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investments

Investment Debate: Stocks or Real Estate

By | 2021, Money Moxie, Newsletter | No Comments

I am often asked if real estate is a better investment than stocks. The answer depends on several variables. Both real estate and stocks have their advantages. They both can offer great returns, passive income, and inflation protection. They also carry their own risks and challenges.

As with any investment opportunity, an understanding of the return potential, the risk involved, and the objective are fundamental to making a wise decision. While real estate and stocks are certainly not the only investment options available, they are the only asset classes that will be considered here.

Unsystematic Risk
One aspect that makes real estate investing difficult to assess generally is that every property is different. Therefore, each investment opportunity must be analyzed by its own unique characteristics. While some properties may provide fantastic returns, others are a bad investment.

Like real estate, stocks also have significant variability in returns. The risk of a poor-performing stock is easily reduced by diversification. Diversification in real estate is challenging, expensive, and for many investors, unattainable.

Leverage
One of the benefits of investing in real estate is the ability to use leverage. Debt always adds risk to the equation, but debt can be a powerful tool if used properly. Lenders typically require a down payment of at least 20% for an investment property. But that 20% allows the investor to participate in 100% of the property’s appreciation.

Leverage can also be used to purchase stocks, but it is usually not recommended. Margin trading means borrowing money from a broker to purchase stocks. Trading in a margin account increases your purchasing power, but it also amplifies losses.

Liquidity
At one point or another, liquidity becomes important to every investor. Stocks are liquid. If a stock investor needs cash, she can place trades and usually receive the money within a couple of days.

Real estate is not liquid by comparison. In most circumstances, a real estate investor cannot pull cash out of a property without a refinance or complete liquidation. This can be problematic.

Taxes
A real estate investor has the advantage of deducting expenses to reduce tax liability. He or she can also depreciate the asset over time. This can be beneficial year to year; however, one major problem is the taxes due upon the sale of the property. Depreciation recapture can assess taxes on the depreciation previously claimed, and the appreciation becomes taxable all in the same year as the sale. This can create a significant tax bill. A 1031-exchange defers the tax liability but only if the money is quickly reinvested into a like-kind asset. This does not help an investor looking to cash in on their investment.

Stock investors do not have the ability to deduct expenses or depreciate assets. There are several tax-advantaged accounts that give the investor tax-free or tax-deferred growth. These accounts provide significant control over how and when investments are taxed. When losses occur in taxable accounts, the stock investor can strategically sell to offset gains. They can also sell portions of the portfolio as needed and spread the tax liability over many years, thus reducing the marginal tax rate.

Costs, Fees, and Expenses
Costs, fees, and expenses can significantly eat into returns. The expenses with real estate are significant and impossible to project. Transaction costs are high. Maintenance and repair costs are ongoing. Property taxes, insurance, and possible HOA fees need to be considered. If hired, a property manager will take a good percentage of the profit. If a property goes unrented for a time, monthly costs can significantly increase.

Stocks, on the other hand, have a low barrier to entry, and fees are minimal. Opening a stock account is generally free, and trading costs are zero in many cases. Sales loads, management fees, and annual expenses are all comparably small and remain relatively consistent.

Demands
Real estate can be demanding, especially if the investor decides to cut costs by acting as the landlord. Appliance failures and other problems can occur day or night and often require immediate attention. Work, holidays, and family vacations can all be interrupted. Finding renters, enforcing house rules, and property maintenance takes time and energy. Dealing with renters and evictions can be stressful and time-consuming.

Stocks are very low maintenance. Generally, the less attention you give a proper portfolio allocation after purchase, the better.

Volatility
Both the real estate market and the stock market deal with volatility. Both markets suffer periods of depreciation and loss. But stock market volatility is measured daily and is constantly called to our attention. We cannot escape it. This can lead to emotional volatility, which can result in bad investment decisions.

Real estate volatility is more hidden. An investor may become aware of large swings but is mostly incognizant of market movements.

