Qualified Charitable Distributions

Credit: Stuart Miles at FreeDigitalPhotos.net

If I were a betting man, I’d say there is probably a pretty good chance that you have recently put the finishing touches on your tax return. If I’m wrong, congratulations on getting your taxes done early! Your CPA thanks you, trust me. If I’m wrong because I just reminded you that your taxes are due on April 18th this year, save this post for later and make double sure that your CPA is filing you an extension!

Either way, while taxes are still likely fresh in your mind, I wanted to mention something to you for this year called Qualified Charitable Distributions. For those of us who do not like to type or write long words, we affectionately call them “QCDs.”

Qualified Charitable Distributions allow an IRA owner who is over age 70 ½ the opportunity to directly transfer up to $100,000 annually from an IRA to a qualified charity tax-free. QCDs are not new in the sense that they were created by Congress back in 2006 as part of the Pension Protection Act, but they have had a roller coaster history ever since. In the initial legislation, QCDs were only to exist for two years, and at the end of 2007, the opportunity to make QCDs was no more. QCDs became popular during that time period though, and almost every year since 2007, Congress hemmed and hawed over whether to bring them back each tax year or not. Some years they did, some years they didn’t, and some years they did retroactively (I wish I could do things retroactively…). To put it simply, it was a mess. Thankfully, as a result of the Consolidated Appropriations Act of 2016, QCDs are back, and for now at least, they are back permanently.

When a taxpayer makes a QCD, they don’t report taxable income for transferring money from their IRA and they don’t report a charitable deduction, either. It’s almost like it never happened for tax purposes. If a taxpayer just withdrew money from their IRA and donated it like normal, they would report the taxable income and they could take a charitable deduction. The taxpayer gets hit with the “stick” of the additional income, but receives the “carrot” of an additional deduction. So which should you do?

I’ll be honest with you, in most cases, the initial difference on your taxes from charitably gifting by making a QCD or not making a QCD usually appears pretty small, but that doesn’t mean you shouldn’t consider a QCD. By not having to report the additional income when you make a QCD, it’s possible you can avoid triggering or reduce the damage of some of the tax laws currently in place that penalize taxpayers. Charitably giving by making a QCD could reduce your income taxes on your Social Security benefits, it could reduce a phase-out of your itemized deductions, and it could keep your income under one of those heinous Medicare income thresholds so that your insurance premiums don’t increase. If you don’t have a lot of deductions and take the standard deduction instead of itemizing your deductions, a QCD is likely a good idea for you because otherwise you will be recognizing income and not having enough deductions to get any credit on your taxes.

I know that was a lot, and I’m sorry. I’m still a recovering CPA... My point is if you or someone you know is over age 70 ½, they have an IRA, and they are charitably inclined, make sure they ask their CPA about this new potentially tax-saving tool that we now permanently have in our taxpayer toolbox. Just do your CPA a favor, and ask them after April 18th!

-Tom

Continuing Care Retirement Communities

Credit: Ambro at FreeDigitalPhotos.net

Continuing Care Retirement Communities or CCRCs are becoming more and more common. CCRCs are retirement communities that offer different levels of service and health care at the same location or campus. Most CCRCs have apartments, cottages, or small houses, which allow healthier residents to experience a neighborhood feel while still enjoying access to the amenities (restaurants, gyms, libraries, clubs, etc.) of the larger campus. CCRCs also usually have smaller apartments or rooms for residents who need more assistance in addition to skilled nursing facilities and rehabilitation centers. The idea is to not have to move to multiple residences towards the end of one’s life, and to not have to be separated from a healthier or sicker spouse.

The growing popularity of CCRCs is due to a number of reasons. For one, residents want to keep their independence as long as possible and CCRCs allow them the flexibility to do so. CCRCs also allow many sick residents to stay with, or at least in the same facility as, their healthier spouse. Additionally, many residents either do not want to be a burden on their spouse or family, or simply do not have spouses or families that are able to handle the burden of care necessary to support them. With people living longer and longer, I would expect this trend to continue. I’ve already seen it as I have helped a growing number of clients transition themselves or their parents to CCRCs. It’s a big decision; emotionally and financially, and one that should not be taken lightly. In that spirit, I’d like to offer a few financial tips I’ve learned along the way.

1. Know what you can do. As you might imagine, there are varying qualities of CCRCs with varying costs. It’s important to look at what your new living expenses would be and whether that is a feasible “burn rate” given your amount of assets and life expectancy. Many people have to sell their primary residence to make a move to a CCRC possible.
2. Figure out your real estate options. If you need to sell your primary residence when moving into a CCRC, talk with the CCRC before making any decisions. In some cases they have people or relationships that can help you clean out and even sell a home at discounted rates. I’m talking estate sale experts, realtors, and mortgage brokers. Some CCRCs offer financing on a short term loan between the time you sell your primary residence and move in, but sometimes “outside” financing on a loan to bridge you between the sale of your old home and the purchase of your new CCRC home may be necessary.
3. Consider refundable versus nonrefundable options. Some CCRCs charge you more up front, but promise to give your heirs a portion of your down payment back after you pass away or if you pass away within a certain period of time. Depending on the specific offer, your financial capabilities, and your life expectancy, there can be a strategic decision to be made here.
4. Consult with a CPA. At certain CCRCs, a portion of your initial down payment can qualify as a medical deduction for income tax purposes. Ask any CCRC you are considering if this is the case, and then if so, talk with your CPA. A really large medical deduction might cause you to have a really low or negative income tax year in the year you move into a CCRC, so it may make sense to pull some income forward or recognize some extra income in such a year if possible. Perhaps the CCRC will let you pay the down payment over two tax years so you can spread out the deduction? A medical deduction for moving into a really nice CCRC can near six figures, so the tax planning on this isn’t something to just do yourself or with your generic tax software!
5. Get on a waiting list sooner rather than later. There are more people interested in CCRCs than there are spots available. If you know there is a particular facility you are interested in or you have friends going into, inquire if there is a waiting list. Usually you can get on a waiting list for several hundred to a few thousand dollars that may even be refundable if you change your mind. You may not be able to get into the CCRC you want to when you need it if you don’t go ahead and get on the list beforehand!

As always, if I can be of assistance to you or someone in your family considering a move into a CCRC, please let me know. You know where to find me.

-Tom

Landing the Plane

Credit: potowizard

Many of you know that I love analogies. One of my favorites that I use with people who are nearing the end of their careers is that they should think about entering into retirement like landing a plane. Whether the gainfully-employed ride has been smooth sailing or more than a little turbulent doesn’t really change the fact that you need to be prepared to land the plane. The retirement landing can be graceful and you can reach your home destination smiling, or the landing can go pretty poorly and even end in a fiery crash of sorts. Most people prefer the graceful landing that ends with smiling, so if you’re thinking about retirement, I thought I’d share a few tips on how you might want to land your very own plane.

