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Qualified Charitable Distributions for 2016

300px-IRS.svg_Individuals needing to take their required minimum distributions (RMD) for 2016 may consider having all or part of their RMD distributed as a Qualified Charitable Contribution (QCD).

In order to qualify, the following rules must be met.

  1. The individual taking the QCD must be age 70 ½.
  2. The maximum allowed QCD is $100,000 per individual, annually.
  3. The QCD must come from an IRA. QCDs from 401(k)s, 403(b)s, 457(b)s, SEPs, SIMPLEs are not permitted. An individual may roll over an amount to their IRA and then made the QCD.
  4. The QCD is counted toward the individual’s RMD for the tax year. If the RMD was already taken, the QCD cannot be retroactively made.
  5. The QCD must be made directly to the charitable organization.
  6. Generally, the charity must be a public charity.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 made allowing QCDs from IRAs permanent. The tax benefit from this distribution is that the individual is not allowed to take a charitable deduction for the gift to the charity; however, the distribution is not taxed as income to the individual.

Dependents and Exemptions

A young child

When filling out your tax return this year, you may have questions about dependents – such as who can be claimed on your return.  Claiming a dependent can have a significant impact on your return, including increasing exemptions and possibly increasing certain credits like the Earned Income Credit and various others.

The IRS recently published Tax Tip 2016-08, which lists ten facts about dependents and exemptions.  Below is the list of facts, along with some additional information that I’ve included (my comments are in italics):

Exemptions and Dependents: TopTen Tax Facts

Most people can claim an exemption on their tax return. It can lower your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.

  1. E-file Your Tax Return.  Easy does it! Use IRS E-file to file a complete and accurate tax return. The software will help you determine the number of exemptions that you can claim. E-file options include free Volunteer AssistanceIRS Free File, commercial software and professional assistance.
  2. Exemptions Cut Income.  There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $4,000 for each exemption you claim on your 2015 tax return. (So a family of four can claim exemptions of up to $16,000!)
  3. Personal Exemptions.  You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:
    • Had no gross income,
    • Is not filing a tax return, and
    • Was not the dependent of another taxpayer.
  4. Exemptions for Dependents.  You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Get Publication 501 on Just click on the Forms & Pubs tab on the home page.Essentially, the dependent must either be a qualifying child or a qualifying relative. To be a qualifying child, the following tests must be met:
    • The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
    • The child must be (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or (c) any age if permanently and totally disabled.
    • The child must have lived with you for more than half of the year. There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children.
    • The child must not have provided more than half of his or her own support for the year.
    • The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid).

    If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. See Qualifying Child of More Than One Person to find out which person is the person entitled to claim the child as a qualifying child.

    To be a qualifying relative, the following tests must be met:

    • The person can’t be your qualifying child or the qualifying child of any other taxpayer.
    • The person either (a) must be related to you in one of the ways listed under Relatives who don’t have to live with you, or (b) must live with you all year as a member of your household (and your relationship must not violate local law). There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children.
    • The person’s gross income for the year must be less than $4,000. There is an exception if the person is disabled and has income from a sheltered workshop.
    • You must provide more than half of the person’s total support for the year. There are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped children.

    See Publication 501 for more details on dependents if you have additional questions.

  5. Report Health Care Coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:

    Visit for more on these rules.

  6. Some People Don’t Qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
  7. Dependents May Have to File.  A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like total income, whether they are married and if they owe certain taxes.
  8. No Exemption on Dependent’s Return.  If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person as your dependent.
  9. Exemption Phase-Out.  The $4,000 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income. See Publication 501 for details.
  10. Try the IRS Online Tool.  Use the Interactive Tax Assistant tool on to see if a person qualifies as your dependent.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on

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What to do with an extra 1,000 dollars

One Thousand Dollars!

One Thousand Dollars! (Photo credit: The Consumerist)

I occasionally get this question – especially around the time of tax refunds.  When someone comes up with an extra $1,000, they often want to know how to best use that money wisely to help out their overall financial condition.