Historical Returns
According to the Federal Reserve Economic Data website, the S&P 500 index has consistently outperformed the general real estate market. Note, these numbers reflect gross appreciation and do not take into account income or dividends. They also do not consider costs, expenses, or fees (of which real estate has many).

Conclusion
Although I believe stock investing is better suited for most people, the right real estate investment can be advantageous and profitable. Before you make any significant financial decision, reach out to your Private Wealth Manager at Smedley Financial. We can help provide you with the information needed to make the best decision for you.

*Data from Federal Reserve Bank of St. Louis. Returns through March 31, 2021. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on changing conditions. This is not a recommendation to purchase any investment.

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Getting Organized

By | 2021, Money Moxie, Newsletter | No Comments

Keeping up with paperwork, documents, and bills each year can be challenging. It is too easy to put the papers in a pile to be addressed at a future date. Or, my personal favorite, file them away and store them until you run out of space.

You can handle paperwork more efficiently. The tricks are to go paperless when possible and save only necessary documents. Technology makes it easy to organize statements and bills, so take advantage of electronic access whenever possible. Some documents like pay stubs, investment statements, and insurance policies may be kept for a year. Other documents will be around longer. Suggestions for what to keep and what to toss are summarized below.

For tips on organizing your entire home, watch our recorded Money Matters webinar. It can be found on our website at SmedleyFinancial.com under Just for Women – Organization from March, 9th, 2021.

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What To Do When Rates Are So Low

By | 2021, Money Moxie, Newsletter | No Comments

All across America, CDs are coming due at banks and credit unions, and savers are appalled at how low their new rates will be. It is just a fraction of what the CD was making before. Low-interest rates are benefiting borrowers and punishing savers. If you have excess money in savings or CDs because you wanted protection, what do you do now?

We always counsel people to keep their emergency fund and short-term money in places that are easily accessible, like savings, money markets, or short-term CDs (12 months or less). That counsel hasn’t changed.

The need to have easy access to the money supersedes the need for a return. People should still have an emergency fund of 3-6 months of living expenses. In addition, any expenditures that will happen in the next year should be in short-term savings.

If your short-term savings buckets are full and you still have excess in the bank, there are some good options.

(1) Use a money market or short-term CD and hope that rates are better in 12 months. If you do this, protection is the main goal. Accept that you will make little on your money. Interest rates may come up a little over the course of a year, but don’t expect much improvement. Still, waiting 12 months to get a better rate is probably better than locking your money up in a 5-year CD.

(2) One step up from CDs are fixed annuities. Don’t let the annuity name scare you. They are like CDs on steroids. They are great tools to help protect assets with a slightly higher interest rate than CDs. However, they have much larger penalties than CDs if you pull your money out early. Because of this, we typically recommend no more than 20% of your investments here.

(3) Another option that should avoid losses while providing some potential growth is an Equity Indexed Annuity. The largest upside for this is that your original investment is guaranteed, and you have the potential to make more interest than a CD or fixed annuity, depending on what the markets do.

The downside is you have to lock your money up for 5-10 years. There are significant penalties for early withdrawal, so we would recommend no more than 20% of your investments in these types of products.

(4) If you are willing to take some risk for potentially better returns, then you can invest conservatively. This option may lose principal but has more potential. This can be done by using conservative investments like bonds or a combination of bonds and stocks to get some growth with limited downside. We typically recommend a ratio close to 80% bonds and 20% stock.

(5) If you don’t need the money for more than 5 years, you may accept more risk by investing. While this has potential for losses, it also has potential for more growth.

In considering any of these options, remember this is only one piece of the puzzle. Always make sure your investments fit into your overall financial plan. If you have any questions about how to implement these options or are wondering which one(s) are right for you, please contact our Wealth Management consultants.

This article is not a solicitation, offer, or recommendation to buy or sell any security. Annuities are insurance products backed by the issuing company’s ability to pay. There is a potential for loss as well as gain with stocks and bonds. Past performance is no guarantee of future results.

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Are You Thinking of Refinancing?

By | 2021, Money Matters | No Comments

With interest rates at historic lows, there is a lot of talk about refinancing current mortgages. If you own a home, this is a great time to evaluate your loan and ensure you have the best terms available.