1. Get Your Cash Up – When working, I recommend most people keep around three to six months’ worth of their core living expenses in cash. In retirement, I’ve found that most people prefer a little more. If you have a particular cash number that helps you sleep better, go for it, but otherwise I normally recommend one to two years’ worth of your core living expenses in cash. That may sound a little crazy to you, but when your paycheck goes away (or goes down) when you do retire and there is a cyclical pullback in the stock market, you might feel differently.
2. Have a Plan for Where Your Income Will Come From – If you have a pension, that’s really great, but where is the rest of the cash you need to fund your lifestyle going to come from? Randomly pulling cash from various investment accounts and haphazardly deciding when to turn on an annuity or start drawing Social Security is usually not a good strategy. You need a plan! There are tax implications and timing implications that need to be considered if you want to land as efficiently and effectively as possible!
3. Strive to be Debt-Free – This may require using a decent chunk of your assets, or you might even decide that you want to work a year or two longer so you can do this, but if you can go into retirement debt-free, it is huge! Imagine how it feels to still get that mortgage bill you’re used to when you’re not getting that pay check you’re used to. Being debt-free going into retirement not only really seems to help many of my clients psychologically, but it also helps take pressure off cash and investment accounts. If your monthly mortgage payment is making up a sizable chunk of your fixed expenses, and you can make it disappear before you lower your landing gear, I’d be willing to bet you’ll feel a lot better.
4. Make the Big Purchases Before You Retire – What? I’m telling you to spend money? Well, sort of. This may also sound a little batty, but if you are going to need something such as a new car or a new roof in the next couple of years, I’d probably suggest you go ahead and accelerate that purchase while you’re still working and making the big(ger) bucks. Assuming your retirement income will be a little lower than your working income, I’ve found that going ahead and taking care of some of the big ticket items can make your landing feel a little smoother. Put simply, big expenses can hurt the psyche and the pocketbook, but they seem to hurt less if you’re still working.
5. Get to Know Your New Boss/Co-Worker – I’m certainly not a therapist, but I am observant enough to have noted that some people’s transition to a little more family time seems to go better than others. Sure, you’ll have to get used to spending a lot more time with your husband or wife, but that knife cuts both ways; they will have to get used to spending a lot more time with you, too! Working to improve your relationship with your spouse and developing some mutual and separate activities before you retire are probably really good ideas. I’ve heard it said that retirement is twice as much spouse and half as much money! I don’t know about that, but you get the point. Consider some relationship planning before you exit your plane and head to baggage claim.
6. Think About What You’re Going to Do Once You’ve Landed – I know I said I’m not a therapist, but you need a plan for you when you retire. My busy, ambitious, and hardworking clients who eat, sleep, and bleed what they do for a living tell me that retiring can feel like jumping off of a moving train. The emotions of that jump and coming to a relative stop can be a tough adjustment. Take a trip, sleep in for a few weeks, do the crossword, but have a plan for after that. Things such as volunteer work, periodic consulting, gardening, car restoring, or woodworking can be good things. You’re going to want to have something to do. Retiring is a treat for some, but I’ve seen it be a difficult pill for others to swallow. Do as you wish, but I’d suggest you have some hobbies and groups lined up before you bid your boss adieu.

 

I don’t know about you, but I think the landing is one of the most important parts of a flight. If you’re beginning your descent and could use a little help making your approach, please let me know. This has been your captain speaking.

 

-Tom

Donor Advised Funds

Credit: Renjith Krishnan

Do you want to give money to a good and noble cause, but haven’t really found one that you like? Do you already give cash or appreciated stock to several charitable organizations, but wish you could give more? Are you already giving about as much as you realistically can and still wish you could give more? Perhaps you’ve had a really good year at work, you sold a business, or one of your stock holdings shot up like a rocket, and you want to give charitably over time and not all in one year? If you or anyone you know can relate to the above scenarios, you are not alone, and I may have just the solution you have been looking for: a donor advised fund.

A donor advised fund is an account that is maintained by a sponsoring charitable organization and lets donors give to charity with greater flexibility while still realizing the tax benefits associated with charitable gifting. In English, if you wanted to open a donor advised fund, you would open an account with a sponsoring charitable organization such as Schwab Charitable or Fidelity Charitable, and you would contribute your donations directly to them. This would allow you to lock in your immediate tax deduction just as if you had given a check to the American Heart Association. However, with a donor advised fund, you don’t have to immediately distribute your contribution. For example, if you gave $2,000 worth of appreciated Apple stock in 2014, you could distribute the contribution in 2015, 2021, or whenever you like. You could certainly distribute the funds in 2014 if you wanted to, but you wouldn’t have to, because once you contributed the Apple stock to your donor advised fund, it’s no longer yours. Essentially, you made an irrevocable gift, but you reserved the right to direct where the distribution goes at a later date.

By contributing to a donor advised fund and not immediately distributing your contribution, your contribution “lingers” in your account for a longer period of time. During this time, your contributions can be invested, and any growth will be tax-free. As with any investment, the value of your account could go up and it could go down, but your deduction won’t change (remember, you locked that in at the value of your donation when you originally contributed). This ability to let contributions linger can give a donor time to decide which organizations they want to benefit, and it can give a donor’s invested contributions time to grow and one day potentially offer a greater monetary benefit to a particular charity than the smaller, initial contribution could have offered. (That being said, I know of plenty of good charitable organizations that need money now to advance their cause and further their mission, so you’ll have to personally weigh immediate impact versus long-term financial magnitude.)

If you have a big tax year or your income stream is pretty sporadic (a lot one year, a little for a few years, then a lot again one year), donor advised funds can really be a good fit for you. If you’re charitably inclined, your CPA and financial advisor are probably encouraging you to give in those good income years so that you can fulfill your charitable desires and hopefully maximize your charitable deductions. As we discussed earlier, a donor advised fund will allow you to lock in your donation in that high tax year, but it will also allow you to give as you wish. Another way of saying this would be that a donor advised fund lets someone make charitable contributions sporadically and strategically (to their donor advised fund) and charitable distributions (to qualifying charitable organizations) smoothly, or however they wish.

Finally, what happens if you pass away and still have money left in your donor advised fund? Well, there are several possibilities. You could name charitable beneficiaries that would receive whatever is left in your account, or you could name another person or people as your contingent successor(s) to direct the distribution of assets left in your donor advised fund. Simply naming a charitable beneficiary is smooth and clean, but I have seen cases where naming spouses and children as contingent successors has worked really well. It allows contingent successors to benefit organizations they feel strongly about, and it also powerfully instills how important “giving back” was to the deceased one last time.

A donor advised fund is not for everyone, but I think it’s a pretty nifty tool considering all of the flexibility it offers. It’s sort of like having your own private foundation!

-Tom

A Traditional 401(k) vs. A Roth 401(k)

Credit: Stuart Miles

Another question that came up a few times from readers submitting questions for The Lightning Round was whether I would recommend a Traditional 401(k) or a Roth 401(k). This is actually a very difficult question to answer because it depends on the future tax rates of the individual asking the question. I tried to write an answer (I really did), but I also know that there are times when writing less is worth more. I think this is one of those times. Let’s look at an example…

Suppose Tom has two different 401(k) contribution options. With option one, he can contribute to a Traditional 401(k) plan where pre-tax income is deducted from his paycheck and placed in a tax-deferred account. Tom will have to pay taxes when he takes withdrawals from the account in retirement. With option two, he can contribute to a Roth 401(k) plan where after-tax income is deducted from his paycheck and placed in a retirement account. In this case, Tom will not have to pay any additional taxes when he takes withdrawals in retirement. Suppose Tom’s tax rate is 25% as he contributes and will remain 25% in the future when he takes withdrawals in retirement. Suppose Tom contributed $5,000 per year from his paycheck. Suppose Tom’s investments return a steady 5% per year.

     What would happen if Tom went with a Traditional 401(k)?

     What would happen if Tom went with a Roth 401(k)?

Are you surprised to see $21,239.15 as the answer to both scenarios? Don’t be! In the Traditional 401(k) scenario, Tom is deferring paying taxes now, so it’s only fair that he pays taxes on his contributions and earnings in the future, right? However, in the Roth 401(k) scenario, Tom is paying the piper (aka the IRS) up front, so why should he be taxed any more on his contributions or earnings years from now?

