Rent or own in retirement?

By Andrew Zashin*

The majority of Americans age 65 and older are homeowners and almost all of them own their homes free and clear, according to a Merrill Lynch-Age Wave survey. But in this current sellers market, does it make sense to continue to own? In other words, if you are a retiree, is there a benefit to selling your home and to rent instead?

Under current federal law, homeowners can qualify to exclude all or part of the gains received from the sale of their main residence from their income. Specifically, tax guidelines allow an excludable gain up to $250,000 per taxpayer or $500,000 on a joint return filed by a married couple. The law also permits more than one exclusion per taxpayer per lifetime.

A taxpayer can only exclude the gain from one home sale during the two-year period ending on the sale date. However, to qualify for the exclusion a taxpayer must have owned the home for at least two years and lived in the home as their main residence for at least two years. Both tests must be satisfied during the five-year period up to the date of the sale. The homeowner must report the sale of the home to the IRS even if the gain from the sale is excludable.

As a result of the exclusion, the sale of one’s home can generate a significant amount of money that can be invested and generate income. This income can then be used to help pay rent on an apartment, house or a condo. From a pure financial perspective, renting can be a more affordable option for retirees who are looking to downsize and walk away from the price tags that come with home maintenance and repair.

However, retirees often have a strong desire to age in place and own their home. But if that desire does not apply to you, renting rather than buying, regardless of housing type, allows you to invest the money from your home sale to create an additional income stream, assuming you have the discipline to use the proceeds wisely. According to Homeadvisor, in 2020, maintenance spending among homeowners who completed home maintenance projects was $3,192, a $2,087 increase from 2019.

The biggest advantage to renting a single-family home is that one can retain the greater privacy and peace and quiet that come with this type of residence compared with a multifamily property. The biggest drawbacks include social isolation and accessibility issues related to the physical disabilities that often accompany aging. Similarly, renting a condo allows one to experience its upsides without the financial obligations associated with owning one.

Renting in retirement could also be a good choice if one is moving to be near a relative who might end up moving themselves. Apartments can be the least expensive rental option of all, in part because they are often smaller than condos and houses. But one often gives up peace and quiet and privacy when renting an apartment.

As with so many things in life, there is no one size to fits all. There are many factors to consider when it comes to renting or owning. However, efforts are underway to significantly change the tax laws that may result in losing the exclusion and raising tax rates which, on a $500,000 otherwise excludable gain could result in you paying as much as $200,000 of taxes on a $500,000 sale of your home. As a result, it is always best to speak with your tax adviser prior to making any significant residential changes.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:07-05:00July 16th, 2021|home ownership, rentals, Retirement Planning|

COVID-19 making people look closer at retirement

By Andrew Zashin*

“There’s never enough time to do all the nothing you want” – Calvin & Hobbes

For many Americans, the decision as to when to retire is one to be labored over and discussed at length. Unsurprisingly, the COVID-19 pandemic is playing an important role in that decision.

Most notably, statistics have shown that retirement-eligible Americans are opting to leave the workforce at a much higher rate than prior to the pandemic. Several theories have been proffered. One possible explanation is that the age group most adversely affected by exposure to virus coincides directly with the age of retirement, i.e. why continue to work and exposure yourself to a potentially life-threatening virus when you have the opportunity to retire? Or, perhaps, the decision isn’t exactly voluntary: have many Americans lost employment and retired as opposed to continuously look for work that simply is not available at this time.

Regardless of the reasoning, a larger-than-normal amount of people find themselves preparing to retire during one of the worst economic recessions in American history.

So what should one do or not do if they find themselves preparing to retire during the pandemic?

First, closely consider your age and the ramifications of claiming Social Security benefits. While many individuals will be eligible to receive Social Security benefits at age 62, most people are better off drawing from their other accounts and claiming your Social Security benefits at an age closer to 70. The additional time will allow for the benefit to increase in value and provide you a higher benefit than had you tapped into that financial source at the earliest possible age. The chart below shows when full Social Security benefits are available based upon ones date of birth.

