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Ask a Financial Advisor: 6 steps to tax and estate planning with Bill Hampton

Ask a Financial Advisor: 6 steps to tax and estate planning with Bill Hampton
by Brad Cartier, posted in Investment Strategy

Planning for the future can be challenging when we are caught up in the here and now of real estate investing. Let’s face it, this stuff is fun! At least once a year it is worth it to take a step back and think more strategically about your investing business. This means tax, estate, and retirement planning.

Investors need a retirement and estate plan just like the rest of the workforce. And we get these questions so much, that we decided to bring in a professional to answer all of them. We are extremely fortunate to have had tax strategist and financial coach Bill Hampton drop by (virtually, of course) to discuss these critical issues. Bill is a personal finance expert and planner with over 22 years in the industry.

Enjoy our interview with Bill.

Brad: Bill, thanks so much for stopping by. I wanted to start out the conversation by asking you: Given what has gone on in 2020, what is your biggest concern for real estate investors moving into 2021 and beyond?

Bill: Real estate investors should focus on saving for emergencies, saving for retirement, saving for education, and saving for real estate expenses. We’ll get into detail on each below.

In a basic sense, you need to contribute to a retirement plan starting as early as you can afford it. Many dollar limits on retirement plans and IRAs are higher in 2020, too. The maximum 401(k) contribution for 2020 is $19,500, but those born before 1971 can put in $6,500 more (both amounts are $500 higher than in 2019). The caps apply to 403(b) and 457 plans as well. This year’s cap on contributions to SIMPLE IRAs is $13,500 ($500 more than last year), plus $3,000 extra for people age 50 and up.

The 2020 contribution limit for traditional IRAs and Roth IRAs remains at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up.

You also need to contribute to a Health Savings Account (HSA). The annual cap on deductible contributions to health savings accounts (HSAs) rises in 2020 from $3,500 to $3,550 for self-only coverage and from $7,000 to $7,100 for family coverage. People born before 1966 can put in $1,000 more (same as last year).

For real estate investors specifically, you need to continuously conduct an analysis (a certified public accountant can assist) of your cash flow and debt. This calculation should take into account all their personal and business cash flow and any debt. Cash flow (lifestyle creep) and debt (debt to income ratio) can affect the ability to obtain real estate loans. Cash inflows generally include the following: Salaries, interest from savings accounts, dividends from investments, capital gains from the sale of financial securities like stocks and bonds.

Cash inflow can also include money received from the sale of assets like houses or cars. Essentially, your cash inflow consists of anything that brings in money.

Cash outflow represents all expenses, regardless of size. Cash outflows include the following types of costs: Rent or mortgage payments, Utility bills, Groceries, Gas, Entertainment.

New 2021 Tax Changes Every Real Estate Investor Should Know

Brad: Moving over to taxes, we’ve seen some changes recently, what specific ones should real estate investors be aware of heading into 2021 and 2022 specifically with regards to taxes?

Bill: There have been so many!

  • The SECURE Act changed the age for RMD (required minimum distribution) from 70 ½ to 72.
  • The CARES Act allows seniors to skip their RMD in 2020 without penalty.
  • The SECURE Act allows owners of traditional IRAs to make contributions past the age of 70 ½.
  • People having a baby or adopting a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay the 10% penalty for pre-age-59½ withdrawals.
  • Beginning in 2020, fellowships, stipends or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA contributions, too. This will help qualifying students begin saving for retirement sooner.

Brad: Let’s keep going on taxes Bill, what are the best income tax strategies for reducing tax burden for real estate investors?

Bill: Self-employed people and owners of LLCs, S corporations, and other pass-through entities can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $326,600 for joint filers and $163,300 for others ($321,400 and $160,700, respectively, for 2019).

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How to Set up a College Fund

Brad: So you mentioned education earlier, what are the best practices for approaching college savings?

Bill: There are 529 Plans, as well as Roth IRA savings. The two expansions to 529 college savings plans starting in 2020. First, funds can now be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, up to $10,000 in total (not annually) can be withdrawn to pay off student loans.

529 Plans 


  • Withdrawals spent on qualified higher education expenses and up to $10,000 per year in K-12 tuition avoid federal tax, and some states offer additional state tax benefits.
  • Depending on which plan you use, maximum investments can exceed $500,000 over the life of the account, and deposits up to $15,000 per year per individual will qualify for the annual gift tax exclusion.
  • There’s also an option to treat a contribution up to $75,000 in one year as if it were made over a five-year period to shelter a larger amount from taxes.
  • 529 plans receive favorable financial aid treatment: accounts owned by dependent students are treated as parent assets and nothing has to be reported on the FAFSA when the funds are withdrawn to pay for college.


  • Earnings are subject to income tax and a 10% penalty if the withdrawal is not spent on qualified education expenses.
  • Investment strategies available are limited to what’s offered by the program.
  • Withdrawals from accounts owned by someone other than the student or their parent have to be added back to the student’s income on the following year’s FAFSA and can reduce aid eligibility by as much as 50% of the amount of the distribution.

