Categories for Blog
November 18, 2012 9:18 am
Published by dylan
People who work with a financial advisor are far more likely to understand the situation they will face after they retire, according to a recent survey by Franklin Templeton Investments.
Two out of three people who work with a financial advisor know the amount of retirement funds they will withdraw each year after they retire. That’s almost twice the proportion of those who’ve never worked with an advisor who have that knowledge, according to the Franklin Templeton Retirement Income Strategies and Expectations (RISE) survey, taken in September 2011.
Volatile world markets and changes in the way people build retirement assets make it more important than ever for pre-retirees to understand their retirement picture, says Michael Doshier, vice president of retirement marketing for Franklin Templeton.
“Sixty-seven percent of respondents were more concerned about investment volatility than they were prior to the recession that began in 2008,” Doshier said. “People’s worries varied by age, gender, and income level, but from a general standpoint, some of their specific worries related to health expenses, Social Security, and simply running out of money.
“Our survey also showed, however, that working with a financial advisor can make a clear difference in how Americans think about retirement planning. By sitting down with a financial advisor, identifying and prioritizing one’s retirement goals and concerns, and writing down a simple plan to address them, people can take meaningful steps toward confident action.”
The RISE survey was conducted online among 1,020 men and 1,026 women. Here are other findings:
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38% of respondents who never have worked with a financial advisor said Social Security will provide the most income during their retirement, compared with 19% of people who work with an advisor.
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Just 4% of people who never have worked with a financial advisor said IRA funds will provide the most income during their retirement, compared with 13% of people who work with an advisor.
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35% of people who never have worked with an advisor said they do not think about how they will approach different sources of retirement income.
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Running out of money in retirement is the top concern of 35% of people who never have worked with an advisor, while 24% of those who work with an advisor cited it as their top concern.
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Of those respondents who never have worked with an advisor, 41% said they don’t think they have enough money to need one, and 30% said they prefer to handle their finances on their own.
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79% of Americans currently do not work with a financial advisor, but 47% of respondents said they would consider going to a financial advisor or switching their current advisor if the advisor prepared a written retirement income plan.
September 28, 2012 8:20 am
Published by dylan
Shifting taxable income to other family members—usually children or grandchildren—who are in lower tax brackets is a time-tested tax planning technique. It may enable you to reduce overall taxes for your family. But this strategy could be especially valuable now. Due to the new American Taxpayer Relief Act (ATRA), a new top tax rate applies to ordinary income, while favorable tax breaks for capital gains and dividends are scaled back for upper-income investors.
If you own income-producing property, such as securities or real estate, you’re taxed on the income from those assets in your own higher tax bracket. But your children and grandchildren are likely to be taxed at lower rates, and if you can shift tax liability for the property to the younger generations, your family will pay less in taxes.
Typically, you might give the property to a family member through a direct gift. More sophisticated arrangements may involve the use of a trust. Either way, income from the property is taxed to the family member in a lower tax bracket instead of to you in your higher bracket.
What makes this strategy even more attractive now for upper-income individuals are the tax changes under ATRA. Beginning in 2013, a top tax rate of 39.6% is added for single filers with income above $400,000 and joint filers with income above $450,000 Also, the maximum tax rate for long-term capital gains and dividends of 15% (reduced to 0% for low-income investors) increases to 20% for investors above those same income thresholds.
Suppose you own property that produces annual income of $20,000. If you’re in the top bracket in 2013, you’ll pay $7,920 in tax on the income (39.6% of $20,000). But a child in the 15% tax bracket would owe tax of only $3,000 (15% of $20,000) on the same income—$4,920 less.
There are other tax ramifications to consider, however. A transfer of property is subject to gift tax, although you’re allowed an annual gift tax exclusion ($14,000 per recipient in 2013) as well as a lifetime exemption (for combined lifetime and estate gifts) of $5.25 million in 2013. The biggest impediment to this strategy may be the “kiddie tax,” which applies to investment income above an annual limit ($2,000 in 2013) for a child under age 19 or a full-time student under age 24. In those cases, income that exceeds the threshold will be taxed at the top rate of the child’s parent.
Finally, remember that you’re giving up ownership of property when you transfer it to family members. The best approach is to incorporate income-splitting into an overall plan.
