by Stephen Reed | Accounting News, News, Newsletter, Retirement, Retirement Savings, Tax Planning - Individual
Required Minimum Distributions (RMDs) are mandatory withdrawals from certain retirement accounts. They can significantly impact your tax burden and overall financial well-being. In 2024, changes introduced by the Secure 2.0 Act have increased the minimum age for RMDs, potentially leading to the highest RMDs in history. Here’s what retirees need to know about these new regulations and how they will affect your retirement strategy.
What Are Required Minimum Distributions (RMDs)?
RMDs are the minimum amounts that retirees must withdraw annually from tax-deferred retirement accounts such as 401(k)s, traditional IRAs, and 403(b)s once they reach a certain age. These distributions are designed to ensure that retirees eventually pay taxes on the funds they have been deferring throughout their working lives.
The Secure 2.0 Act Raised RMD Age
When the Secure 2.0 Act was passed in 2022, the age at which retirees must begin taking RMDs was raised from 72 to 73, granting more flexibility and time for retirement savings to grow. This change applies to retirees turning 73 in 2024 and beyond, offering an additional year of tax deferral before RMDs are required.
However, this delay could result in more significant distributions when retirees finally begin taking RMDs, especially if their accounts continue to grow. (Retirees who turn 73 in 2024 must take their first RMD by April 1, 2025.) Larger account balances combined with higher RMD percentages as retirees age could result in retirees facing the largest RMDs ever, especially with stock market gains in recent years.
Why 2024 RMDs Could Be the Highest Ever
The combination of tax-deferred growth, the higher RMD age, and inflation adjustments could make 2024 a challenging year for retirees facing their first RMDs. Because retirees must withdraw a specific percentage of their account balance, individuals with growing portfolios may end up withdrawing and facing taxes on larger amounts. This can push some retirees into higher tax brackets, which could lead to a reduction in overall retirement income.
Key Factors for Retirees to Consider
As you approach your RMD age, there are several important factors to keep in mind that can significantly impact your tax planning. Understanding these key points will help you make informed decisions and avoid common pitfalls related to RMDs.
- RMDs Are Taxed as Ordinary Income
When you take an RMD, it is taxed as ordinary income, meaning it is added to your other taxable income for the year. This can impact your tax liability, particularly if your RMD pushes you into a higher tax bracket. Careful tax planning is essential to minimize the impact of RMDs on your overall income.
- Failure to Meet RMD Deadlines Could Result in Financial Penalties
One of the most critical things retirees need to remember is that failure to take RMDs by the required deadline (typically December 31) can result in significant penalties. The current penalty for missing an RMD is 25% of the amount that should have been withdrawn. This penalty can often be reduced to 10% if the missed RMD is corrected within two years, but it’s still a costly mistake you’ll want to avoid.
- There’s No Escaping RMDs
Once you reach the RMD age, you must take these distributions from your tax-deferred accounts. Even if you don’t need the money, you are required by law to withdraw the minimum amount. Failure to do so will result in penalties, and delaying the withdrawal will not eliminate the tax liability.
For retirees who don’t need the extra income, reinvesting the distribution into a taxable account may be a good option to keep the money working for you, but the taxes will still need to be paid.
- RMDs Are Not Required in Roth IRAs
A strategy to possibly minimize the impact of RMDs is to utilize a Roth IRA. Unlike traditional IRAs or 401(k)s, Roth IRAs do not require RMDs during the account holder’s lifetime. Since contributions to Roth IRAs are made with after-tax dollars, the growth and withdrawals from these accounts are tax-free, providing more flexibility in retirement income planning. The one caveat to this applies to inherited Roth IRAs. If you’re the benefactor of someone else’s Roth IRA, you must take RMDs.
by Stephen Reed | Industry - Retail & Distribution, News, Newsletter, Retail & Distribution
Effective positioning is crucial for brands seeking to connect with their target audiences and drive sales. But what exactly is positioning, and why does it matter? This article will explore the fundamentals of positioning and practical steps for retailers to develop a compelling positioning strategy.