Of course this question has different answers for different situations.  I’ll run through several different sets of conditions that a person might find him or herself in, and some suggestions for how you might use an extra $1,000 to best improve your financial standing.  (It’s important to note that you don’t have to have an extra $1,000 lying around to use this advice – you could have an extra ten or twenty or fifty bucks a week and put it to work with the same principles.)  The point is to find money that isn’t being spent on something critical, and put it to work for you!  Even small steps amount to wonders.


If you have consumer debt, including credit card debt, auto loans, student loans and the like, it makes the most sense to use this money to bring down your overall debt balance or eliminate it if you can.

If the interest rate on your debt is greater than about 3% or 4%, you aren’t likely to find a better way to invest an extra $1,000 than to eliminate some of your interest costs.  This is because debt is a negative investment – when you have debt that carries an interest rate of 8%, year over year while the debt balance is there, you are “earning” a –8% return on that money.

Some folks recommend eliminating all debt, but that’s a bit impractical in today’s world.  Low-cost mortgage debt and auto loans can be good uses of leverage – especially mortgage debt at the rates we’ve seen of late.  I suggest that you focus on the highest rate consumer debt first and foremost, eliminating this drag on your financial state.  Once you’ve eliminated every debt except for mortgage debt, you can move on to other pursuits.  Eliminating consumer debt at high interest rates is the best move you can make to  improve your financial self.

Emergency Fund

An emergency fund is an amount of money set aside that can be used to cover all of the unexpected expenses that come up and surprise you: new tires for the car, roof replacement, or medical expenses not covered by insurance, for example.  The other thing that an emergency fund is for is to give you some “cushion” if you find yourself unemployed for an extended period of time.  It’s for this reason that an emergency fund is typically referred to as a certain number of months’ worth of expenses – such as 3-6 months’ worth of expenses.  You should have an emergency fund of an amount that would provide for your living expenses for several months should you be unexpectedly laid off.

If you don’t have an emergency fund, or if your emergency fund is smaller than you should have set aside, this is another great place to put an extra $1,000.  Typically an emergency fund is in a place that’s a bit difficult to get at – such as a bank savings account without debit card or ATM access.  This way you’re not tempted to invade this money for non-emergency purposes.  Sometimes folks use a Roth IRA as a dual-purpose account until they can establish separate accounts for retirement and emergency funds.

A Roth IRA could be used as your emergency fund, since you can withdraw your contributions to your Roth IRA at any time for any purpose without tax or penalty.  I don’t recommend this option for long-term use, because if you have to get at the funds for an emergency purpose and you’re not able to replace them in the account within 60 days, you’ll lose the Roth treatment of those contributions forever.  You can always put more into the Roth IRA at a later time, but once you’ve got the money in there, you shouldn’t take it out before retirement without a very, very good reason.


The most important tool for achieving financial success is knowledge.  For this reason, I suggest that you use some of your new-found riches to improve your financial knowledge.  There are many good books out there that will help you to better understand your finances and how you can improve things.

I wouldn’t suggest spending an extra $1,000 totally on education – maybe as much as $50 or $100 for several good books.  This will help you to make good decisions with your remaining windfall.

Retirement Savings

If you haven’t maxed out all of your retirement savings for the year, such as 401(k) plans and IRAs, this is another good place to put an extra $1,000 to work.  For an IRA or Roth IRA (if you’re eligible by your income level) it’s simply a matter of making the contribution to the account and investing it appropriately.

If on the other hand you haven’t maxed out your 401(k) plan, you can defer an extra $1,000 by your paychecks throughout the remainder of the year and earmark an extra $1,000 to make up the difference in reduced take-home pay.  If you started in July and you have 13 more pays left in the year, you’d set aside around $75 per paycheck (if paid every two weeks) and your income will be reduced by a little less than that, since the money you deferred isn’t taxed.

Charitable Donations

Consider making a donation with your extra money. There are many deserving charities (I’m sure you can come up with a list of several without much difficulty) that would LOVE to have a donation of $1,000. And you can take a deduction on your tax return for the donation (assuming that you itemize your deductions).

Who Does Each Option Work Best For?

Folks who are just starting out in improving your financial situation quite often need to focus on all of the options I mentioned above – debt reduction, emergency fund, knowledge and retirement savings.   The list was put together in priority order, so you should focus on debt reduction first, then emergency funds, and so on.