Two, carefully review all financial penalties associated with drawing upon a non-government retirement account such as a 401(k) or 403(b) in advance of age 60. The general rule of thumb is that the IRS imposes a 10% penalty on the taxable portion of your retirement distribution if a distribution is taken before age 55½. There are, however, exceptions to this rule that are dependent upon your age and when you choose to leave the work force. For example, an employee who leaves the work force at age 55 or after will not incur a 10% tax penalty if they choose to draw upon their 401(k).

Lastly, it is important to consider whether it makes sense to draw down on non-retirement accounts such as mutual funds or savings accounts in lieu of opting to take an early distribution from a retirement account or filing for Social Security benefits. While income from mutual funds is taxed, for the average tax filer, this income is taxed at a lower rate than regular income. Given these consequences, it may make sense to liquidate these funds instead of taking the significant tax penalty associated with an early distribution.

In short, the decision to retire is a personal one and one that has many financial ramifications. While the COVID-19 pandemic may have caused you to consider retiring earlier than previously anticipated, it is important to review all your financial options prior to making this significant decision. As a result, it is best practice to contact a financial planner and Social Security in advance of leaving the work force in order to better understand your unique situation.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:08-05:00October 13th, 2020|COVID-19, Retirement Planning|

Security in retirement and the SECURE Act

By Andrew Zashin*

It is estimated that as many as three-quarters of Americans have insufficient retirement savings and a full quarter may have no retirement savings at all. And, given that the majority of workers receive none of the pension benefits that had been common among prior generations, many Americans are left to either continue working longer than intended, or to survive solely or primarily on Social Security payments.

When one considers the average Social Security payment is only about 29% above the Federal Poverty Level, it should come as no surprise that many American seniors are finding themselves in poverty for the first time in their lives.

Enter the SECURE Act, which passed in the U.S. House of Representatives in May of this year. The Setting Every Community Up for Retirement Enhancement Act – which has bipartisan support, and passed the House nearly unanimously – now awaits a vote from the U.S. Senate. While it is not clear if this bill will get attention during the remainder of this legislative year, many industry leaders are hopeful for a 2020 passage. While the bill is unlikely to solve the problem, industry leaders largely agree that it is a step in the right direction and will provide some measure of improvement to a complex and looming problem.

A primary goal of the act is to expand access to employer-provided 401(k) savings plans. The act intends to make it easier for smaller businesses to offer retirement savings plans to their employees through several avenues, including offering a new tax credit to help defray startup costs for new plans, and increasing credit limitations for plan startup costs in order to make it more affordable. The Act would also change safe harbor provisions to make annuities a more realistic investment offering within plans thereby widening investment choices, and allow certain part-time employees to participate in employer-sponsored plans in order to open up plans to more employees.

The act also aims to provide employees with more opportunities for long-term savings. If enacted, employees would be allowed to save into an individual retirement account indefinitely and would not have to take required minimum distributions until age 72. Currently, contributions must stop and required minimum withdrawals must start at age 70½. This change would allow employees to keep funds invested for an additional 18 months beyond current liability and they could continue to save should they opt to delay retirement.

The SECURE Act has a few other interesting provisions. It expands the scope of permissible early withdrawals. Currently, a plan participant will generally have to pay a 10% penalty for withdrawing funds before age 59½. There are limited exceptions now, for reasons such as disability, large medical expenses, a home purchase, or higher education expenses.

But the SECURE Act would also allow parents to withdraw up to $5,000 from retirement accounts without penalty to be used for certain qualified expenses related to birth or adoption. The act would also change the way that inherited IRAs are paid out. Currently, non-spouse beneficiaries – such as children – are able to take from an inherited IRA required minimum distributions over the beneficiary’s expected lifetime. Rather than having a faster distribution calendar, this allows the recipient to continue growing the money, tax-advantaged, for a longer period of time. The SECURE Act would remove this option and require monies to be paid out to beneficiaries within 10 years.