What is Positioning?
Positioning refers to how a brand is perceived in the minds of consumers compared to its competitors. It involves crafting a unique identity that resonates with your target audience, highlighting your brand’s distinct benefits and values. Effective positioning differentiates a retailer in a crowded market, making it easier for consumers to choose your products over others.
Why is Positioning Important?
- Consumer Connection: Strong positioning helps retailers build emotional connections with consumers. When a brand speaks directly to its audience’s needs and desires, it fosters loyalty and trust.
- Competitive Advantage: Effective positioning sets a retailer apart from competitors. It clarifies what makes the brand unique and why consumers should choose it.
- Guided Messaging: A well-defined position informs all marketing efforts, from advertising to social media, ensuring consistency in messaging that resonates in a timely way with your target audience. It provides clarity on what you do and why your audience should choose you over competitors.
Starting with Positioning: Focus on Customers
To develop a successful positioning strategy, retailers must begin with a deep understanding of their customers. Here are the steps to developing a winning positioning strategy:
Market Research
Conduct thorough market research to gather insights about your target audience. Utilize surveys, interviews, and focus groups to identify demographics, preferences, pain points, and buying behaviors. Online tools like Google Analytics and social media insights can also provide valuable data.
Competitive Analysis
Evaluate your competitors to understand their positioning strategies. Identify their strengths and weaknesses, and analyze how they communicate with their audiences. This competitive analysis will help pinpoint gaps in the market that your brand can fill.
Develop Positioning and Messaging
Now it’s time to start developing your positioning statement. This should articulate your brand’s unique value proposition and the key benefits you offer. Consider using a format like:
“For [target audience], [brand name] is the [category] that [unique benefit] because [reason to believe].”
For example, “For eco-conscious shoppers, Green Harvest Market is the online store that provides organic, sustainably sourced products because we partner directly with local farmers.”
In addition to the positioning statement, create messaging that reinforces this position across all channels. Use language that resonates with your audience and aligns with their values.
Test Your Positioning
After developing your positioning and messaging, you’ll need to test their effectiveness. This can be done through A/B testing on advertisements (two versions of an ad are compared to see which one performs better), website content, and social media posts. Monitor engagement metrics such as click-through rates, conversion rates, and customer feedback to determine if your positioning is resonating.
Ongoing Evaluation and Adjustment
Positioning is not a one-time effort. Continuously evaluate how well your positioning aligns with market changes and consumer preferences. Regularly solicit feedback through customer surveys and monitor industry trends to make necessary adjustments.
by Stephen Reed | Accounting News, News, Newsletter, Social Security
As we approach 2025, several significant changes are on the horizon for Social Security beneficiaries. From cost-of-living adjustments (COLA) to shifts in the full retirement age (FRA), these updates will impact millions of Americans who rely on Social Security as a crucial part of their retirement income. Understanding these changes is essential for retirees and those nearing retirement to ensure their financial plans remain on track.
Cost-of-Living Adjustment (COLA) for 2025
One of the most anticipated updates to Social Security each year is the cost-of-living adjustment (COLA). This adjustment is intended to keep benefits in line with inflation, helping retirees maintain their purchasing power despite rising prices.
For 2025, however, retirees are likely to receive a smaller COLA than in recent years. After historically high adjustments in 2022 and 2023—8.7% and 3.2%, respectively—due to surging inflation, the rate of increase is expected to moderate as inflation cools. While the exact percentage will be determined by the inflation data from the third quarter of 2024, early estimates suggest that the 2025 COLA could be around 2-3%. This smaller increase could surprise retirees who have grown accustomed to more substantial adjustments recently.
Higher Full Retirement Age for 2025
Another critical change coming in 2025 is a further increase in the full retirement age (FRA). The full retirement age is the point at which retirees can claim 100% of their Social Security benefits. For those born in 1959, who are turning 66 in 2025, the FRA will be 66 years and 10 months. Comparatively, those who turned 66 in 2024 reached FRA at 66 and eight months. For those who turn 66 in 2026 and beyond, FRA will be even later, at 67 years old. This means future retirees need to carefully consider their retirement timing, as claiming benefits before reaching the full retirement age results in a permanent reduction in monthly payments.
