that. Very important is who is left in charge of assets the trust designates for your children’s benefit. If a divorce is amicable, it may make sense to leave the ex-spouse with control over the children’s assets and income. But in many cases, it’s best to designate a different trustee.

A good divorce lawyer understands many of these issues, but likely lacks expertise in the fine points of estate planning and trusts. That’s why you should put a competent estate-planning specialist in touch with your attorney when divorce proceedings begin—and again after they are concluded. In consultation with your lawyer, the experts at Old North State Trust can advise you about how to structure property divisions for your benefit and your children’s, as well as avoiding any unforeseen legal entanglements.Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Federal Tax Filing and IRA Contribution Deadline Extended

  • On March 20, Treasury Secretary Steven Mnuchin announced the tax-filing deadline for 2019 federal income tax returns has beenextended from April 15 to July 15, 2020 (IRS Notice 2020-18).
  • However, if you have a tax liability in excess of $1M, it must be paid by April 15th regardless.
  • The N.C. Department of Revenue (NCDOR) recently announced that they will extend the April 15 tax filing deadline to July 15 for individual, corporate, and franchise taxes to mirror the announced deadline change from the Internal Revenue Service.
  • Confirmed by IRS, this extension also postpones the deadline for making 2019 prior-year contributions to traditional and Roth IRAs to July 15, 2020.


  • On March 27, 2020, President Trump signed into law themassive Coronavirus Aid, Relief, and Economic Security (CARES) Act.This legislation includes a waiver of required minimum distributions(RMDs) for 2020; it applies to company savings plans and IRAs, including both traditional and Roth inherited IRAs.
  • The CARES Act impacts 2019 RMDs having a required beginning date of April 1, 2020. Any 2019 RMD amount remaining and not withdrawn by January 1, 2020 is waived.
  • Roth Conversions can be done for those IRA Holders taking RMD Distributions without the requirement of taking the RMD first; any amount you desire to convert.
  • New 10% early distribution penalty exceptions now apply.
  • The CARES Act waives the 10% early distribution penalty on up
  • to $100,000 of 2020 distributions from IRAs and plans for affected individuals. The tax would be due but could be spread evenly over 3 years, and the funds could be repaid during those 3 years.
  • You can also contribute to your IRA & Roth until the July 15th date.

Other Information

  • The new law also affects company plan loans taken by affected individuals. First, the law increases the maximum amount of plan loans to the lesser of $100,000 (reduced by other outstanding loans) or 100% of the account balance. (The usual limit is the lesser of $50,000, reduced by other outstanding loans, or 50% of the account balance.) This rule applies to loans taken within 180 days from the bill’s date of enactment. Second, any loan repayments normally due between date of enactment and December 31, 2020 could be suspended for one year.
  • Employers filing for Paycheck Protection Program also known as PPP;
  • 75% of your LOAN MUST be put to payroll and you must maintain or rehire all past employees (laid off over the past 2 months) by June 15th OR the loan will not be forgivable.
  • Its best to keep these funds in a separate checking account to pay rent, and payroll expenses or maintain a really tight accounting system for documentation purposes.