Three senators, Ted Cruz, R-Texas, Mike Lee, R-Utah and Pat Toomey, R-Pennsylvania, have expressed concerns with specific provisions of the bill, which may keep it from getting passed by unanimous consent. However, some version of the bill does seem quite likely to pass in 2020, at least. And, this would seem to be some small step in the right direction.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:10-05:00October 18th, 2019|Retirement Planning, SECURE Act|

Make real estate part of your retirement planning

By Andrew Zashin*

When you think of preparing for retirement, what comes to mind? A 401(k)? A pension? An IRA? Social Security? Other savings? What about real estate? Maybe surprisingly, some prospective retirees are looking to real estate investments to help fund their golden years.

If you are interested in the prospect, know that you have several options.

One of the simplest ways is to invest in a real estate investment trust, generally known by the acronym, REIT. A REIT is effectively the real estate equivalent of a mutual fund. They own and typically operate real property that produces income, such as apartment buildings, warehouses, hotels, shopping centers and even timberlands. Some even provide financing. They can be private or public. And, perhaps most interesting for investors, they are subject to tax rules that require at least 90 percent of all taxable income be distributed to shareholders each year.

On the other hand, it can be difficult to get into the best-managed REITs. Income can be inconsistent. And, the required payouts can limit growth, as there will simply be less capital available for reinvestment.

Another option is to create an income stream through property rental. Some people may opt to own a second (or third, fourth, or 10th) home or building for purposes of renting it out. Others may opt to live in one part of a multi-family home or apartment building and rent the other units. Or, of course, commercial buildings can garner significant rents. And vacation rentals, whether rented with the assistance of a property management company or even a rental website like Airbnb, are likely to bill weekly, providing net amounts that can be much higher than other residential types of rentals, especially in popular tourist spots.

On the other hand, all types of rental properties require some capital. You may have ongoing expenses like a mortgage, management expenses, standard upkeep and improvements, and property taxes. To come out ahead, it is imperative to do some level of cost-benefit analysis to make sure the investment is likely to be worth it.

It may be enough to simply take equity out of your home. If you’ve paid off – or even just paid down – your home in the years leading up toward retirement, this could be a good option for you. Home equity loans and home equity lines of credit will permit you to borrow against the wealth that you have built up. Loan proceeds would then be available for other investment, payment of expenses, and the like. The downside is that these funds will need to be repaid, and the repayment terms will certainly need to be weighed against available cash flow and the benefit derived.

Finally, if you or your spouse are over the age of 62, a reverse mortgage might be a good option for you. This is an alternate type of mortgage loan that allows a homeowner to access the equity built up in his or her property. The equity funds are received at the inception of the loan and usually require no monthly repayment.

Instead, interest is added to the loan balance, which will be collected at the time the home is sold or the homeowner passes away. Borrowers will still be responsible for paying property taxes and home owner’s insurance, not to mention any repairs. The loan balance can grow beyond the actual equity available in the home, especially in a down economy. However, the borrower –or his or her estate – is not typically on the hook for any overage. But, it is important to understand that no value may be left for heirs.

Unless you are going to become a property tycoon, you will probably not be able to retire on real property alone. But, if you are looking for some supplement cash flow – or a lump sum of cash– these options may help you get there.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:11-05:00October 18th, 2018|Estate Planning, Real Estate, Retirement Planning|

Reverse mortgages: predatory lending or valuable planning tool?

By Andrew Zashin*

This article originally appeared as a column for the Cleveland Jewish News.

“Are you over the age of 62?”

“Do you have equity trapped in your home?”

“Having trouble making your monthly mortgage payments?”

“Supplement your retirement savings and make that money work for you.”

Targeted advertisements tout the benefits of reverse mortgages.

A reverse mortgage is a special type of loan offered to homeowners over the age of 62, generally with at least 50 percent equity in their home. Under this type of loan, borrowers pay property taxes and homeowner’s insurance, but no mortgage payment, and get immediate access to the home equity that has built up. The borrower keeps the home and will generally never be forced out of it.

It differs from other loan products like home equity loans or home equity lines of credit in that the borrower makes no monthly mortgage payment. Instead, repayment of the loan – including the interest that has compounded each month – is deferred until the home is sold or the borrower dies.

In general, the home is the collateral for the loan, and the borrower, or borrower’s estate, is not responsible for repaying interest that exceeds the home’s value. Given the way these loans are structured, it should come as no surprise that there may or may not be any equity left in the home when it is time to sell it.