While interest rates across all loan types may be low, not all loans are the same. Here are some tips to help you understand the nuances and determine if you should refinance a first mortgage, take a home equity loan, or open a home equity line of credit.

Mortgage loans, referred to as first or second mortgages, are paid over a fixed period of years: 30, 20, 15, 10, or less. The interest rate can be fixed for the entire loan term or variable, changing based on the Prime rate. While rates are low and you can spread the payments over many years, keep in mind that you will pay less in overall interest if the loan term is shorter, say 15 years, versus a longer-term, say 30 years. While the payment may be higher, the difference can save you tens of thousands of dollars.

In this example, the savings for taking the shorter-term loan is $126,450. Not to mention that you are out of debt in half the time. This example does not include taxes, insurance, or any associated closing costs.

I realize that locking yourself into a higher monthly payment may limit your monthly discretionary cash flow. It does not have to be all or nothing. Choose the mortgage term that helps you save as much as possible and still maintain a flexible cash flow—making an extra principal payment when possible will save you interest and shorten the term of the loan.

Home equity loans allow you to borrow based on the equity in your home. These loans are gaining in popularity as home values continue to skyrocket. The increasing value of your home has likely created a pool of equity. Tapping into that equity for home improvements, such as upgrading a kitchen or adding a room or garage, is a favorable option compared to borrowing on a signature loan or credit card. Home equity loans have a fixed loan period, up to 10 or 15 years, and offer both fixed and variable interest rates.

Home Equity Line of Credit loans, referred to a HELOCs, allow you to use the equity in your home in another way. These loans offer a fixed credit limit that you can tap into as needed. The interest rate is variable and can increase or decrease over time. Repayment of the loan is more like a credit card in that there will be a minimum required payment each month, such as 1.25% of the loan balance. The trick here is discipline. You must form a plan to get the loan paid in a certain period. Otherwise, you will find that making the minimum payment has cost you a great deal of money.

After looking at the loan options available, consider what you will pay in closing costs. You may be required to pay for an appraisal, and sometimes a lower advertised rate requires that you pay points to secure the loan. This means you will have to come up with a percentage of the loan amount at closing.

Choosing between a fixed or variable rate can be difficult. I will say this; it is more likely that interest rates will go up in the future rather than down. Variable rates are generally lower than fixed rates and may make sense if it is likely that interest rates will go down. In the current environment, fixed rates are so low that you can feel confident you are locking in a good rate for the term of your loan.

Before you move forward, take the time to compare the facts on your current loan versus a new loan. The closing costs associated with a new loan may cost you more than keeping the current one. If you have questions, please reach out to our team. We can help you assess your options and determine the best course of action.

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What Makes the World Go ‘Round?

By | 2020, Money Moxie | No Comments

I ran my first half marathon in August of last year. I have never been much of a runner, but when the metabolism starts to slow down, you have got to do something. I chose to run.

Before last year, my distance record was 5 miles. That record had been in place since 2003, and I thought it would always stand. Now, here I am with, six half marathons under my belt and another four scheduled for later this year. I find crossing a finish line after pushing myself harder than I thought physically possible to be very rewarding. It makes me happy. But what does running have to do with finances?

It often appears as though the system in which we live is driven by money. It is so easy to get caught up in account balances, market returns, and investment news. We have all heard the saying, “Money makes the world go ‘round.” In today’s world, it is hard to disagree with that.

There is no question that money is essential. Money provides stability and opportunity. I have chosen to make a career out of helping people make wise financial decisions because I believe it is important. It is good to have money and the things it can buy, but what I value most in life, money can’t buy.

We talk with you a lot about money. We review your finances and performance on a regular basis. We talk about markets, the economy, and your investments. We build a financial plan and update it often. But the reason for all of this is not money. What is most important to us is that you live the life you truly want to live. We want you to achieve your goals, and we believe it is our job to help ensure money is never an excuse not to.