August 1, 2012 8:24 am
Published by dylan
Mortgage interest rates are at historic lows, but does that mean you should refinance an existing mortgage? A “refi” may pay off, but you should consider all of the relevant factors, including these five potential problems:
1. You’re back to square one.
Starting over is hard to do if you’re close to paying off a mortgage. For instance, if you take out a 30-year loan, the monthly payments in the first seven years will reduce your principal by only 5% or so, with the rest going to interest. Instead of beginning to make a dent in their principal debt, homeowners who refinance after seven years are effectively starting from scratch. Figure out how much you’re really saving if you shave only a percentage point or less off your current rate.
2. Closing costs can pile up.
Depending on how long you stay in a home, the expenses of a new loan can outpace the savings. Figure on closing costs equal to about 1.5% of the mortgage amount. Then calculate your monthly savings to see how long it will take you to break even on the cost of the mortgage. For example, if you refinance a $300,000 mortgage, closing costs will run about $4,500. If the new mortgage interest rate is 1 percentage point lower than your current rate, you will save $178 a month and will need just over 25 months to recoup your closing costs. So if you’re not planning to stay in the house for more than two years, you could end up losing money. Reduce these costs by paying the prepaid items out of pocket. You’ll get that money back when the escrow accounts on your old loan are paid back to you.
3. Terms can be confusing.
With refis so popular now, they can take a long time to process, and it may not be clear when you should stop paying your current mortgage. If you inadvertently fall behind, it could throw a monkey wrench into the works. Generally, lenders offer a two-week grace period after a mortgage payment is due and then charge a 5% penalty. Even worse, your credit score might plummet by 100 points or more if you’re 30 days past due—and that change could affect your refi.
4. The appraisal may be too low.
Before the refi is approved, the lender will require an independent appraisal to confirm the home’s value. The numbers now are trending lower than expected for many homeowners, especially those who reside in areas hit by numerous foreclosures. If the appraised value is too low and you don’t have enough equity in the home, the lender could raise the rate or deny the loan altogether.
5. You could pay hidden fees.
Under federal law, lenders must provide a good-faith estimate of the fees needed to complete the refi, and that statement could reveal costs you hadn’t expected. Also, some low-interest mortgages require you to pay “points,” and each point is equal to 1% of the mortgage amount. That could delay your break-even point even longer.
July 9, 2012 8:26 am
Published by dylan
Tax planning isn’t just for the end of the year. This is especially true in 2012, a year in which a national election could affect tax policies, and when several key tax breaks are slated to expire. What should you do in this situation? Here are five midyear tax-planning moves that may improve your financial picture:
1. Harvest tax losses.
If you’ve realized capital gains from securities sales this year, you can use any capital losses before the close of the year to offset those gains, plus up to $3,000 of ordinary income. If now is a favorable time from an investment perspective to sell certain securities, don’t wait until year-end to take action.
2. Realize capital gains.
Conversely, any capital gains you recognize now can help you take advantage of earlier losses, making your profits effectively tax-free up to the amount of your losses. Furthermore, the maximum tax rate on long-term capital gain (for securities held longer than a year) in 2012 is only 15% (0% for lower-income investors). The top rate is set to jump to 20% (10% for lower-income investors) in 2013, barring legislative changes.
3. Invest in dividend-paying stocks.
Like the current break on long-term capital gains, a favorable tax provision for “qualified dividends” (paid out by most domestic corporations) is scheduled to expire at the end of the year. Currently, the maximum tax rate for dividend profits also is only 15% (0% for lower-income investors). Beginning in 2013, however, dividends will be taxed at ordinary rates that could reach as high as 39.6% (up from the current top tax rate of 35%). If you invest in stocks now that will pay dividends at year-end, you could reap tax benefits.
4. Dodge the “wash sale” rule.
Under this rule, you can’t deduct a loss from the sale of securities if you acquire “substantially identical” securities within 30 days of the sale transaction. To avoid tax problems, wait at least 31 days before you buy back the same or similar securities. Alternatively, you could “double up,” acquiring the new securities now and waiting at least 31 days before selling the original shares.
5. Contribute to your retirement plan.
It’s easy for employees to contribute to a 401(k) plan during the year through regular payroll deductions. If you’re self-employed, you might set up a comparable plan, such as a Savings Incentive Match Plan for Employees (SIMPLE) or a Simplified Employee Pension (SEP). Caution: Although you have until the 2012 tax-return due date (plus extensions), to get a SEP started, the deadline for setting up a SIMPLE for 2012 is October 1.