This type of loan – known more formally as a home equity conversion mortgage – was first made available under the Reagan administration in 1988. In the subsequent decades, reverse mortgages have been criticized for many reasons, including confusing terms that make predatory lending a concern, high initiation costs, higher interest rates than conventional mortgages or home-equity loans, and compounding interest that can quickly deplete home equity, leaving little wealth to pass on to heirs.

AARP has been rather vocal in its efforts to advocate and educate consumers about this planning tool. While the terms of a reverse mortgage prevent foreclosure on the borrower, before 2014 those protections did not extend to a surviving spouse who was under the age of 62. The law was subsequently changed, making it a less risky option for borrowers with spouses below the age limit.

Reverse mortgages have developed a stigma as being a “last-resort” option for those who desperately need money because they have insufficient retirement savings to meet expenses or unexpected bills. It is certainly true that this type of loan can help with those things. But the recent recession is still fresh in everyone’s mind and has proven that real estate is not the sound, guaranteed return investment that it was historically thought to be. While this loan product can certainly help people with cash flow concerns, even if you have more than enough saved to last and sustain a few retirements, rising home values may make a reverse mortgage a smart financial tool to – just like advertisements say – make your money work for you.

2023-11-10T13:38:12-05:00July 27th, 2017|Real Estate, Retirement Planning, Reverse Mortgage|

Failure to plan is planning to fail

By Andrew Zashin*

This article originally appeared as a column for the Cleveland Jewish News.

To be sure, these are uncertain times. Of course, presidential elections always bring uncertainty and, without a doubt, the new administration will be different than the last, even if policy specifics aren’t clear at this point. But one thing remains clear: whether your preferred candidate just won or lost, you should ignore your retirement planning at your own peril.

It pays – literally – to have a retirement plan beyond Social Security. For readers working in the public sector or in the trades, hopefully you will be able to count on monthly pension benefits, whether to supplement or use as a primary income source. If you have access to a 401(k), 403(b), IRA or other retirement plan sponsored by your employer, hopefully you are currently funding it and taking advantage of any employer contributions for which you may be eligible. But what about those readers without access to these types of plans? Fortunately, you still have some ways to start saving.

A Roth IRA is a popular choice. These plans are generally available through major brokerage firms. Money invested in a Roth IRA has already been taxed, and these plans allow for tax-free growth – unlike other types of brokerage accounts that may be subject to capital gains tax – giving you the potential for tax-free withdrawals in retirement. Income limits do apply, though, and higher income earners may not qualify for a Roth IRA. Annual contributions are capped, as well.

Traditional IRAs are preferable for other investors. These products often provide for tax-deductible contributions (depending on your income level) and tax-deferred growth, which can help your balance to increase more quickly. There is no income limit on contributions, meaning even high-income earners can take advantage of this investment vehicle. Traditional IRAs do come with early-withdrawal penalties before age 59½ and with mandatory withdrawals beginning at age 70½.

Another relatively new and potentially useful option is the “myRA.” The myRA is available through the United States Treasury Department. While brokerage firms usually require between one and several thousand dollars to open an IRA account, the myRA requires virtually nothing to start and is available even to those with only a few dollars to save each month. With this option, your money is invested in a United States Treasury savings bond. For this reason, the growth rate is almost certainly going to be lower than other retirement investment options. But it is guaranteed growth. A myRA will get converted into a Roth IRA if the account balance reaches $15,000 or if it has been open for 30 years. The myRA is primarily intended to help individuals get started with retirement investing. It probably won’t be right for those who have already starting saving, but it can be a good way to get going.

Without some change, the current Social Security system won’t be able to pay out promised benefits beyond the mid-2030s. No doubt, something will be done by the upcoming administration and by those who follow. That “something” can take many forms, such as increased taxes (perhaps by raising the Social Security maximum base wage), an increased retirement age, decreased benefits, some combination of these or something else entirely.  The bottom line is that even when the latest solution is solidified, you may get less than you would like. And, in any event, Social Security benefits generally only represent a fraction of a retiree’s prior income.  This means, of course, that you will either have to make a big lifestyle change upon retirement or do a bit of advanced planning to make sure you will have other ways to help you enjoy your retirement and make ends meet.