If you’re a little farther down the timeline and have eliminated all consumer debt and have established an emergency fund, improve your knowledge first, and then add more to your retirement savings.  I mentioned before that the most important tool that you have is your knowledge.  The most important action you can take to improve your financial standing is to increase your bottom line.  We did this first when we eliminated all debt.  The next step is to add to savings.  Both moves will increase your net worth – your assets (savings and possessions) minus your liabilities (loans and other debts) equals your net worth.  The key to financial success is to make moves that will have a positive impact on your net worth.

Students who don’t have any debt accumulated should focus first on the emergency fund, and then on retirement savings.  In some cases it makes good sense here to put the money into a Roth IRA, since money in a Roth IRA won’t be counted on your financial aid forms, since it’s a retirement account.

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Doing My Own Taxes Cost Me $10,000

Businessman juggling fruit

3 Lessons I Learned from My DIY Mistake

This article was provided by Devin Carroll, a financial advisor colleague who practices in Texarkana, TX at his firm Carroll Investment Management.

Doing my own taxes cost me $10,000 last year. It still stings and it has been on my mind a lot lately as tax season approaches.

I was reminded of this the other day while I was shopping with my wife at our local wholesale store. When I passed by the big display of tax software, I thought about the ad that’s been playing over the last few weeks. This ad is a humorous take on just how easy it is to do your own taxes. It’s so easy that everyone in the ad is just using their phones to file! At the conclusion of the ad, the text comes up: “You don’t have to be a genius to do your own taxes.”

Well, I’ve never considered myself a genius, but I can figure things out pretty well. When my accountant retired a few years ago, I decided to give the do-it-yourself tax software a try. The idea was pretty simple: “I’m a smart guy,” I thought. “With today’s technology, there’s no reason why I can’t do my own taxes.”

Doing My Own Taxes

At first, I only had my 1099 and my wife’s W-2. Then I became a half-owner of an insurance agency which added yet another tax form. Still, that wasn’t too bad, so I simply adjusted the version of the tax software I purchased to handle the partnership. In the next year, we bought an investment property and made an entity change for my financial planning practice. Over the next couple of years there were a few other changes that resulted in even more tax forms.

I suppose I didn’t realize just how complex my situation was getting. So, in early 2015, I made my annual pilgrimage to the wholesale store to purchase my tax software. Just like every other year, I set a Saturday aside to do my taxes. I plugged in all of the various income forms and then started working on the deductions.

My tax software showed a big counter at the top of the screen that revealed my current federal tax liability – as I would enter data, the dollar figure would update. When I started getting close to the end of my deductions spreadsheet, the number was still really big. It was so big that my heart rate increased and I was starting to feel a little sick.

A few hours later I was finished. There was nothing left to deduct and I still had an enormous tax bill! In a state of panic I called an accountant friend to get a second opinion. We set a meeting and a few days later we sat down with my nearly complete tax return to discuss options. He told me, “Devin, if you’d made a couple of simple changes at the first of the year, you could’ve saved about $10,000 in taxes.” I was dumbfounded – and really angry at myself.

The Valuable Lessons I Learned

Now, almost a year later, I can look back on this experience and remember the lessons I learned. Here are three takeaways from my do-it-yourself mistake . . . .

  1. I don’t know everything.

As much as anything, this was a lesson in humility. Before this, I didn’t think that tax advisers had anything to offer me. In fact, I’d even mentally dubbed them with titles such as “document processors.”

I should’ve already learned to be more humble and hire professionals. I can’t tell you how many projects I’ve looked at and thought, “Why would I hire someone when I can do that?” The results in many of those projects have had similar results, too. One that immediately comes to mind was my attempt to save $50 by moving my own cable line in the attic. Yep . . . I fell through the attic, ended up in the emergency room, and had to pay several hundred dollars to get the massive hole in my ceiling fixed.

In our information-rich world, you can find a how-to for everything. It’s really tempting to read about a topic for a few minutes and think we understand all the nuances. That’s not the case with the federal tax code. Consider this for a moment . . . . In 1984 the tax code was 26,300 pages. Today, it’s a monstrous 75,000 pages. That’s just too much information to fully comprehend along with everything you need to know for your “real” job.