Of course, tax laws are ever evolving and you might have to make wholesale changes in your game plan after the election. We’ll keep you up to date on new developments.
July 9, 2012 8:12 am
Published by dylan
Everyone’s financial situation is different, but people at various stages of life often share similar concerns. Here’s a question from a client we encountered under such circumstances:
“I am in my 60s and recently retired from my full-time job. Over the years, I’ve opened several traditional IRAs and a Roth IRA. Also, I have a ‘rollover IRA’ with funds from a 401(k) at a previous job. Should I consolidate all of these IRAs into one for tax purposes, or should I just leave things the way they are?”
While there is no real tax benefit one way or the other, there is a trap to watch out for if you do consolidate. Combining the assets of your traditional IRAs into a single IRA could provide a few advantages, however.
For starters, it may be more flexible and cost-efficient to have just one IRA, as well as relieving you of considerable clutter if you’re still receiving paper statements from all of your IRA custodians. Also, if one IRA has provided better investment returns than the other or offers other advantages, it might make sense to shift more funds to the IRA with those advantages. (Of course, past performance is no guarantee of future results.) And you may find it easier to coordinate your plans for retirement, and focus on your main objectives, with a consolidated IRA.
Moreover, consolidating accounts might help you avoid a complication that can arise when you start taking “required minimum distributions” (RMDs) from your traditional IRAs. The law mandates that you begin taking RMDs no later than Apri1 1 of the year following the year in which you turn age 70½. These withdrawals from your account, the amount of which is based on life expectancy tables, must continue annually for the rest of your life. If you have several IRAs, you’ll have to choose the source of your annual RMD. It can come from one or multiple IRAs. But no matter how you arrange the distribution, the IRS treats it for tax purposes as coming from all of your IRAs on a “pro-rata” basis.
Let’s say you have four IRAs with a combined value of $500,000, and this year you withdraw $20,000 from one of them. The applicable percentage is 4% ($20,000 divided by $500,000), so it’s calculated as if you had withdrawn 4% of the balance in each IRA. Consolidating your IRAs would eliminate any confusion.
Finally, be aware that you can’t commingle the funds in traditional and Roth IRAs. This is the trap we alluded to earlier. Because Roths have an edge over traditional IRAs—qualified Roth distributions are tax-free and you don’t have to take lifetime mandatory distributions—you wouldn’t want to put them together anyway. Should you consolidate all of your Roth IRAs? Many of the same considerations that apply to combining traditional IRAs also are applicable to Roths.
July 9, 2012 7:54 am
Published by dylan
Will your family members know how to handle a life-threatening illness or injury involving a loved one? A “living will” can point them in the right direction.
Simply put, a living will is a legal document that establishes guidelines for prolonging or ending medical treatment. It’s important to have a living will created for yourself, and for relatives such as your spouse and parents, to inform health-care providers in case of a medical emergency or terminal illness.
A living will indicates the types of medical treatments you want or do not want applied in the event you suffer a terminal illness or fall into a permanent vegetative state. The living will doesn’t become effective unless you’re incapacitated. Typically, a physician must certify that you have a terminal illness or that you’re permanently unconscious.
To cover situations in which someone is incapacitated and can’t speak, yet the condition isn’t so dire that the living will becomes effective, you can execute a health-care power of attorney or health care proxy.
The requirements for living wills vary from state to state. Have an attorney who is experienced in these matters prepare the living will based on applicable laws. The best approach is to coordinate your living will with your regular will, any trusts or powers of attorney you may have, and other estate-planning documents.
July 2, 2012 9:05 am
Published by dylan
People who find themselves owning complex investment vehicles often leave the driving to the professionals. And that’s perfectly acceptable, but even “passengers” should have a basic understanding of how a particular investment works—especially when it’s your hard-earned money on the line.
Consider a retiree who’s looking into purchasing an annuity. Is it an investment product, an insurance product, or both? Will the annuity continue to pay income to heirs if the owner dies? Is the principal protected in case of a severe economic downturn? Surprisingly, many investors—including owners of annuities—are stumped by these basic questions.
Other commonly used terms often befuddle investors. Do you know the difference between an “annual effective yield” and an “average annual yield”? How about an “annual percentage yield”? It’s important to distinguish among different types of yield so you can make valid comparisons of investments.