*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.

2023-11-10T13:38:13-05:00November 16th, 2016|Retirement Planning|

Consider every option in year-end tax planning

By Andrew Zashin*

This article originally appeared as a column for the Cleveland Jewish News.

As another calendar year comes to a close, it’s time again for last-minute year-end tax planning. True, there is just over a month left in 2015, but there is still time to take advantage of some smart planning.

Consider upping your retirement contributions to the maximum allowed amount. Annual contribution limits into common plans like 401(k), 403(b), or 457 plans are $18,000 in 2015. Or, if you are over the age of 50, you can make a catch-up contribution of an additional $6,000. For a simple IRA, the limits are $12,500 for anyone below age 50 and $15,500 for those over age 50. And the contribution limits are $5,500 for a traditional or Roth IRA, or $6,500 for those over 50.

Charitable contributions may be made up until the end of the calendar year. If you itemize your deductions, you may generally deduct up to 50 percent of your adjusted gross income, although 20- and 30-percent limits apply in some cases. Contributions of appreciated assets can be particularly beneficial inasmuch as you can generally both write off the appreciated value of the asset while avoiding capital gains on the appreciation – a win-win for both you and the charitable endeavor.

Be sure to make use of any money you set aside in a flex spending account throughout the year. While funds in a health savings account will generally carry over into the next year, funds in a FSA will be lost if not used in time. While the rules on what constitutes a qualified purchase have tightened a bit, items such as bandages, eye care, home diagnostic tools such as blood pressure monitors and thermometers, joint braces, incontinence products, and over-the-counter medications prescribed by a licensed health care professional can all qualify.

If you have a business, you still have the opportunity to time some moves to best help your bottom line. Depending on the nature of your business, you may shift taxable income into 2016 by delaying billing or the provision of goods or services into the new year. Similarly, you can accelerate deductible expenses into 2015 by doing things like upping the business use of a vehicle that doubles as a personal vehicle, or acquiring new equipment and supplies (that you would be purchasing anyway) in 2015.

Last, but certainly not least, make sure you are taking advantage of every available deduction. Do you work from home? Travel for work? Pay interest on student loans? Have a child in day care so you can work? Have medical bills that exceed 10 percent of your adjusted gross income for the year? Pay tuition? The list of available deductions seems endless. Talk to your tax preparer or, at least, do your own research to make sure you have captured all deductions that might apply to your situation.

They say the only certainties in life are death and taxes. But, with a little planning and forethought you can keep a little more of your money in your pocket into 2016.

*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.

2023-11-10T13:38:13-05:00November 19th, 2015|Charitable Donations, Retirement Planning, Tax Planning|

Investing pitfalls to avoid – how to come out on top

By Andrew Zashin*

This article originally appeared as a column for the Cleveland Jewish News.

So much investing advice is out there. Read 10 different articles and you will find 10 different opinions on how to achieve investing success. What’s a new investor to do? Whom do you look to? How do you know which advice to follow? How do you best invest your money to meet your goals? As you get started, here are some of the primary pitfalls to avoid:

• Don’t fail to identify your goals. The first step toward successful investing is to identify your goals. Maybe you want to save for retirement. Or maybe you want to save for your children’s higher education. Perhaps you want to save up for a new home, grow your wealth, or some combination of all of these. Whatever your reason or reasons for investing, the point is that you want to clearly identify them.

Your goals will drive your personal definition of a wise investment, and only once you have identified your investment goals can you select the best investment options to meet your needs. By failing to do this, you could inadvertently stifle you money’s growth by missing out on the tax advantages associated with tax-deferred accounts such as 529 (college savings) plans or certain IRAs, 401(k), 403(b), or other retirement accounts. Or you might opt for investments that are too risky to satisfactorily protect and grow your money, or too risk-adverse to stand a chance of bringing the returns you are searching for.

So first, figure out what you want to accomplish through investing, and then research your options to determine the best way to achieve those goals.