Great. I’ve mathematically proven to you that it might not make a difference whether you decide to go with a Traditional 401(k) or a Roth 401(k). How does that help you? I hope it helps you focus on the fact that saving for retirement is what really matters, not the Traditional vs. Roth decision.
If you’re expecting to have higher income in retirement than you do now (from things such as Social Security, a pension, or a large inheritance), I’d normally recommend you go with a Roth 401(k). If your income (and your tax rate) will be higher in retirement than it is now, there may be a mathematical difference between choosing a Traditional 401(k) and a Roth 401(k), and a Roth 401(k) will likely be in your favor.

If, like most people, you’re expecting to have a lower income in retirement once your big salary goes away, I’d normally recommend you go with a Traditional 401(k). Save on taxes now while you’re at a higher tax rate and gladly pay taxes on your retirement withdrawals at a lower tax rate when your income is lower. If your tax rate is lower in retirement than it is now, there may be a mathematical difference between choosing a Traditional 401(k) and a Roth 401(k), and a Traditional 401(k) will likely be in your favor.

That leaves one last question. What if tax rates or tax law change between now and when you retire and take withdrawals? Neither of us knows the implications of such a change until it is implemented, but based on our growing federal deficit, I’d guess that if tax rates are going to move, they will be going up. If you’re still on the fence choosing between a Traditional 401(k) and a Roth 401(k), that logic might be a small nod to the Roth 401(k).

In closing, saving is what matters the most – not whether it’s a Traditional 401(k) or a Roth 401(k). If you expect higher taxes in retirement, go with a Roth 401(k). If you expect lower taxes in retirement, go with a Traditional 401(k). If you’re still unclear or nervous about tax rates in the future, hedge your bets - contribute half to a Traditional 401(k) and half to a Roth 401(k). You’ll be half right!

-Tom

The Lightning Round: Take 3

Credit: FreeDigitalPhotos.net

Thanks to all of you for the many questions I received. Some of you even submitted more than one! You asked the questions, and now it’s time for me to share my answers to five of them...

1. I recently sold my house and have the profits sitting in a money market account. I'm relatively young,  have no more debt to pay off, already contribute to my work retirement account, have my rainy day fund, and would still like to put this profit toward my future as well. Is having this money sitting in a money market account the best “bang for my buck" or is there a better way to invest it?

- Anonymous                   

First of all, congratulations on selling your house for a profit! Real estate is not always a profitable investment, but it is certainly nice when it works out. Let me get this straight - you’re debt-free, you’re contributing to your 401(k), and you have set aside enough cash to form an adequate rainy day fund? Well done! You are certainly on a path towards financial success!

There are a lot of things you could do with the excess cash you have in your money market account that would provide you a bigger “bang for your buck.” Unfortunately, given current interest rates, the difference between burying your excess cash in your backyard and leaving it in your money market account earning interest is just not that much. I don’t know the ins and outs of your financial situation, but for someone in your shoes I’d usually suggest you redeploy some of that excess cash and put it to work for you. I’d suggest you consider increasing contributions to your 401(k) plan, opening and contributing to a Roth IRA, or opening and funding a diversified brokerage account. For simplicity’s sake, I’d probably lean towards increasing your 401(k) contributions. For 2014, you can contribute up to $17,500 per year (and if you’re age 50 or older, you can contribute up to $23,000 per year), and any additional contributions you make could be a nice boost to your long-term retirement savings. If you’re contributing to a Traditional 401(k) (not a Roth 401(k)), these additional contributions could also lower your 2014 tax bill, which makes increasing your contribution amount kind of a win-win. Two other things to consider, though: 1) Your 401(k) investment returns could provide you a much bigger “bang for your buck” than you would get in a cash account, but you could also see the value of your money go down in the short-term or during market downturns. 2) My guess is that your money market account balance will go down over time to help you sustain your current lifestyle if you decide to contribute more to your 401(k) going forward because your take-home pay will decrease to facilitate that change. I say that because I don’t want you to be surprised or concerned. By contributing more to your 401(k) going forward, you are essentially slowly and surely reducing your cash on hand and putting your excess cash to work. Just remember, if your money market account gets lower than you would like, you can adjust your 401(k) contributions back down to a level that will allow you to normally sustain your desired cash balance.  

Please let me know if you would like to discuss further.

2. Can you explain, in layman's terms, what supplemental income needs to be reported come tax season and how to do so? For example, I sell Thirty-One on the side and it's not a lot of money, so I'm curious if I even need to report it, and if so, how?

- Amanda                         

When it comes to miscellaneous supplemental income tax law implications in layman’s terms you’re asking a lot (just kidding), but I’m happy to try to translate. Your question is a great one and addresses a common misconception held by many taxpayers. Per the IRS, taxpayers “must also report other income such as: cash earned from side jobs, barter exchange for goods and services, awards, prizes, contest winning, and gambling proceeds…. It is a common misconception that if a taxpayer does not receive a form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.”

If you have income outside of basic things like your wages, salary, interest, and dividends, it really is best to talk with your CPA, and if you don’t have one, find one. That’s because supplemental income is tricky. I think you’ll agree that based on the IRS wording above, it’s pretty clear that supplemental income must be reported, but what is not always clear and most of the time cannot be put in layman’s terms is where to actually report the income. In some cases it might belong on Form 1040 itself, in some cases it might belong on Schedule C, in some cases in might belong on Schedule E, and in some cases, it might also need a Schedule SE (Self-Employment Tax) filled out, too. There could also be an opportunity to reduce the amount of your supplemental income you will be taxed on by specifically listing any expenses (such as travel expenses or postage expenses) you personally incurred by generating that supplemental income, but of course these expenses might belong on Schedule A, but then again, they could belong on Schedule C or Schedule E depending on how you actually generated the supplemental income. I’m about to answer your question, but for non-Thirty-One supplemental income earners I wanted to make two points: 1) See why the tax law really needs to be reformed and simplified? 2) If you have supplemental income, you probably need more than do-it-yourself tax software to make sure you get it right and report the supplemental income in the most tax-efficient (and legal) way possible.

So, I dug and dug for Thirty-One-specific tax guidance and was able to find buried on page 16 of their Consultant Guidebook some surprisingly helpful advice:

“Yes, you’re required to report your commissions and other earnings from your Thirty-One business as income in your tax filings each year. Your other earnings include your Overrides, free products, hostess and other business credits, etc. For tax purposes, you are “self-employed” and it’s important that you keep complete and accurate records of your business income and expenses.
There are some tax benefits for self-employed individuals that may allow you to deduct certain business expenses. We strongly recommend that you talk with your own tax advisor to learn how the tax laws apply to your Thirty-One business.
As a Consultant, you’re a self-employed, independent contractor of Thirty-One. You’re not an employee of Thirty-One and we won’t issue you a Form W-2.
The U.S. Internal Revenue Service (“IRS”) requires us to issue a Form 1099 to every Consultant who earns $600 or more during the previous calendar year. By January 31st of each year, we’ll issue you a Form 1099 for the previous calendar year. Your Form 1099 will include all of your earnings from your Thirty-One business, including your commissions and the other earnings described above.
You’ll have to report the income from your Thirty-One business on Schedule C of your federal income tax return. Because you are self-employed, you may be able to deduct certain business expenses like the use of your vehicle or home office. You can discuss this with your tax advisor and/or contact the IRS for more information at www.irs.gov or (800) 829-1040.
Also, if your state and/or city collect income tax, you may need to file income tax forms with them too.”