  1. Sometimes it pays to hire early.

I can’t tell you how much I wished I would have hired a tax adviser before I thought I needed one. I was so caught up in what they would charge, I let a $10,000 surprise smack me in the face.

The same could be said about many of my prospective retirement planning clients that request information. They hear that I charge an hourly fee and simply turn to the internet for advice that’s much cheaper. The result is often a missed opportunity, missed filing deadline, or some other mistake that has consequences for the rest of their retirement.

If you think you may need someone in a few years, hire them today!

  1. Hiring a professional reduces anxiety.

When I was doing my own taxes, I was constantly worried about getting a letter from the IRS. Not because I was intentionally doing something wrong, but I was always scared that I’d missed something important that would come back to haunt me.

Today, I no longer have that fear. I feel the likelihood of getting that dreaded letter from the IRS has tremendously declined. It may not have, but I sure sleep better.

This tax season, do yourself a favor and hire a tax professional.

Like all professionals, not all tax advisers are created equal. Some are coaches and some are not. Some will help you and some will just let their assistant screen your calls. If you start looking for an accountant who meets your expectations, start before tax season. It’s just too crazy once it gets to mid-February.

As an additional resource, here’s a great article from Kelly Phillips Erb on hiring a tax preparer.

What are your thoughts? Do you plan to hire someone this year?

Devin Carroll is a financial advisor who practices in Texarkana, TX at his firm Carroll Investment Management. He writes about Social Security and retirement related issues on his blog at

5 Tax Credits You Don’t Want to Miss

3446025121_072700607f_n2As individuals begin to file their tax returns for 2015 here are some tax credits that some individuals may qualify for to help reduce, if not eliminate their tax liability.

  1. Child Tax Credit. This credit may be worth up to $1,000 per child, depending on income. The child must be under age 17 at the end of 2015, as well as be a dependent and a US citizen. Additional information can be found in Publication 972.
  1. The American Opportunity Tax Credit. This tax credit for education expenses is allowed for parents for up to the first four years of post-secondary (college) education. The benefit of this credit is that it is a “per student” credit. This means the credit can be taken for multiple children in college. The maximum credit per student is $2,500. Additional information can be found here.
  1. The Lifetime Learning Credit. Like the AOTC, this credit can be claimed for education expenses. The difference between this credit and the AOTC is that this credit is a “per family” credit. This means the maximum amount of $2,000 allowed is in total regardless of how many family members are in college. However, this credit can be used for an unlimited number of years in college. Additional information can be found
  1. The Saver’s Credit. This credit allows taxpayers with lower incomes a credit of $1,000 (single) or $2,000 (MFJ) who are saving for retirement. This credit helps individuals by allowing them to take a credit based off of money contributed to retirement accounts such as a 401(k) or IRA. This credit is also called the retirement savings contributions credit. Additional information can be found here.
  1. Child and Dependent Care Credit. This credit can be taken by individuals who pay for child care expenses in order to work or are active seeking work. The credit cannot exceed $3,000 for one qualifying individual or $6,000 for two or more individuals. The amount of the credit also depends on adjusted gross income. Additional information can be found here.

Everything You Need to Know About File & Suspend and the April 30 Deadline

suspended balloonsBy now if you’re of a certain age, you have probably heard about the end of the file & suspend option for Social Security benefits. If not, click on this link to learn more about this option and the April 30 deadline due to changes made by the Bipartisan Budget Act of 2015.

However, as my email inbox indicates, you have lots of questions about file & suspend.  This article is my effort to cover all the bases with regard to everything you need to know about file & suspend and the April 30 deadline.

For starters, if you and your spouse were born after April 30, 1950, this article does not apply to you, so you can stop reading. If one of you was born before April 30, 1950, the file & suspend option only applies to that individual, not to both of you. Of course, if both of you were born before April 30, 1950, then file & suspend could apply to either of you – but only one of you would actually file & suspend.