Recently I completed a short race with my 5-year-old daughter. After crossing the finish line with her and seeing her excitement and joy, I realized at that moment I could not be happier. Doing what I love, with those I love, is what makes me happiest. This was another reminder that life is too short, not to be happy.

What is it that you want to accomplish? What do you want to experience? What makes you happy? If you do not have answers to these questions, I challenge you to find them. Maybe it is to run a marathon or to visit another country; maybe it is to buy a new home or to pay the current home off. Whatever it is, we want to know about it. And if there is a financial component, we want to help you achieve it. Whatever your goals and dreams are, make sure they are the focus. Make sure they are what makes your world go ‘round.

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Living In Unprecedented Times

By | 2020, Executive Message, Money Moxie | No Comments

The last five months have been record-setting in more ways than we could have imagined. The impact has been wide-reaching – and I am not referring to the COVID-19 virus numbers.

Technology has provided opportunities that have businesses, including ours, to service clients and continue to run their operations while working from home. It allowed students to continue their studies remotely and check in with their teachers when needed. We have access to almost anything: news, shopping, connecting with family and friends, and investment markets, all of which are amazing. In fact, it is hard to imagine what we would have done without technology.

Newer technology has opened the doors for people to save and invest at entry levels without barriers, such as minimum investments. Apps have become popular among the DIY crowd, which are too often young and inexperienced investors.

Securities regulators have spent countless hours creating Regulation Best Interest, as explained in Mikal’s article. Regrettably, they have done little to educate and protect DIY investors who are not prepared for the leveraged risks and hidden fees of this new world. One of these investors even paid the ultimate price.

An app on a phone gives anyone fingertip access to investing. One of these apps offers game-like screen appearances, prompts users to place trades when looking up a stock ticker, and displays falling confetti to make them feel good when placing a trade. These apps even allow investors to leverage their investment through options – something professionals are required to have tested and trained for before offering them to their clients. What these apps do not offer is common sense or an advisor to help investors understand the associated risks of specific investments. They lack education and risk assessment before making speculative, high-risk investments.

We have heard disastrous reports of investors borrowing on credit cards and accessing home equity loans to invest, only to lose the lion’s share of their investment. As financial advisors, we find this very disheartening.

All investors should be educated about their investment options, risks, and costs. Smedley Financial makes a concerted effort to provide you with information and education regarding investing through our Money Moxie and Money Matters newsletters, regular webinars, seminars, and, most importantly, one-on-one meetings with clients. If you have questions or need more information regarding finances or investing, please reach out to our wealth management advisors.

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Facing Coronavirus Uncertainty, Think Long Term

By | 2020, Executive Message, Money Moxie | No Comments

I often include the phrase, “Past performance does not guarantee future results,” to remind us that uncertainty will always be an integral part of investing. I also repeat the words, “Long term,” frequently to help keep perspective in the face of uncertain times.

Warren Buffett understands uncertainty and long-term investing. He is one of the wealthiest individuals on the planet and one of the best investors of all time. Recently he gave us a glimpse into how he is viewing the extreme pessimism and optimism on Wall Street. On May 2, 2020, Warren Buffett conducted a virtual shareholder meeting. In the discussion, we learned that Buffett has been selling some and holding much of his investment portfolio during the Covid-19 pandemic. With around $137 billion in cash, many people thought Buffett would be buying aggressively. We also learned how he is viewing short-term and long-term investing now that he is 89 years old:

I hope I’ve convinced you to bet on America. Not saying that this is the right time to buy stocks if you mean by “right,” that they’re going to go up instead of down. I don’t know where they’re going to go in the next day, or week, or month, or year. But I hope I know enough to know, well, I think I can buy a cross section and do fine over 20 or 30 years. And you may think, for a guy, 89, that that’s kind of an optimistic viewpoint. But I hope that really everybody would buy stocks with the idea that they’re buying partnerships.

At the age of 89, Buffett is still thinking 20 to 30 years into the future. That’s an important lesson for all of us because the likelihood of making money increases with time.

