Friday Financial Five – June 23, 2017

Friday, June 23, 2017

Dan Forbes, GoLocalPDX Contributor

Economy hums along following rate hike

Economic fundamentals continue to be the focus as the Federal Reserve did recently raise the target range for the federal funds rate by 25 basis points to 1.00-1.25%. Investment markets barely registered a reaction, and another hike by year-end is a strong possibility. The Fed has a blueprint to reduce the size of their balance sheet after years of quantitative easing. They will reduce $10 billion per month in Treasuries and mortgage backed holdings for three months, rising until they are cutting the balance sheet by $50 billion per month. As this plan unfolds, consumers can keep an eye on the jobless rate and anticipated inflation around 2 percent.

Senate unveils latest health care proposal

The latest attempt to repeal and replace Obamacare came courtesy of the Senate this week. The plan would eliminate penalties for those that forgo health coverage, while cutting Medicaid and eliminating the tax surcharges meant to pay for Obamacare. Insurers would still let parents keep their children insured until age 26. It would also allow states to waive certain requirements in terms of plan offerings. Similar to the House plan, it would cut funding for Planned Parenthood.

Credit score calculation undergoing changes

Individuals should note upcoming changes to credit scoring, as it is one area they may have control. The three credit bureaus will be adjusting the “VantageScore” calculation before year’s end, so there is time to prepare and possibly capitalize on those changes. The new model focuses more on trends and less on a monthly credit snapshot in hopes of more accurately reflecting a borrower’s credit risk. Timely payments and outstanding debt are still important. A high “utilization ratio” will be a negative, where the borrower has more than 30% of available credit outstanding. It may also hurt to have many cards open. These changes are only applicable to VantageScore, which continues to gain traction with lenders.

Tracking non-deductible IRA contributions

Investors making non-deductible IRA contributions to take advantage of the “backdoor Roth IRA” strategy need to keep the IRS Form 8606 in mind. While those not covered by an employer retirement plan can always deduct IRA contributions, others are subject to income limitations. The backdoor Roth involves putting money in a traditional IRA without benefit of deducting it on the tax return. This non-deductible contribution can be converted to a Roth, as there are no income limitations on conversion. For those that have not kept track, the IRS allows the filing of the 8606 for prior years. Keeping track will help prevent an unpleasant tax situation down the road.

ABLE plans for disabled children

A relatively new tax advantaged plan is the ABLE plan, a product of the “Achieving a Better Life Experience Act” from 2014. These accounts are available for individuals diagnosed with a significant disability before the age of 26. The earnings in the account are not taxable when used for qualified expenses including housing, education, transportation, support, and health services. The annual investment in the account is capped at $14,000 and funds in the account up to $100,000 do not affect the individual’s ability to qualify for public benefit programs. Congress is discussing legislation to increase the age limit and allow 529 plans to be rolled over.

Dan Forbes, a CFP Board Ambassador, is a regular contributor on financial issues. He leads the firm Forbes Financial Planning, Inc in East Greenwich, RI and can be reached at [email protected].