Ground rules

The ground rules for file & suspend are as follows:

  1. You must be at least at Full Retirement Age (66) in order to file & suspend.
  2. There is an April 30 deadline to enact this option (April 30, 2016, and never after that date).
  3. You would only file & suspend if you wish to delay filing your own benefit (or stop receiving your benefit) until some age later than FRA, and one of the following (and perhaps both):
    • You wish to enable someone else (spouse or child) to receive benefits based on your record.
    • You wish to preserve the opportunity to file for a lump sum retroactive benefit at some later age, before you reach age 70.
  4. While your benefits are suspended, you will not receive benefits based on your own record, and you will not be eligible for spousal benefits via restricted application or otherwise (*see below for a technical exception).

Practical Application

If you were born after April 30, 1950, file & suspend (under the old rules) is not for you, so you can stop reading.

Further, if you have already filed for your own benefit and you want to continue receiving your benefit, you would not want to file & suspend.

Once you have filed and suspended, your spouse can file for spousal benefits (or your eligible child can file for child’s benefits) as soon as eligible. For example, if your spouse is already (or has just reached) age 62, he or she will be eligible for spousal benefits upon filing for his or her own benefit.

If you have filed and suspended, your spouse born before 1954 will be eligible to file a restricted application for spousal benefits upon reaching FRA – as long as he or she has not already filed for benefits based on his or her own record.

How to Do It

In order to file & suspend, just the same as filing for any other benefit, you have three options for filing:

  1. Online – you file for benefits at as if you wanted to begin receiving the benefits immediately; at the end of the application there is a “Remarks” section – in this section you will enter the following: I wish to immediately suspend my benefits after filing in order to earn delay credits.
  2. Paper application – using form SSA-BK-1 you do just as described in #1 above, filing out the form as if you wish to receive the benefit immediately, then putting the following line in the Remarks section at the end: I wish to immediately suspend my benefits after filing in order to earn delay credits.
  3. On the phone – call 1-800-772-1213 and tell the representative that you wish to file for your benefit and immediately suspend the benefit in order to earn delay credits.
  4. In person – visit your local Social Security Administration office and tell your representative that you wish to file for your benefit and immediately suspend the benefit in order to earn delay credits.

*Technical Exception to the suspended benefits rule

Earlier in the Ground Rules I mentioned a technical exception to the rule about not being eligible to receive spousal benefits when you have suspended your own benefit. The exception works like this:

Joe has a benefit of $600 available to him if he files at Full Retirement Age. Joe’s wife Barbara, age 67, is already collecting her benefit of $1,500 per month. When Joe reaches Full Retirement Age, he files and suspends his benefit. Joe is still eligible for a restricted application for spousal benefits based upon his wife’s record – but the benefit he will receive is not going to be 50% of Barbara’s benefit. Joe will receive only the excess spousal benefit.

The excess spousal benefit is calculated as 50% of Barbara’s benefit minus Joe’s age 66 benefit – $1,500 / 2 = $750, minus Joe’s benefit of $600 equals $150. So Joe can receive $150 until he decides to unsuspend his benefit, at which point he will be eligible to receive the larger of either the full 50% of Barbara’s benefit or his own benefit, increased by delay credits. If Joe has delayed to age 70, his DRC-enhanced benefit would be $792.

If the above example seems a bit odd, it’s because there are very few plausible situations where this exception might be applied.

5 Ways to Handle a Falling Market

Photo courtesy of Thomas Lefebvre on

Photo courtesy of Thomas Lefebvre on

Given the recent market volatility and the uncertainty that comes with it here are a few things to consider to reduce potential stress. Some individuals can perhaps make the best of a rocky situation.