I hope this is what you were looking for. To recap in layman’s terms: you have to report the income, you are deemed to be self-employed, you are deemed to be an independent contractor, and Thirty-One will send you a 1099 by 1/31/15 for Tax Year 2014 to get you started. As always, I’m happy to help you specifically address your tax situation offline, but I really think you’re going to want the services of a paid tax preparer as well!


3. For the life of me, I do not understand the ad valorem tax. I've read a few government documents on it, but none of them are explicitly clear. Can you please explain for us new-to-Georgia folks? 

- Amanda                         

Sure, I’ll be happy to. Don’t you love it when people explain things in a way that’s so complicated no one can understand it?

On March 1, 2013, Georgia changed the way it taxes motor vehicles. For people who have cars that were purchased before March 1, 2013, nothing changed: you renew your tag right before your birthday and you get to pay an annual ad valorem tax (sometimes nicknamed the “birthday tax”) as part of that process. (An ad valorem tax is a tax based on value.) For people who have bought cars (or will buy cars) since March 1, 2013, the rules have changed: you no longer have to worry about paying an annual ad valorem tax when you renew your tag, but you do have to pay a title ad valorem tax all at once when you buy a new motor vehicle. The title ad valorem tax is calculated based on the fair market value of your new vehicle (less any trade-in value you may have gotten from your old car and less any discounts or rebates you may have received from the dealer) times 6.75%. I know the new title ad valorem tax has the words “ad valorem” in it just like the old tax, but try to ignore that and just think of the new tax as a sales tax of sorts. The new tax is essentially tax pain all at once as opposed to slow tax pain by a lash every time you have a birthday.

A couple of additional “nuggets:”
     - The title ad valorem tax also applies to purchases of used vehicles.
     - If you’re a Georgia resident and you buy your car out of state, you’ll still get to pay the Georgia title ad valorem tax even if you've already paid another state's tax.
     - If you transfer the title of a vehicle within your family, you will trigger a reduced title ad valorem tax.
     - The title ad valorem tax rate is scheduled to increase to 7% in 2015.


I hope that’s clear as mud. If it’s not, please let me know. Here are two other links that might help you: 1) a Georgia Department of Revenue Title Ad Valorem Tax Calculator and 2) a FAQs page about the new rules.

4. I have an opportunity to move to a state that I would prefer not to live in for a really good job opportunity. What should I be thinking about financially as I weigh the pros and cons? 

- Anonymous                    

Nice question, and one I’ve never been asked. Whatever you decide, congratulations on earning the opportunity to take the job!

If the job opportunity was something you were really excited about in a state you were really excited about, I don’t think I’d try to be a wet blanket on your job opportunity as long as it was financially lucrative. I believe there are more currencies in life than just money, such as time, happiness, and fulfillment, so I wouldn’t want financial implications to unnecessarily sway your decision. That being said, since the situation you are describing is "only" a really good job opportunity in a state that you are less than excited about, I can definitely see digging into the financial implications a little bit more.

I’d advise you to consider your new state tax rate versus your current state tax rate. I’d look into what your new property tax rates would be, and maybe even more importantly, how much a suitable home would cost you in your new state versus your current state. I’d look into potential cost of living differences in terms of utilities, transportation, and groceries. Once you factor in the cost of the physical move with these cost adjustments, versus any change you would experience if you took the job in terms of compensation and benefits (don’t forget benefits like 401(k) matching, paid time off, health insurance, etc.), I think you may be better able to gauge whether taking the job would be financially good for you or not.

If you’d like more specific assistance, I’d be happy to try to help you. I have also come across this nifty, little tool developed by the National Center for Policy Analysis that attempts to help you determine how much you will gain or lose by moving to another state, and I’d suggest you check it out. I’m not trying to dismiss your question in any way, but unless it really comes down to financially making it or financial ruin (which you should be able to figure out pretty quickly), I’d spend more energy on considering how your potential move could affect your family and friends, what amenities you might gain or lose, how stable your potential new employer is, and what your growth potential in your new role could be.


5. Do you recommend taxable bonds or municipal bonds for your clients?

-David                              

That’s a very good question and is a question that all investors should ask their financial advisors or brokers and CPAs. (Actually, financial advisors or brokers should be discussing this with their clients and their clients’ CPAs, but that’s a different story.)

As I respond to so many “general” questions, I must also respond to this one: it depends. Bond investors are typically looking for investments with high yields and less volatility than the stock market. They basically have two general bond types to choose from: taxable bonds and municipal bonds. Taxable bonds are typically issued by corporations and offer a higher interest rate, but an investor will have to pay federal and state taxes on their gains. Municipal bonds are typically issued by state and local governments and offer a lower interest rate, but an investor will not have to pay federal taxes on their gains. If the municipal bond is from the state or a locality in the state that the investor resides in, the investor may very well not have to pay any state taxes on their gains either!

So, in summary, I recommend both taxable bonds and municipal bonds to the clients I work with, and in some cases, a combination. If someone is in a 25% tax bracket, they’d much rather have a 5% municipal bond than a 6% taxable bond that would only yield 4.5% after taxes. If someone is in a 10% tax bracket, they’d much rather have a 6% taxable bond that would yield 5.4% after taxes than a 5% municipal bond. My recommendations are client-specific, and under the right circumstances, could even be bond-specific. The one other general comment I can throw your way is that in light of municipal bonds usually having lower interest rates than taxable bonds, municipal bonds rarely ever make sense inside a tax-deferred investment account such as a 401(k) or IRA. A 401(k) or IRA is already pretty much exempt from income taxes until you take a withdrawal or distribution, so the potential after-tax “savings” of municipal bonds would really be of little to no value in these types of accounts.


I hope that helps!


Thanks again for all of the questions. The Lightning Round is a lot of fun for me, but please always feel free to reach out to me with your financial questions year round!

-Tom

Retirement Cash Flow Strategies

Credit: anankkml

For most people, cash flows in retirement look different from cash flows while working. The difference is a transition that I have helped many clients through. Cash flow strategy is one of the most important parts of planning for retirement, but it can be complicated since cash flows frequently come from different sources, start at different ages, and carry varying tax implications. People who develop a good plan and stick to it can often add stability and peace of mind, take advantage of tax saving opportunities, and even generate more income in retirement. Let’s look at a few areas:

• Pension Annuity vs. Lump Sum – For retirees who get to choose a pension payment option, this can be one of the most important decisions they ever make. Actuarially speaking, there’s a good chance that your employer is thinking they are offering you the same amount of money whether you elect an annuity or the lump sum, but there are still things to consider. A lump sum offers a surge of money at retirement that can be more easily passed on to your heirs and better protect your purchasing power against inflation if it is properly invested, but a majority of clients I work with seem to find comfort in choosing the annuity option. In most cases, the monthly annuity amount will remain the same until the day you die. This may not help you against inflation, but if you live long enough, it could eventually mean more total money for you. In the meantime, an annuity feels like a paycheck, which is what retirees are used to, and the mental comfort that brings is the main reason I am usually a supporter of a pension annuity election. I also advise most clients to select a “joint and survivor option” if it is available so that a surviving spouse won’t lose their loved one and the benefits of their loved one’s annuity at the same time. This tactic usually costs the spouse whose pension it is a little bit of cash each check, but it can be a tremendous comfort to the other spouse.
• Required Minimum Distribution Planning – I’ve discussed this before, but age 70 ½ is an important half-birthday! I won’t take you back through all of the details we covered in my post “Required Minimum Distributions,” but I will say that you should factor this into your retirement planning. If things are a little tight on you before you have to start these distributions, or if the distributions are going to put you in a higher tax bracket once they begin, it may make sense to start prudently withdrawing from your retirement accounts before 70 ½. This could save you tax dollars and allow you a steadier lifestyle throughout retirement as opposed to cutting it close in your 60s and rolling in cash in your 70s. It’s just a thought, but one you should consider if you’re over 59 ½ (there could be penalties if you withdraw from retirement accounts before 59 ½).
• Social Security Strategy – Many people, including me, are concerned about the long-term solvency of the program as we know it going forward, but there are some Social Security strategies you should consider if your retirement cash flows are doing just fine when you turn 62. If you decide to claim Social Security retirement benefits at age 62 (the earliest applicable age), you are deemed to be collecting benefits “early,” and will only receive around 75% of the benefit you would receive at your “full retirement age.” (Currently, full retirement age is usually between age 66 and 67 for most people, but take a look at this chart to find your specific full retirement age.) If you wait until your full retirement age, you can receive 100% of your benefit, but if your retirement cash flow is still doing just fine at your full retirement age, it might be worth waiting until age 70, when you could receive around 132% of your benefit! That’s around 8% growth per year from age 66 to age 70, and that’s not a bad investment return if you ask me! Putting off claiming Social Security could provide you with more money in retirement if you live long enough, but at the same time, you could be shooting yourself in the foot if you end up passing away relatively young. I would suggest you consider your health and family history, and then consider how much Social Security income at age 62 would help before you decide to delay filing. If you do decide to delay, you can always start before your full retirement age or age 70 if you need to with a partially higher amount of benefits, but it’s probably not worth having beanie weenies in your 60s so you can have filet mignon in your 70s.

I hope you’re beginning to see that if you consider your spending and saving now versus later, the importance of starting off strong, your humble abode(s), your health insurance, and your retirement cash flow strategies, that there are many things you can do to put yourself in the position of having a chance to retire early. That being said, I’ve met plenty of people who could retire early but don’t and plenty of people who did retire early and wish they hadn’t. Some even went back to work! The How to Retire Early Series will conclude next week with a look at why you might not want to retire early even if you followed the advice of my previous posts and could. I hope you’ll check it out.

-Tom

Your Humble Abode(s)

Credit: nonicknamephoto

I want you to think about a few things with me. Think about how much the property taxes are on your home. Think about how much your homeowner’s insurance costs. Think about your monthly water bill, gas bill, and electric bill. If you pay someone to mow your lawn, think about that. Do you have an exterminator or a cleaning person? What about the annual fee for your alarm system monitoring? Do you have HOA fees or neighborhood dues? Do you need a pencil and paper yet to add all of that up? Don’t forget there are also those periodic home maintenance surprises that come up like replacing an air conditioning unit, hot water heater, dishwasher, or roof. The point I’m trying to make is that owning and maintaining real estate is expensive.

If you’re a homeowner you already knew that, but have you ever thought about the significant portion of your living expenses that is tied to the upkeep of your residence? Even when not considering any outstanding debt you might have on your house, having your own place requires a lot of cash flow and chews up a lot of assets. It’s important to realize this when you are working, but it is absolutely critical to understand this when you are planning for retirement.

In order to make it in retirement, you have to live off of any income you have coming in (like pensions or Social Security) plus small portions of your investment assets. Some people can live solely off of their retirement income streams, but most people slowly draw down their investment assets over time to supplement their lifestyle in retirement. The thing is, you don’t want to outlive your investment assets, so you’ve got to have a plan to make your nest egg last. A big part of making your investment assets last in retirement is by reducing your fixed expenses, and as we just discussed, a big part of your fixed expenses is often tied to your humble abode(s).

Whether you are planning for retirement, nearing retirement, or finding that you're eating up your nest egg too fast in retirement, here are some tips that might help:

• Pay off your mortgage(s) before you retire. This will likely reduce your fixed expenses significantly and help you make ends meet in retirement.
• Do major capital improvements to your real estate before you retire. If you’re going to redecorate, finish a basement, or get a new refrigerator, do it while your working cash flow is still coming in. It will make you feel better and give you peace of mind. Think of it as investing in staying put.
• Don’t keep multiple residences if you find it difficult financially or physically. Dusting one house stinks. Dusting two houses is awful! Pick one. Think of all of the property taxes, insurance premiums, utility costs, and lower back pain you will save!
• Get out of town. Sure, stay near the kids, but move to the suburbs or the country. Homes are cheaper, property taxes are lower, and the cost of living is likely lower, too. You’ll feel like you have more purchasing power, and you can add the difference between your urban home selling price and suburban home purchase price to your nest egg to strengthen your overall financial position.
• Consider state taxes on retirees. It’s probably not worth moving states just to save on state taxes, but if you’re on the border or a good portion of your family is in a different state, why not consider it? Take a look at this interactive map, and you’ll see that all states’ taxation is not created equal!
• Finally, think about downsizing. All I’m saying is that if you no longer need five bedrooms, why have five bedrooms? If all of the kids come at once, you can help fund their stays in a nice hotel, and you’ll probably still save money versus maintaining your own five-bedroom “bed and breakfast.” If you do decide to downsize, be careful and make sure you don’t more elegantly furnish a smaller house as opposed to actually downsizing and leaving yourself with some extra proceeds to put with your nest egg.

 

Personally, I plan to have a place on the beach when I retire. If my wife and I can swing it, we’d probably like to keep a place near my parents and her parents and/or near our eventual kids and their families. If we can’t swing it, we’ll just visit a lot because it is often a lot cheaper to pay for a hotel or even rent a place for a few weeks than it is to maintain an extra humble abode!

 

The How to Retire Early Series will continue next time with a look at an important piece of everyone’s retirement puzzle: health insurance.

 

-Tom

What You Should Do If You Owed Taxes

Credit: Stuart Miles

Last week I posted some suggestions about what you should do with your tax refund. A majority of Americans do receive tax refunds, but what if you’re not expecting a refund? What if you actually owe more taxes to dear Uncle Sam or your state’s department of revenue? I want to help you, too!

The first thing you need to do is pay up. It stinks, but don’t add penalties and interest to your pain. Realize that if you promptly settle up by April 15th, you really haven’t done anything wrong. On a brighter note, at least you can have the satisfaction of knowing that you didn’t let those people in Washington, D.C., hold any more of your money than they should have. If you invested some of your money last year and now owe taxes, you may have even come out a tiny bit ahead than if you had gone ahead and withheld more taxes or made larger estimated payments!

The second thing you need to do is figure out what happened. Do you always owe more taxes? If so, you may want to consider changing your tax withholdings or making larger estimated payments. If this is the first year you owed more taxes, what changed? Did you make more money (larger income base, higher tax brackets)? Did your stocks do unusually well (more dividends, realized gains, or capital gain distributions)? Were you healthier? Did you refinance or pay off a mortgage (we refinanced in 2013 and definitely noticed a difference on our mortgage interest deduction!)? Did you give less to charity? Any of these changes can result in fewer itemized deductions. Did you somehow stumble into Alternative Minimum Tax? It’s also worth mentioning that if you owed Uncle Sam, you will probably need to pay either 90% of your expected tax for 2014 or 110% of the tax shown on your 2013 return (whichever is smaller) to avoid an estimated tax penalty next year. Consider meeting with your CPA to take a good hard look at what happened in 2013 and what is likely going to happen in 2014. You have time to adjust things for 2014 now, but you won’t in April 2015!