• Don’t look for “get rich quick” schemes. Unless you are a very experienced investor (if you are, you are probably not reading this article) you are not going to make millions of dollars from your investment overnight. Do not try it and do not expect it. This is a recipe for failure. If someone is promising you these sorts of returns, run the other way as quickly as you can. This person is almost certainly scamming you. Instead, understand that wealth grows over time, exponentially, and the longer you can give your money to grow the better your results.

• Don’t put all your eggs in one basket. Diversify your investment portfolio. That is not to say that you need several different accounts (although you may, if each account is serving a different purpose.) However, within your account you will want to make sure you have a diverse portfolio of investments. A good, diversified portfolio will not include one or two stocks. Most likely it will not even contain only stocks. Instead, it will more likely include a good balance of investments such as stocks, bonds, index funds and mutual funds. The logic behind diversification is that even if one investment tanks, the others will perform better and prevent catastrophic losses.

Investing is, of course, not an exact science. You will not find a step-by-step how-to that will guarantee results. Financial advisers, stockbrokers and portfolio managers build entire careers out of choosing good, solid performing investments and even they get it wrong. But, with these basic tips and a lot of research, you can soon learn to make sound investments that will grow your wealth over time and help you meet your financial goals.

*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.

2023-11-10T13:38:14-05:00May 14th, 2015|Investing, Retirement Planning|

Retirement plans have access issues – and advantages

By Andrew Zashin*

This article originally appeared as a column for the Cleveland Jewish News.

Clients who come through my door are often quite protective of their retirement funds – understandably so. After all, an individual typically spends his or her entire working life saving for retirement. A retired worker will probably be entitled to some Social Security benefits.

A lucky minority will have pension plans to count on. No matter the case, most workers will be looking to supplement their retirement incomes with payouts from an Individual Retirement Account, 401(k), 403(b) which is a tax-deferred type of account similar to a 401(k) but generally offered in the public and nonprofit sectors, or something similar.

Perhaps it is not surprising, then, that I am frequently asked about when such retirement plans can be touched, and by whom.

You probably are somewhat familiar with your plan’s rules and the associated tax laws governing your retirement age. No doubt you have named one or more beneficiaries who will receive the balance of your account should you pass away before being paid out all your saved monies. You probably already know you can “cash out” your retirement account – though, of course, you likely know you will pay a large penalty for doing so. You may know whether or not your plan permits you to borrow against your saved amount.

What you may not know is that funds in 401(k), 403(b) and some other accounts can often be taken out prior to retirement in event of a “hardship.” A hardship distribution is generally available in more extreme circumstances when funds are not available elsewhere. Qualifying hardships may include certain medical expenses, costs relating to purchase of a principal residence, certain expenses for repair of such a residence, payments necessary to prevent eviction from or foreclosure on one, tuition and related educational fees and expenses, or burial/funeral expenses.

You also may not know that retirement savings are generally safe from creditors – at least while they still sit in the account. This means that if money is due you, or if you owe money from a judgment, back due rent or funds owed from a lawsuit, for example, it is probably not going to be able to be collected from a retirement account. Similarly, retirement accounts generally will remain intact in spite of a bankruptcy. Note that back due child and spousal support is handled differently than other types of debt.

A further, but important point, which many find surprising, is that retirement plans are divisible upon a divorce. It is tempting and quite common to take the attitude that “I worked hard to earn that money, not my spouse. It’s mine and I shouldn’t have to share it!” However, according to the law, this simply is not true. Just as the house, the business, the bank accounts, and the debts get split upon a divorce, so, too, do the retirement accounts. As a general rule, anything that accrued during the marriage will be split, very likely equally. Yes, even pension plans. A specific type of order is issued to split up retirement plans so that tax-deferred accounts can be transferred to the ex-spouse with no penalties, and pension benefits can be paid out to the ex-spouse according to the plan’s standard retirement calendar.

As life expectancy increases and confidence in Social Security decreases, retirement savings plans will doubtless become more popular. If you are reading this, you likely have at least one such plan. Just as it pays you to take time to consider what investments you want to make, it makes sense to understand the rules and laws that affect how and by whom your money can be accessed. You can start by talking to your plan administrator.

*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.

2023-11-10T13:38:16-05:00January 16th, 2013|Divorce, Property Division, Retirement Planning|
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