  1. Do nothing. Before reacting or making a decision that could affect your returns and income in the future, take a moment to think about the situation. Is it as bad as it seems? Is it just like the previous market dips? What happened afterwards? If you’ve decided on the correct asset allocation for your portfolio then expecting market dips should be the norm, not the exception.
  1. Revisit your goals. Remember the reason why you’re investing in the first place. Is it for retirement and you’re in your 30s? Is it for a college education and you have a 6 month old? Is it for retirement income and you have a family history of longevity? This point is similar to the first, if you have specific goals in mind for the money and generally a long time horizon, then short term decreases shouldn’t bother you. In fact…
  1. Take advantage of the reduced prices! The Chinese word for crisis is made up of two characters – one meaning danger and the other meaning opportunity. While others may see danger in a falling market and rush to sell their assets (selling low) you may consider taking advantage of the opportunity of reduced prices and buying more (buying low). Rhetorically, why to individuals feel good about buying when the market is high? Take advantage of the sale price.
  1. Have an emergency fund. Consider setting aside an amount of money that you can live off of should an emergency arise (losing a job, car repair, etc.). Generally, the rule of thumb is anywhere from 3 to 6 months of non-discretionary living expenses. Some individuals are comfortable with 9 to 12 months. The reason this is important is this reduces the temptation or the need to dip into retirement or college savings in a down market to pay for an unexpected expense. Having the cushion of the emergency fund to fall back on reduces the danger of realizing losses in your portfolio.
  1. Talk with a professional, fiduciary financial planner. Similar to point number 3, there are individuals that will try to take a crisis and seize this opportunity to exploit an individual’s fears. This means trying to sell someone a product they don’t need and or locking them into a product with heavy fees, poor returns but the promise of “downside protection”. Talk with a fee-only planner that is legally obligated to put the client’s best interest first. While some products may be beneficial, they are often sold with commission on the brain.

Additionally, many individuals become concerned that their portfolio is experiencing volatility and lower returns. They may have a friend whose portfolio is going up. Be wary. As a friend of mine told me a long time ago, “If all the assets in your portfolio go in one direction, you’re not diversified.”

Maintaining Confidence in an Uncertain World

confidence wonder womanAll around us, every day, we see signs of an unstable financial world. The stock market has been all over the place, instability continues in the Middle East (like it will ever change?); at home we’re confronted by a presidential election that offers little choice other than to hold your nose and vote for the one that you believe is likely to do the least damage. Add to this the rising cost of “getting by” and there’s little wonder many folks are very concerned  and have little confidence about the future.

What Can You Do?

I don’t suggest hiding under your bed – this has never worked for me, and sometimes you find things there that you would rather not! On the other hand, there are few things that you can do to help get through this uncertainty, and maybe you’ll decide that it’s not so scary after all.

For starters, all of the headlines we see, especially the financial ones, must be taken with a grain of salt. For example, back in early 2001, CNN reported that seven cows, born and raised in Germany, had been diagnosed with mad cow disease. Within six weeks, beef consumption in Germany dropped in half. Yet, throughout the 30+ years since mad cow disease was discovered, a total of 150 deaths have been attributed to this disease. On the other hand, we are told that salmonella poisoning kills more than 600 people in the US every year, along with making an additional 1.4 million of us sick. But the popularity of chicken, the primary food source that hosts salmonella poisoning, continues to increase.

This odd behavior comes about because of how we perceive and interpret information. Obviously, our personal experiences have the greatest weight, followed by experiences related to us by friends and family. The next most believable source of information is mass media, including the largely undocumented internet, while last in line is documented, statistical evidence. So, while most folks have had enough experience with food poisoning to put the salmonella statistics in their proper context, Mad Cow disease, with its sensational name and (at the time) largely unknown characteristics, made us sit up and take notice. And, more importantly from the perspective of the media provider, the sensational SELLS!

So What Does This Mean For My Finances?

Consider how this phenomena impacts your financial confidence. For several years, the watch-word has been to stay out of medium- and long-term bonds as investments, because the long-term rates are going up. This talk began in 2009 – and just lately short-term rates went up a bit, but not enough to make an appreciable difference in using medium- and long-term bonds in your portfolio.

This is not to say that you should ignore the news – but rather, you should keep your trusty grain of salt handy as you do follow the news. And ask your trusted advisor to help you interpret the news that you find particularly troubling. In addition, it doesn’t add value to check your portfolio’s value every day and wring your hands over every headline in the various financial news outlets. Generally speaking, these headlines provide no value to the average investor, and more often than not they serve to distract you from the aim of your long-term plans.

Understand Why You Choose Investments

One of the more difficult things for most folks to understand is that it is near impossible to always choose a “big winner” mutual fund. Consider this: if, over the past five years, a mutual fund manager has had a better-than-average result from his mutual fund (meaning, he’s beating the indexes over that period), he’s one of approximately 3% of all mutual fund managers. When you consider that new funds are introduced every year, replacing old “losers”, you begin to realize that this 3% is actually a smaller number, since the losing funds have disappeared from the list (this is known as survivor bias – meaning those funds that survive look better because the losers have dropped out of sight).