The Dow Jones index is made up of 30 stocks, so it’s not a comprehensive example, but it is perhaps the oldest index. Over the last 100 calendar years, the probability of a positive return in any given year was 69%. That’s not bad, but that means that 31% were negative. Now that’s uncertainty. At the extremes, the Dow lost over 50% (1931) and gained 63% (1933). That’s what we call short-term.

I would define long-term as 10 years or more. It makes a big difference. The Dow was positive 83% of the 10-year periods and 96% of the 20-year periods. Only during the Great Depression were the 20-year numbers negative, but any investor who could have stayed invested would have done well in the latter half of the Depression and in the decades to come. Through these 100 years, the Dow averaged a 5.7% annual return (and that does not even include dividends).

So, while uncertainty will probably always be difficult to embrace, time can be our ally. Warren Buffett is choosing to think this way at the age of 89. I firmly believe that the same perspective will be beneficial to us as we continue through the 2020 Coronavirus pandemic and beyond.

*The Dow Jones index is often used to represent the U.S. stock market. One cannot invest directly in an index and of course, past performance does not guarantee future results.

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Climbing a Wall of Worry

By | 2020, Money Moxie, Newsletter | No Comments

Climbing a wall of worry is a common phrase in the investment world. The implication is that the market will move higher as it overcomes uncertainty. In 2018, the U.S. stock market had its worst December since 1931. It followed with the best returns since 2013. The American consumer kept things going in the economy at just above 2 percent while interest rate cuts and asset purchases by the Federal Reserve made all the difference for the markets.

Don’t Fight The Fed

In 2018, the Federal Reserve (Fed) was on auto-pilot: raising interest rates unless something went wrong. By December 2018, the Fed’s actions spooked investors.

By July 2019, the 2-year government bond paid a higher interest rate than the 10-year. That is what we call an inverted yield curve. The short-term rates are somewhat controlled by the Fed. The long-term rates are more driven by investors. So, the inverted curve is the result of investors believing that the Federal Reserve is making a mistake by keeping short-term rates too high. Over the last 50 years, the Fed has never been so quick to react as it was in 2019. This very well could have helped us avoid a recession in 2019-2020.

The Fed seems willing to do whatever it takes to keep this steady economy going, but the Fed is also going to try to stay out of the way in an election year. I expect it will take a large change in the economy to entice the Fed to make any changes to interest rates.

After three interest rate cuts last year, the Fed really may not have to engage in more stimulus in 2020. The impact of those cuts is likely to trickle down into the U.S. economy this year.

More Slow Growth: No Recession

The U.S. economy has averaged 2-3% economic growth for the last 10 years. This trend is likely to continue. Corporate earnings in the United States ended 2019 near zero. Expect a bounce. However, uncertainty over global demand, trade, and politics will probably continue. Once again, economic growth will rely heavily on American consumers.

Coronavirus: Watch For a Peak

Coronavirus has spread incredibly quickly through China, and around 2.3 percent of those who become infected, die of the disease. The World Health Organization (WHO) declared it a global health emergency on January 30, 2020.

Of recent outbreaks (Ebola, Zika, & SARS), SARS seems the best comparison. SARS spread more slowly. The World Health Organization did not declare it a global crisis until the number of people infected peaked (March 12, 2003).

In 2020, the Chinese government and the WHO have acted more quickly to contain Coronavirus. If successful, infections should peak in February. If efforts fail immediately, it seems likely that, just as with SARS, Coronavirus will be on the decline by March.

*Research by SFS. Investing involves risk, including the potential loss of principal. Dow and S&P 500 indexes are widely considered to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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The Congruity of the Annuity

By | 2019, Money Moxie, Newsletter | No Comments

Too often we have people come into our office after having just attended a free dinner that preceded the purchase of an annuity. “A guaranteed return with no downside risk” is what they believe they now own. That sounds great. I would purchase that too. However, it isn’t until after a lengthy conversation that they begin to understand how their annuity truly works.

An annuity can be a great financial product if it is congruent with the overall portfolio. There are times we use annuities to accomplish specific objectives and are pleased with how they perform in these situations. The problem we often see with the annuity is not the product itself, but how it is used. In other words, the ambiguity of the annuity can lead to incongruity, and the solution could require some ingenuity.