Do you consider yourself an investment expert? Here are a few simple questions—with the answers below—to see how you measure up.
1. An insurance company generally begins payments under an annuity when:
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The accumulation phase begins.
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The accumulation phase ends.
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The annuity owner dies.
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The annuity owner retires.
2. Payments under a variable annuity are based on:
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Fluctuations in the current interest rate.
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Fluctuations in the current inflation rate.
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Performance of underlying stocks.
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Performance of the Standard & Poor’s (S&P) 500 index.
3. An annual effective yield is described best as:
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The annual return before interest is compounded.
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The annual return after interest is compounded.
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The annual return before inflation.
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The annual return after inflation.
4. The average annual yield often is used to:
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Compare the past performance of mutual funds.
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Distinguish Treasury bills from Treasury notes.
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Factor in the tax-free element of municipal bonds.
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Account for a guaranteed minimum-income benefit.
5. When you buy Treasury bills at auction, the rate is:
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Based on the current interest rate for loans.
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Based on the S&P 500.
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Equal to par.
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Discounted from face value.
6. A “private activity bond” is best described as:
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A corporate bond eligible for capital-gain treatment.
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A corporate bond exempt from income tax.
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A municipal bond that is completely taxable.
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A municipal bond that can trigger alternative minimum tax (AMT) problems.
7. An exchange-traded fund (ETF):
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Trades like stocks.
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Trades like mutual funds.
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Involves trades between major stock exchanges.
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Involves trades between different currencies.
Answers: 1-b; 2-c; 3-b; 4-a; 5-d; 6-d; 7-a
April 17, 2012 1:14 pm
Published by dylan
The European continent is an ocean away from the United States, but Europe’s debt crisis may hit close to home for U.S. investors.
Your investment portfolio almost certainly contains some exposure to Europe. You could own European companies through investments in international funds, or you may be invested indirectly through multinational corporations that do business in Europe. Moreover, if the European debt crisis worsens, that could lead to increased volatility in U.S. and global investment markets.
You’re also affected because Europe’s economy directly affects the U.S. economy through bank lending, trade, and other economic connections. Europe is the largest U.S. trading partner, accounting for 20% of U.S. exports. At the same time, U.S. banks hold a lot of European debt, and worries about Europe’s economic health have already dampened business investment and hiring in America.
Some analysts believe the credit crisis in Europe has been contained and that further impact on world markets should be minimal. Others continue to warn that Europe’s problems are likely to send the global economy into another recession this year.
Either way, it’s vital for investors to take into account events in Europe and position their portfolios accordingly. We are watching the debt crisis very closely and we can help you take a proactive stance.
April 17, 2012 12:16 pm
Published by dylan
The 401(k) plan continues to be, by far, the most popular company-sponsored retirement plan in the land. And it’s no wonder. This unique retirement-saving vehicle offers tax advantages to employees and can also be a valuable tool for employers looking to recruit and retain top talent.
The basic premise is simple: You arrange to have a portion of your pre-tax salary deposited in a separate account. Frequently, an employer will agree to match each dollar that plan participants contribute, up to a specified percentage of compensation. For example, if you earn $100,000 and put $10,000 a year into your 401(k), your company, providing a 3% match, would kick in another $3,000 annually.
There’s no current tax on investment earnings within the account, though you also don’t get to claim a deduction for losses. Distributions from the account, usually during retirement, are taxed at ordinary income rates. If you change jobs or retire, you normally can choose among keeping the money in your old company’s plan, shifting it to a new 401(k), or rolling over some or all of the account to an IRA.
That’s the short story. But there are numerous other legal limits and restrictions to contend with. One of the biggest is the annual limit on how much salary you can defer, a number that rises based on an inflation index. Furthermore, the plan must satisfy strict, complex nondiscrimination requirements.
How well do you know the current rules? See how you fare on this brief quiz.
1) The maximum amount an employed 45-year-old can contribute to a 401(k) in 2012 is:
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Zero.
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$17,000.
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$21,500.
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$22,500.
2) The maximum amount an employed 55-year-old can contribute to a 401(k) in 2012 is:
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Zero.
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$17,000.
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$21,500.
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$22,500.
3) The maximum amount a retired 65-year-old can contribute to a 401(k) in 2012 is:
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Zero.