There are tons of things you could do to make sure you get a refund, including beginning to make estimated tax payments (or making larger estimated payments), increasing contributions to your Traditional 401(k) (so that you have less taxable income), or simply adjusting your automatic tax withholdings. Since people most commonly owe more taxes because they have gotten a raise or an itemized deduction decreased (like medical expenses or mortgage interest), it is important to periodically think about adjusting your withholdings proactively.

To adjust your withholdings, go to your employer’s accounting or human resources department and tell them you’d like to adjust your withholdings. They will likely give you Form W-4 and your state’s equivalent to the W-4. The form is pretty simple and people most frequently elect to have more taxes withheld from their checks if they’re married by putting a “0” on Line C (because they have a working spouse, they work two jobs, or earn a lot of income), or if they’re single, by requesting to have more withheld from each paycheck on Line 6. If you need more assistance, the IRS has put together this little withholding calculator app to try and assist taxpayers. As always, I’m happy to help anyone with questions, but this is another example of where tax preparation software may not be all you need to help with your taxes and tax planning!

I prefer to get a small refund, and I think most people feel the same way. It just feels better and makes things easier. If you find that you owe more than you paid in this year or got a refund that was so small you could barely purchase breakfast, as painful as it may be, I’d suggest you go ahead and start thinking about your taxes for 2014.

-Tom

Required Minimum Distributions

Credit: Stuart Miles

In my line of work, I get to surprise people all of the time. Sometimes my advice or the conclusion of my financial analysis evokes an elated and relieved response. Sometimes it does not, but instead confirms a painful reality or brings about sadness and temporary distress (not to worry: I’m happy to develop a new plan or strategy for my clients who find themselves in temporary distress).

One of the most frequent surprises I get to deliver is the news that in the year you become 70 ½ years of age, if you have certain retirement investment accounts like a 401(k), Traditional IRA, or qualified (tax-deferred) annuity, you are required to start taking minimum distributions, whether you want to or not! Technically, you could choose not to take your minimum distributions and agree to pay one of the most onerous IRS penalties of 50% of the amount you should have withdrawn, but since I’ve never had any takers on that strategy, let’s push forward assuming you will take your required minimum distributions (RMDs).

The amount that has to be distributed is based on IRS life expectancy tables and the age of your spouse (or designated beneficiary). It’s a relatively simple multiplication problem consisting of your account’s previous year-end value and your applicable life expectancy factor, but there are so many tables and beneficiary circumstances to consider that I’d suggest you let your financial advisor or CPA do it for you. There are some brokerage firms and custodians that will actually calculate your RMD for you on your brokerage statements when they become required, but please note that brokerage firm calculations will only be relative to the accounts you have with them. If you have multiple accounts that require RMDs, you’ll need to be careful, and make sure you take enough in total and from each account to avoid the before-mentioned “bear” of a tax penalty.

This required distribution can be a good surprise. If you’re not already withdrawing from your retirement account, this distribution can feel like a little extra income that could be used for anything from family trips to home renovations. I should mention, though, that your distribution does not have to be spent! You have to withdraw it and you have to pay taxes on your withdrawal, but you’re welcome to top off your savings account or reinvest the proceeds in your after-tax brokerage account.

This required distribution can be a bad surprise if you didn’t know you had to do it (or forget to do it), but even if you’re on top of things, it still stinks because the tax man cometh. Uncle Sam wants to wish you a happy birthday from age 70 ½ on, and to commemorate the occasion, he’s going to want ordinary income taxes from your distribution amount to help fill his empty coffers.

If you’ve read this post, there is no reason to let RMDs surprise you. If you are 70 ½ or older, please double check with your financial advisor and CPA to make sure you are taking your RMDs. If you’re almost 70 ½, I’d urge you to meet with your financial advisor and make sure you have a game plan in place for your RMDs as there is often an opportunity for meaningful and significant tax and cash flow planning. If you’re nowhere near 70 ½, I bet you can think of someone you care about who is and would appreciate you looking out for them.

-Tom

Keeping It in the Family

Credit: photostock

A common goal of many of the clients I serve is keeping “it” in the family. No, that’s not a south Alabama reference; I’m talking about keeping heirlooms, assets, and wealth inside the family clan. There are many financial aspects that families need to consider, and some may require complex, technical, and creative solutions to get the intended job done. My intent in this post is to scratch the surface and bring a few common issues I’ve seen to your attention.

Annual exclusion gifting- In 2014, you can give $14,000 or less to another individual, and it will be exempt from gift tax implications. This is a great way to keep assets in the family, as the transfer is exempt from gift taxes and can reduce the assets of older family members that could potentially make up an otherwise taxable estate. However, this practice can also create problems if the recipients start feeling entitled to the gifting or become dependent on it and the donor can’t bring themselves to cut off the giving if their own financial situation becomes less favorable.

Unintended Will Consequences- Leaving things to family members by will is also a great and somewhat obvious way to keep things in the family, but there can still be problems. What if you leave your residence to your two kids 50/50 and one wants to sell it and one wants to keep it? Your bequest just became a family feud! What if your will leaves all of your assets to your second wife and her will leaves all of her assets to her kids from her first marriage? If you have kids from your first marriage and predecease your second wife, your kids could be totally left out if the proper estate planning is not in place! What if you leave all of your stuff to your daughter and she couldn’t care less about your beloved coin collection that your brother would love to have? Without specifically bequeathing personal effects, the possessions that some people in your family view as treasures could be treated as trash, literally!

Forgotten Beneficiary Designations- What if you forgot to change the beneficiary designation of your company’s life insurance policy to your second husband after you remarried and the proverbial bread truck comes by? Forget you look like Wile E. Coyote - your second husband would be left without an asset he could have really benefited from while your regrettable ex-husband would be the recipient of a most pleasant and unexpected surprise! Remember, beneficiary designations trump your will!

The “Tax Bite”- There are numerous strategies that you can employ right before the end of your life (and even at death) to reduce Uncle Sam’s potential income and estate tax bites out of your estate. Less tax means more money to your charities, causes, and heirs. Uncle Sam’s share can be sizable, so tax planning should always be considered if you want to keep as much in the family as you can.

Closely Held Family Business Succession- If there is a closely held family business involved in your affairs, there definitely needs to be a clear succession plan in place to ensure the business entity stays in your family or at least compensates your family. Far too often when a business’s founder or leader passes away, a family disagreement between heirs with different objectives, expectations of the business, and degrees of interest or experience with the business comes to light. If the business just automatically goes to the spouse, that person could be forced into a position they don’t want to be in, or frankly, aren’t good at. Think of how painful it would be for the former business owner looking down to watch the value he or she painfully built up brick by brick fall apart, fail, or become a relationship strain for their family.

Annual exclusion gifting, careful will considerations, proper titling and beneficiary designations, advantageous tax planning, and thoughtful family business succession planning can help keep it in the family. Many people don’t want their heirs to know too much, and I totally get that, but I’d also counter that you don’t want your heirs to know too little either. I’ve heard it said that people spend forty years accumulating assets, twenty years trying to preserve assets, and about thirty minutes figuring out how to distribute their assets. If you want to keep family peace, leave the legacy you intend, and keep as much of your wealth in the family as possible, I’d advise getting together with your financial advisor, estate attorney, and accountant to take a look.

-Tom

Know When to Hold ’Em

Credit: stockimages

One of the most important questions I try to help people answer is when they should sell a particular stock. It’s a valid question, and if someone has a large number of shares of a single stock or a significant portion of their wealth is directly tied to one company’s stock performance, it can be one of the most important questions I ever help them answer.