Bill: Setting up a Roth IRA is another option for saving for college, as the early withdrawal penalty is completely waived when you withdraw funds for college tuition. And it’s a great option for anyone that is self-employed, but let’s understand the pros and cons:

The Pros and Cons of Retirement Plans (Roth IRA) for Real Estate Investors

Roth IRA


  • Contributions can be withdrawn at any time for any reason.
  • The normal 10% early withdrawal penalty on earnings is waived when the funds are spent on qualified higher education expenses.
  • There is a broad range of investment options available.
  • The value of retirement accounts is not counted as an asset on the FAFSA.


  • In 2020, the maximum investment allowed is $6,000 ($7,000 for taxpayers 50 and over).
  • Married couples who earn $206,000 or more are ineligible to contribute ($139,000 for individuals).
  • Withdrawals from a Roth IRA to pay for college is counted as base-year income on the FAFSA.

Steps to Retirement for Real Estate Investors

Brad: What questions should real estate investors ask themselves to prepare for retirement?

Bill: First, consider your retirement date. Health issues or layoffs often force people out of the workforce earlier than they might consider ideal, while others continue to work longer than they anticipated because they need or enjoy their jobs or value the social dimension. In other words, as valuable as it is to set a goal date for retirement, you may end up deviating from it for one reason or another.

Here are some steps you should be taking to prepare for retirement now:

Step #1: Assess Your In-Retirement Income Needs

One common rule of thumb for that job is the 80% rule–that is, in retirement, you’ll need to replace about 80% of your working income. Taxes may go down and you don’t have to save as you did when you were working, which represents the bulk of that 20% reduction.

But affluent retirees tend to spend much less than 80% of their working incomes, on average, whereas retirees with lower working incomes tend to consume a higher percentage of their working incomes in retirement. That’s only logical, in that affluent households likely have heavier savings rates, whereas lower-income households consume a bigger share of what they make.

Moreover, many retirees plan lifestyle changes in retirement that will affect their spending. Some retirees may be planning to downsize or move to a lower-cost part of the country to make retirement more affordable, for example, while other retirees may expect spending to increase because of heavy travel plans. Making lifestyle adjustments like these can be incredibly impactful from a financial standpoint, but they may not be agreeable to many.

Step #2: Quantify and Maximize Pension and Social Security Benefits

How much of those income needs will be supplied by sources other than your portfolio–for example, Social Security and/or pension income? The next step in the process is to quantify how much income you’ll receive from those sources and to consider how your decisions can enlarge or shrink those benefits.

Step #3: Determine Whether Your Planned Spending Rate Is Sustainable

Once you’ve determined your in-retirement income needs and how much of them will be covered by certain sources such as Social Security, your portfolio is going to have to supply the amount that’s left over. The annual dollar amount you plan to withdraw from your portfolio, divided by your portfolio’s current value, is your withdrawal rate (or even better, your spending rate).

Step #4: Craft a Long-Term Portfolio Based on Your Anticipated Income Needs

Once you’ve determined your spending plan, the next step is to structure your portfolio to support it. Long gone are the days that retirees can subsist on the income from their cash and bonds; today’s retirees also need the long-term growth potential from stocks.

Step #5: Pay Attention to Tax Management

It would be simple if we could each bring just a single portfolio into retirement, but the reality is much messier. Most retirees hold their assets in a variety of tax silos: tax-deferred, taxable, and Roth. Each of these accounts carries its own tax treatment, which has implications for the types of securities you hold within them. In addition to asset allocation considerations, it’s also worthwhile to harmonize how you’ll withdraw from these accounts for your cash flow needs, as doing so can reduce the drag of taxes on your withdrawals.

Step #6: Assess Insurance Coverage

Nearly all of the insurance coverage that made sense while you were working (life, auto, homeowners insurance) will still be necessary while you’re retired. Medicare adds a new wrinkle to healthcare coverage for retirees, along with purchasing supplemental coverage to pick up what Medicare doesn’t.

Estate Planning for Real Estate Investors

Brad: Finally, you touched on estate planning which is an often overlooked topic by real estate investors. What are all the different nuances to planning an estate as you transition from a working professional or full time real estate investor to a retiree?

Bill: Documenting your wishes in the off-chance that you should die or become incapacitated is valuable at every life stage, but it takes on increasing importance when we age. What do you want to happen to your financial assets? Who do you want to be able to make important financial and healthcare decisions on your behalf? What instructions do you want to give your spouse or other loved ones about your portfolio?

Retirees and pre-retirees should ask and answer all of these questions when they’re of sound mind and body and update their estate plans and beneficiary designations periodically to reflect their current situations.

Brad: Bill, thanks so much for stopping by and providing so much value, if people want to learn more about you, where can they go?

Bill: Thanks for having my Brad and the Stessa team! If folks want to head to my website, they will find a bunch of resources and contact information.

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