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$17,000.
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$21,500.
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$22,500.
4) The minimum number of employees required to establish a 401(k) plan is:
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1.
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10.
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25.
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100.
5) If you aren’t a company’s owner, you must begin taking distributions from its 401(k) plan:
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At age 59½.
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At age 70½.
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When you retire.
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At age 70½ or your retirement date, whichever comes later.
6) A rollover from a 401(k) plan to an IRA is subject to a 20% withholding tax unless:
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You complete the rollover within 60 days.
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You arrange a trustee-to-trustee transfer.
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You retire before the end of the tax year.
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You are under age 59½.
7) If you receive a $10,000 “hardship distribution” from a 401(k) in 2012 and you’re in the 25% tax bracket, your income tax liability is:
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Zero.
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$1,000.
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$2,500.
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$3,500.
Answers: 1-b; 2-d; 3-a; 4-a; 5-d; 6-b; 7-c
April 11, 2012 1:23 pm
Published by dylan
The new JOBS Act—the Jumpstart Our Business Startups Act of 2012—is designed to promote growth among small businesses. Under the law, entrepreneurs will be able to raise cash without jumping through the usual hoops for the Securities & Exchange Commission (SEC). Here are the key provisions.
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A privately owned company with revenue of less than $1 billion can sell up to $50 million in shares through an initial public offering (IPO) without registering with the SEC. Also, companies in this category are exempt from having to commission independent audits of their internal controls for up to five years.
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Small companies may have as many as 2,000 shareholders (up from 500) or 500 unaccredited investors without registering with the SEC. An accredited investor is defined as someone who has a net worth of more than $1 million (not counting a primary residence), earnings of at least $300,000 ($200,000 for single filers) for the past two years, or is a general partner, director, or executive officer of the company issuing the IPO.
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The new law allows “crowdfunding” to attract cash from large pools of small investors. Investments are limited to the lesser of $10,000 or 10% of the income of an investor.
Consult with a professional if you’re interested in issuing an IPO or acquiring shares of one.
April 11, 2012 12:14 pm
Published by dylan
Now that the “payroll tax holiday” has been extended through the rest of 2012, can we expect other significant tax legislation from Congress? Not before the national elections.
Although our nation’s lawmakers may still act to keep several other expiring tax provisions, it seems unlikely Republicans and Democrats will reach consensus on the best tax policy for the country before November. Once voters have been heard, Congress will probably get down to business.
Their task is daunting. Several key tax law breaks are scheduled to be scaled back in 2013 if there’s no congressional action.
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The two top tax brackets for ordinary income in 2012 are 33% and 35%. Absent new legislation, the two top rates in 2013 will rise to 36% and 39.6%, respectively.
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Currently, the maximum tax rate on long-term capital gains and qualified dividends is 15%. These “Bush tax cuts” are set to expire after 2012 when the capital gains rate will jump to 20% and dividends will be taxed at ordinary income rates.
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For 2012, the maximum estate tax exclusion is $5.12 million, and a surviving spouse may take advantage of any leftover exclusion of the spouse who died. But that “portability” is scheduled to end next year, and the exclusion will revert to $1 million.
We still could see wholesale changes in these tax rules...but not until later in the year.
April 11, 2012 11:06 am
Published by dylan
An improving jobs picture sent consumer confidence up for six straight months through February, as Americans gained hope the economy is improving. Even people who said their own finances remained in poor shape felt more hopeful about the overall economy.
The University of Michigan’s Consumer Sentiment Index rose to 75.3 in February, up from a 31-year low of 54.9 in August 2011. That followed news that America’s unemployment rate had fallen to 8.3% in January. It had been at 9.1% in August, down from a 2009 high of 10%.
Consumer sentiment rose despite the fact that more households said their income had dropped from the previous month, and a majority said they did not think their income would grow during the next year.
Most economists are backing up this consumer optimism. A survey by the National Association for Business Economics in late February showed economists expect unemployment to remain at 8.3% this year. That’s a significant improvement from their November forecast of 8.9%.
The economists also predict job growth will accelerate next year and the jobless rate will fall to 7.8%. They forecast the U.S. economy will grow 2.4% this year, up from 2011, when economists believe the economy grew 1.6%.
The improving outlook among consumers and economists bodes well for 2012, as stock markets tend to rise on positive sentiment.