Annuities can be complicated. If you are considering an annuity, make sure you understand how it fits into your financial plan…and also its policies, fees, expenses, commissions, terms, benefits, exclusions, riders, investment options, and waiting periods. Due to their complexity, they can be easy to misuse, which can create significant financial problems.

An annuity is a contract between you and an insurance company. There are three main types of annuities: fixed, indexed, and variable. Each type has its own objectives and fits into a financial plan differently. Each type also carries its own expenses, level of risk, and earning potential. Even within their individual types, they can vary greatly depending on the insurance company that issues them.

Annuities can be expensive. The average annuity costs approximately 3% per year. It is important to understand that there are often expenses you don’t see. Unfortunately, too many salesmen do not clearly explain the costs, nor how they are applied. I have seen annuities advertised with “No Fees!” In truth, however, these same annuities carry large expenses.

It is also important to understand that annuities are illiquid. This means you can’t access most, if not all, of the money in your annuity without surrender charges for a significant period (usually 7-10 years). Annuities are long-term investment contracts and you’ll pay hefty fees if you take your money out too soon.

Again, we believe annuities are great at doing what annuities do. It just isn’t often we meet with people who have a need for them. If you are wondering whether an annuity is right for you, come and see us. We will always be upfront and honest about the cost and structure of the products we sell. If an annuity does make sense in your financial plan, we’ll help make sure you purchase the most appropriate and cost-efficient annuity for you.

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Year-End Tax Strategies

By | 2019, Money Moxie, Newsletter | No Comments

We are closing in on the holiday season. Before you slip into the holiday mode, let’s talk about a few ways you can wrap up the year!

1. The market has had an incredible run. This is an excellent time to look at your non-retirement accounts to see if you can take advantage of tax harvesting.

If you have an investment that has gained $10,000 and another that has lost $10,000, you can sell both investments and avoid paying tax on the capital gains. This matching of gains and losses is known as tax harvesting.

The gains and losses do not have to match exactly, but your gain and loss have to both be long term or short term. If you have held an investment for more than a year, it is considered a long-term capital gain and would be taxed at capital gains rates. If you have held the investment for less than one year, it is considered a short-term gain and would be taxed at the higher ordinary income tax rates. Either way, the resulting tax savings can be significant.

2. Here’s a win-win strategy. If you don’t have losses to offset your gains, you can still get tax relief by donating to a cause about which you are passionate or your favorite charity: church, school, food bank, hospital, etc. Consider this – donating an appreciated investment directly to your charity of choice will avoid taxes.

To qualify, you must have held the investment for more than one year, and it must have appreciated in value. You avoid paying taxes, and the charity receives the full value of your donation tax-free. The money you would have donated can be used to purchase another investment to start the process over again.

3. Current tax rates are at historic lows. Consider converting money from a traditional IRA to a Roth IRA. You can choose how much to convert. For example, if you have room for another $10,000 of income before you hit the next marginal tax-bracket, make it count.

Before the year ends, convert $10,000 from your traditional IRA to a Roth IRA. If you are under 59 1/2 years old, you will have to pay tax on the conversion with other money – say from a savings account. If you are over 59 1/2, you can have taxes withheld from the distribution.

The benefits of Roth IRAs are tremendous. Roth IRAs grow tax-free, meaning you never pay taxes on the earnings, there are no required distributions at any age, and if you do not use the money during your lifetime, your beneficiaries receive the money tax-free!*

4. If you are over 70 1/2 years old and you have an IRA, you can donate part or all of your Required Minimum Distribution (RMD) to your favorite charity and pay no taxes. This distribution is called a Qualified Charitable Distribution (QCD). The distribution still satisfies your RMD. This cannot be done from a 401(k). If you have a 401(k) and want to take advantage of this next year, you need to roll out your 401(k) before the end of the year.

*Tax-free withdrawals if certain conditions are met: a five-year account aging requirement and attaining age 59½, becoming disabled, using up to $10,000 to buy a first home, or upon death. SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.

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