There are many methods available in determining when the “perfect” time to sell a particular stock is: you could rely on your gut instinct, you could go with what everyone else is saying about the stock, you could try to read into the latest analyst estimates or quarterly earnings release, or you could take my advice and rely on Kenny Rogers. You probably know by now that I am big on using analogies to help explain complex financial issues in a way that can actually be understood, and helping someone decide when to sell a stock is no exception. I can offer fancy, technical analysis all day long, or I can quote a few lines from Kenny Rogers’ “The Gambler:”

You got to know when to hold ‘em,
Know when to fold ’em,
Know when to walk away
And know when to run
 

You should probably consider holding your specific stock if you do not have a specific cash flow need for the stock proceeds, you are debt-free, and most importantly, you have already reached financial independence with prudently diversified assets. However, by shrewdly taking some of the gain off the table when your stock has made some money, and by avoiding the temptation to always wait for one more dollar in stock price, you may avoid having to fold (sell) your stock when it is down at an inopportune time.

You should probably walk away from your specific stock if you know your stock has generated enough gain to provide for a specific cash flow need (such as paying for your child’s college), has generated enough gain for you to reach financial independence (assuming you sell your stock and smartly reinvest the proceeds in a prudently diversified strategy), or if you believe that the stock’s price will be flat or lower in the near future. It’s true that you might be better off if you had held your stock a little longer and its price continued to rise, and you should always consider the tax implications of selling you stock, but there is something to be said for walking away with a bird in hand.

If your specific stock has generated more than enough gain to provide for a specific cash flow need or allow you to reach financial independence, what are you waiting for? Run! I always keep in mind a comment a client shared with me once: “Little pigs get fat. Hogs get slaughtered.”

So what should you do with your individual stock holdings? It still depends. Please know that I’m happy to help you determine what you should consider doing with your stock and/or the proceeds from your stock. I just caution you not to count your money when you’re still sitting at the table. There will be time enough for counting when the dealing is done!

-Tom

One Awesome Baby Gift

Credit: Marcus

More and more of my friends are having babies. Some are on number two (or even three)! It certainly is exciting, and one of these days I hope to be a dad myself, but all of these baby pictures, registries, and showers are something else. My wife and I usually try to give an awesome toy or something we know the proud parents have said they really need, but if I were Bill Gates, there is one awesome baby gift I really wish we could give. It’s not financially viable for us to give (especially since the storks have been so busy), but perhaps I can give you a few more details about one of the most awesome gifts you can give to a newborn and their parents: a 529 Plan.

A 529 plan is a college savings plan designed to help address future college costs including tuition, books, and other education-related expenses at most public (and some private) institutions of higher learning in the United States. 529 plans, also known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions, and come with many favorable tax benefits authorized by Section 529 of the Internal Revenue Code. Essentially, all of the money contributed, as well as any money earned while invested in a 529 plan, is allowed to be distributed free of federal income tax (and most state income tax) as long as it is withdrawn for qualified educational expenses. That means by setting up and contributing to a 529 Plan for a new baby, you are helping the baby (and his or her parents) pay for college and giving the stock market around eighteen years to have a chance to generate some significant, tax-free appreciation.

There are lots of technical questions to consider, like whether to go with a pre-paid tuition 529 plan or a college savings 529 plan (I’d go with the college savings plan because it gives the beneficiary more flexibility to choose more colleges in different states). You’ll need to select an initial investment allocation, but I usually propose an age-based portfolio that automatically addresses investment allocation going forward and reduces more-aggressive stock exposure as the beneficiary gets closer to college age. There are also limits on how much you can give a new baby in a 529 plan, but unless you are a pretty financially blessed parent or grandparent, these probably won’t come into play. Still, be sure to talk to your CPA or financial advisor before you proceed.

My point is that you really can give the gift of a 529 Plan because many plans and many states have relatively low minimum contributions ($25 or less in many cases) to set up a 529 Plan. Besides, even without the small initial contribution gift, by simply informing new parents about the huge potential tax benefits of a 529 Plan and giving them a mechanism to go ahead and start saving for college sooner rather than later, you are already doing a whole lot! Cute, little shoes are great, onesies are adorable, and dangling crib mobiles can be amusing, but I really am sold on the potential benefits of 529 Plans. Shoes, outfits, and toys are necessary and address a definite, immediate need, but helping a child (and their parents) graduate from college with less debt, or even no debt, is a pretty swell gift, too.

My wife and I haven’t yet given a 529 Plan to any of our friends or family members’ newborns, but we’ve told people about them. If you can give a little one you care about a 529 Plan, I encourage you to do so, but even if you don’t, you can give two baby gifts: a super-cute one and this very valuable information.

-Tom

Wag the Dog

Credit: Maggie Smith

Wag the Dog is a 1997 comedy featuring Robert De Niro and Dustin Hoffman in which a “spin-doctor” publicist and a Hollywood producer work together to cover up a presidential scandal. I won’t ruin the movie for you if you haven’t seen it, but the gist of it is that the publicist and producer help create a fake war against Albania to take the American people's attention away from the inappropriate actions of the president. While it’s quite a humorous movie (and I must confess that it makes me wonder how often “significant” events have been cooked up in the past to give our leaders a little breathing room), allowing something to divert one’s attention away from what it should be on (letting something “wag the dog”) isn’t funny at all.

As I’ve said before, it’s my job to try to help people and to make strategic financial suggestions to the clients I serve, but I never tell people what to do. Sadly, in spite of my best efforts and persistent explanations, I’ve had several experiences as a CPA and a financial planner where the clients I serve have been unable to focus on their overall financial situation because of their obsession with a specific portion of their financial situation - usually this has to do with their taxes. That’s why I want to focus on a few tax-related issues that I have seen “wag” my clients from doing what I truly believe is in their best interest.

• Capital Gains
• I’m convinced there is nothing that gets CPAs and investment advisors yelled at more than capital gains. If clients have capital gains, they are usually mad because they owe taxes, but if clients have capital losses, they are usually mad because they have lost money. Either way, in terms of recognizing capital gains, selling out of a stock position that has gone up a considerable amount often makes sense because you are taking your gain off the table and giving yourself the opportunity to buy a different stock position that has more potential for future, additional growth. Yes, you’ll have to pay taxes on the amount the stock position went up or appreciated, but isn’t that better than the alternatives? If you wait for the stock price to go back down before you sell, you probably won’t owe any taxes, but you also won’t have any gain, and if you’re not willing to sell the stock during your lifetime, what good is the stock to you in the first place (unless you plan on charitably gifting it or specifically bequeathing it)? No matter the stock or investment, there comes a time when it makes sense to sell your position, take your gain, and run. Please don’t let capital gain taxes solely wag you from considering taking that gain.
• Income Timing
• Some people have jobs with steady incomes, and their tax picture is about the same every year. Some people have jobs with fluctuating incomes; some years they will be in lower tax brackets, and some years they will be in higher tax brackets. Whether still actively working or retired, by taking a multiple-year view towards your income stream, you can attempt to manage unusual “bursts” of income, such as stock options, lump sum pension payments, deferred compensation payouts, IRA distributions, and annuity distributions, in a tax-efficient manner. The problem is that some people want all of their money at once and give Uncle Sam a massive portion of their income, as opposed to cumulatively giving the government less if income is more evenly spread out. There are also people who want to pay as little in taxes as possible every year and keep putting off stock option exercises, distributions, and payouts until they back themselves into a year when they have no choice but to give Uncle Sam a massive portion of their income. As usual, there is often a sweet spot in the middle where by prudently spreading out your income you can have long-term tax savings. Please don’t let a complete disregard for income tax implications or a blind focus on minimizing current year income taxes wag you from potential tax savings.
• Having a CPA
• It concerns me how many people choose not to have a CPA prepare their taxes. I know tax preparation fees can be high, but having someone who knows the latest in federal and state tax laws, gift tax laws, and estate tax laws is invaluable. Having the ability to point your finger towards someone else should there be an issue and the IRS comes calling is nice, too! If you don’t have a CPA, I would strongly encourage you to consider finding one unless you know all about the Georgia Retirement Income Exclusion, the changing AGI threshold for itemized medical deductions, and how to plan on utilizing the portability of your now inflation-adjusted estate tax exemption. I know, TurboTax and its brothers are great, but accidentally misusing tax software does not excuse you from any errors or penalties that may be related to those mistakes. As the Tax Court said in a case back in 2000, “Tax preparation software is only as good as the information one inputs into it.” Please don’t let the fees of having a CPA prepare your taxes (which are likely tax deductible) wag you from having your taxes done as correctly and as efficiently as possible.   