Planning Ahead for Future Changes
The adjustments in 2025 signal an ongoing trend that retirees and those nearing retirement should be aware of. Not only is the FRA gradually increasing, but future COLA increases are also expected to be modest.
Given these changes, retirees should plan for a scenario in which their Social Security benefits do not keep pace with inflation as strongly as they might have hoped. This is especially important in an economic environment where healthcare costs and other living expenses can rise rapidly. Financial advisors often recommend that retirees consider diversifying their income sources and not relying solely on Social Security for their retirement needs.
The Social Security changes coming in 2025 may not be as dramatic as some recent adjustments, but they highlight the importance of understanding how these shifts can affect your financial future. Whether you’re approaching retirement or already receiving benefits, staying on top of these changes can help you make informed decisions and better prepare for the years ahead.
by Stephen Reed | Accounting News, Industry - Construction, News, Newsletter
Managing cash flow in the construction industry can be challenging, and it’s crucial to understand the difference between income and cash flow to avoid falling for the illusion of profitability. Many construction businesses may appear profitable on paper, but they could face significant financial issues if they’re not managing cash flow effectively. In this article, we’ll discuss the common pitfalls that lead to the illusion of profitability and practical tools to boost profits.
Income vs. Cash Flow: Understanding the Difference
Income refers to the total amount of money a business earns from its activities, such as contract payments, sales of materials, or other services. Cash flow, on the other hand, is the movement of money in and out of the business – all the ways it is earned and lost. While income is a measure of profitability, cash flow is a measure of liquidity. Positive cash flow ensures that a business can meet its financial obligations, such as paying suppliers, employees, and other expenses.
Money In and Money Out
In the construction industry, the timing of money coming in and going out can create significant cash flow challenges. Payments from clients may be delayed due to project milestones or interruptions, while expenses for materials, labor, and equipment are typically paid upfront. This imbalance can strain cash flow, making it difficult to cover operating costs, even if the business is profitable on paper.
It’s also important to consider all the different means of “money-in” and “money-out”. “Money-in” can include tax credits, borrowing funds, selling equipment, acquiring investors, and earning investment income, while “money-out” can include profit distributions, paying taxes, purchasing assets, and repaying loans.
Being intimately aware of all the moving parts of your financial landscape – the cost of goods and services sold, your overhead and operating costs, loan payments, taxes, etc. – will help to keep from falling into the illusion of profitability.
The Illusion of Profitability
The illusion of profitability occurs when a construction business appears to be doing well based on its income statements but fails to account for all financial factors. This can happen if a company overlooks expenses, underestimates project costs, or fails to manage receivables effectively. For example, a business may complete a high-revenue project but if the client struggles to pay on time, this can lead to cash flow problems. This illusion can mask underlying financial issues, putting the business at risk.
Tools to Boost Profits
- Understand Current Business Cash Standing
Regularly reviewing your business’s cash standing is essential. This involves monitoring cash flow statements, balance sheets, and profit and loss statements. By understanding your current cash position, you can make informed decisions about spending, investments, and managing debt. Regular financial reviews help identify potential cash flow issues before they become critical problems.
- Create a Cash Flow Projection
A cash flow projection is a forecast of your expected cash inflows and outflows over a specific period, typically 12 months. This helps you anticipate periods of cash shortages or surpluses, allowing you to plan accordingly. Include all expected payments from clients and all anticipated expenses, such as payroll, materials, and overhead costs. Be sure to account for seasonality issues and infrequent payments like liability insurance and worker’s comp. Regularly updating your cash flow projection ensures it remains accurate and useful for decision-making.
- Forecast Your Cash Flow Break-Even Point
The “cash flow break-even point” is a crucial financial benchmark indicating when a business’s long-term cash inflows match its long-term cash outflows. This point marks the transition from operating at a loss to generating profits.
The best way to forecast this is to create an adjusted break-even cash flow forecast to help you determine the minimum amount of cash needed to cover your operating expenses and avoid cash flow deficits. This forecast takes into account all fixed and variable costs, helping you set realistic financial goals. Do you expect an increase or drop in sales and production volume? What about receivables and payables, payroll expense changes, and inventory or supply management issues? By understanding your break-even point, you can better manage your pricing, project selection, and expense control to ensure sustainable profitability.
- Manage Your Cash Strategically
Effective cash management is critical to maintaining positive cash flow. Implement strategies such as invoicing promptly, offering early payment discounts to clients, and negotiating favorable payment terms with suppliers. Additionally, closely monitor accounts receivable and follow up on overdue payments. Controlling your cash flow ensures that you have the liquidity needed to meet your obligations and invest in growth opportunities.
by Stephen Reed | Accounting News, Audit and Accounting, IRS, News, Newsletter, Small Business
The Internal Revenue Service (IRS) has recently announced a significant increase in the number of audits it plans to conduct in the coming years. This development is part of a broader initiative aimed at improving tax compliance and closing the tax gap, which is the difference between taxes owed and taxes paid on time. As a taxpayer, understanding who the IRS plans to target with these audits is important. Here’s what you need to know.
The Inflation Reduction Act
The Inflation Reduction Act (IRA), which was signed into law in 2022 by President Biden, granted the IRS $80 billion in new funding. The goal of the funding is to bolster an agency known for lengthy processing delays, a drop-off in audit rates, and major customer service shortcomings.
Over the next three tax years, the IRS plans a sharp increase in audits, but the agency insists these audits won’t affect taxpayers who earn less than $400,000 annually.
Focus on High-Income Earners
The IRS plans to focus on individuals earning $400,000 or more annually. This demographic has historically been associated with more complex tax returns, which can include multiple income streams, investments, and deductions. The IRS’s goal in focusing on high-income earners is to ensure that these taxpayers are accurately reporting their income and paying the correct amount of taxes.
Large Corporations
The IRS plans to triple the audit rates on large corporations with assets totaling more than $250 million. By tax year 2026, audit rates for these companies will rise to 22.6%, up from 8.8% in 2019. Additionally, large partnerships with assets totaling more than $10 million will be subject to significant audit rate increases, rising to 1% in tax year 2026 from 0.1% in 2019.
Small Businesses Potentially Under the Microscope
Despite initially assuring small business owners that the increase in audits won’t affect small businesses, some evidence is signifying otherwise. The Government Accountability Office, a nonpartisan agency, reported that more than 90% of audits are on families and small businesses below the $400,000 income threshold. In March, when Treasury Secretary Janet Yellen was asked by the House Ways and Means Committee about the number of new audits funded by the Inflation Reduction Act, she confirmed that the proportion of new audits targeting those families and small businesses would remain at the historical level of 90%.
Cryptocurrency Transactions
With the rise of digital currencies, the IRS is increasing its efforts to audit taxpayers involved in cryptocurrency transactions. This includes gains from the sale of cryptocurrencies, mining activities, and even receiving cryptocurrencies as payment for goods or services. If investors do not comply with reporting requirements, the IRS could impose accuracy penalties. Therefore, investors should maintain detailed records of all cryptocurrency transactions.
Offshore Accounts
Taxpayers with offshore accounts and foreign assets are also on the IRS’s radar. The Agency has long focused on foreign income and assets due to the potential for significant tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers with foreign financial assets exceeding certain thresholds to report these assets to the IRS. Failure to comply with these reporting requirements can result in substantial penalties. The boost in funding will allow the IRS to continue an aggressive pursuit of individuals and businesses attempting to hide income and assets overseas.
Preparing for a Possible Audit
Given the IRS’s focus on these areas, taxpayers need to ensure their tax returns are accurate and comply with all applicable laws. Keeping thorough records and documentation can help in the event of an audit. Consulting with qualified tax professionals can also provide guidance and help mitigate the risk of errors on your tax return.