 

Taxes are the main “dog-wagger” I see, but there are others. Trying to save too much money too fast by shortchanging your quality of life is letting your savings goal wag the dog. Trying to pay down debt too fast by jeopardizing your emergency fund is letting your debt reduction plan wag the dog. Trying to max out your 401(k) contributions by cutting your ability to comfortably pay monthly expenses is letting your investing strategy wag the dog. I could go on and on.

 

Get some popcorn, watch the movie, and try to remember that just as a dog should wag its tail, your overall financial situation should drive your specific financial decision making.   

 

-Tom

I Wanna Be a Billionaire

Credit: -Marcus-

Earlier this week, I spent a fair amount of time reading a very technical, highbrow article about many things someone could do with their wealth to build an enduring legacy. The article was very useful, and I even learned some new financial planning techniques and strategies I may mention to some of the clients I serve, but in the words of Ron Burgundy (Anchorman reference), it reeked of “leather-bound books and rich mahogany.”

I want to be clear - there is nothing wrong with a good leather-bound book or a rich mahogany bookshelf, but that article was simply not for everyone. I’d go so far as to say it was written for only a very small group of people. Now I always tell all of my clients the truth and try to give all of my clients the same advice I would give my mother if she were in their shoes, but the thing is, the clients I serve are very, very different from one another. Some have cufflinks, some have holey blue jeans. Some like beef wellington, some like a hamburger steak (I’d take the hamburger steak, myself!). There’s nothing wrong with being different, and quite frankly, I enjoy the daily challenge of being a financial planning “chameleon” as I tweak my approach, tactics, and explanations to try to provide the best advice I can in a manner that each, unique client can relate to and understand.

I tell you all this so you can hopefully appreciate my motivation behind today’s post. Today, I offer some financial thoughts and commentary for you to think about as you live your life and consider what type of legacy you want to build, and one day, leave behind. I’m attempting the same thing as the author of the aforementioned highbrow article, but I don’t think overly-technical speech and a rich mahogany vocabulary are always necessary when trying to help people financially. Here goes nothing, but let’s see what I can do with a slightly “PG-13ed” excerpt of Travie McCoy and Bruno Mars’ “Billionaire,” a reggae, pop rap song about what McCoy would do if he had a billion dollars. The song lyrics are italicized and green; my commentary is in parentheses and black.

I wanna be a billionaire so freaking bad
(You and me both!)
Buy all of the things I never had
(There’s nothing wrong with prudently spending some of your hard-earned money. You need to save, you need to pay down debt, and you need to invest, but it’s important to remember that when your time comes, you can’t take your money with you!)
Uh, I wanna be on the cover of Forbes magazine
(It’s true, with personal or financial success there often comes fame and public attention, so you need to be careful. Even if you don’t quite make the cover of Forbes, it’s probably a good idea to have a substantial umbrella policy like we discussed in "Surviving Mayhem," or one with liability coverage close to your total net worth.)
Smiling next to Oprah and the Queen
(As I’ve gotten older, I realize more and more that there is sadly some truth to the phrase, “It’s not what you know but who you know.” If that is indeed the case in this cruel world, at least try to leverage your contacts and relationships to do good and make a difference!)
Oh every time I close my eyes
I see my name in shining lights yeah
A different city every night alright
I swear the world better prepare
For when I'm a billionaire
(The world better prepare and so should you! Planning in advance and examining the pros and cons of a life or financial decision before you make it is absolutely crucial. You don’t want to start a business and then worry about the wording in the partnership agreement, you don’t want to begin thinking about saving up money to send your kid to college when they’re already a senior in high school, and you don’t want to weigh the impact of choosing an annuity pension versus taking a lump sum at retirement for the very first time on your last day on the job!)
Yeah I would have a show like Oprah
I would be the host of everyday Christmas
Give Travie your wish list
(You can currently give someone up to $14,000 per year without their being any gift tax consequences.)
I'd probably pull an Angelina and Brad Pitt
And adopt a bunch of babies that ain't never had stuff
(Adopting is a wonderful thing to do. If you want to help, but you’re not in a position to adopt, there are many, very good charities you can assist with your time or resources that benefit children in need.)
Give away a few Mercedes like 'Here lady have this'
(Please talk to your financial advisor, insurance agent, and family BEFORE you give away a Mercedes!)
And last but not least grant somebody their last wish
(Contributions to the Make-A-Wish Foundation are tax-deductible…)
…I'd probably visit where Katrina hit
And do a lot more than FEMA did…
(Once again, there are numerous charitable opportunities where you can make a difference. Oftentimes in the case of a major disaster, you can specifically direct your contributions with many national and international charities.)
…Toss a couple million in the air just for the heck of it
(Please don’t.)
But keep the fives, twenties, tens and bens completely separate
(It is critical that any money of substance you have accumulated be diversified and secured. Investments need to be properly allocated, too much cash in one bank account isn’t as secure as it could be and the interest isn’t going to keep up with inflation anyway, and having cash stuck under the mattress can be a huge security risk (theft, fire, etc.))
And yeah I'll be in a whole new tax bracket
(You got that right! The new top federal tax rate is 39.6%. Add in state taxes, payroll taxes, and the Medicare surcharge, and your overall tax rate is likely getting on up there. It’s always a good time for tax planning with your CPA or financial advisor.)
We in recession but let me take a crack at it
I'll probably take whatever's left and just split it up
So everybody that I love can have a couple bucks
(It’s important to have an up-to-date estate plan in place. The current estate exemption amount is $5.25 million per person, so many people will not face estate taxes, but with as many tax laws that have changed in recent years, you need to make sure your money is still going where you want it to go!)
And not a single tummy around me would know what hungry was
Eating good, sleeping soundly
(It is more blessed to give than to receive.)
I know we all have a similar dream
Go in your pocket, pull out your wallet
And put it in the air and sing…

We can’t all be billionaires, but it is fun (and important) to think about what we can do with what we have. I’ve got a meeting later this week with a couple, and we are going over their estate plan to do just that. Perhaps, I’d better split the difference and go with something between rich mahogany and reggae lyrics. Either way, if you feel like your life and your purpose are bigger than just you, I encourage you to think about what fingerprints you’re leaving behind. Please keep in mind that your actions and your finances can be powerful tools in leaving a legacy that you can be proud of.

-Tom