Add to this mix the fact that “past performance doesn’t guarantee future results”. In other words, just because a particular fund manager has beaten the average in the past doesn’t mean that he will do so in the future. What I’m driving at is this: There is no point in chasing the “best” managed mutual fund, especially when the index is likely to beat or equal any given manager 97% of the time, at a cost of far less than half (in terms of internal expense ratios). Our experience shows that you can find a broad-index portfolio for literally pennies versus the dollar many funds change for internal expenses. You’re much better off spending time making sure that your portfolio is well diversified and matches your risk tolerance, and then maintaining solid discipline to not run for the exits when a headline looks scary to you.

Have a Trusted Advisor to Lean On

This goes for all facets of your life, obviously – and of course it’s a bit self-serving when coming from me. The point is, while it’s human nature to believe we can “do it on our own”, we eventually come to realize that we need some additional expertise to help us plan. And once we’ve made those plans, having someone to help us review and consider options is a must – because simply having a plan isn’t enough, we must execute and review results. Once we’ve seen those results, we can then determine how to make minor adjustments for the future, and then again, execute the plans. Especially when the environment has been volatile, it’s important to review our results and make sure we’re still on track.

You might think that the work a financial planner does is based primarily in the future, but the present is at least as important – especially when things haven’t gone the way we’d hoped. In other words, while we’re aiming for a particular goal in the future, it is where we are “today” that gives us our starting point. Confucius said “A journey of a thousand miles begins with a single step”. But if you never stopped during that thousand miles to consider where your destination is relative to where you are right now, you’d likely end up somewhere else.

The Point of All This (FINALLY!)

I know I’ve rambled a bit, but I think you get the gist of my message – Lay out careful plans, don’t allow the “pundits” and headlines to distract you, use the market averages to your advantage, diversify to match your risk tolerance, and check your progress regularly. The author Michael Pollan presented a seven-word mantra in his best-selling book “In Defense of Food” that provides clarity when making choices there:

“Eat food. Not too much. Mostly plants.”

From this idea, I’ve built the following mantra for confidence in investing and planning:

“Plan ahead. Don’t be distracted. Save lots.”

I hope this will help you as you go forward in your financial life. In these uncertain times, having a sound foundation to guide you is your most important tool.

Tips for Tax Time

incometaxbyalancleaver_2000_thumb1Given that it the start of tax season and individuals will be gathering and preparing their 2015 tax return information, I’d thought I’d put together some basic tax tips. Individuals may consider thinking about these items in order to have a smooth and (hopefully) stress-free 2015 tax season.

Additionally, I’ve included a link to our 2015 Tax organizer.

Please feel free to use it at your convenience to get your “tax ducks in a row”. Furthermore, please let us know if you’d like us to prepare and file your taxes for you. Many current clients have found Blankenship Financial to be cost effective and efficient compared to other big-named tax preparation services. As Enrolled Agents both Jim and I are well qualified to handle most tax matters and returns.

And now with the tax tips…

  1. Beware the non-tax man cometh! Each year we field calls from clients and prospective clients regarding calls they get from fraudsters claiming to be the IRS and that the individuals owe the IRS money. Typical phrasing includes a tax penalty owed that can be remedied with a credit card. DO NOT GIVE THEM ANY INFORMATION! If it’s a legitimate issue with the IRS you will receive the notice in writing. Of course, feel free to call us to have a look as well.
  1. Consider not procrastinating. Although this can be hard to do, do your best to organize all of your information as soon as possible. Take advantage of the link above and get everything in order well before the tax deadline. This not only reduces stress, it also helps reduce fees and penalties for late filing and payments.
  1. Organize throughout the year. Many folks take advantage of deductions. This means keeping track of receipts, mileage, etc. Instead of stuffing it all into a shoebox until tax time, take some time throughout the year to make files and organize bills, receipts and mileage logs. There are even online apps that can do this for you with a scanner or your smartphone.
  1. Use a bookkeeping/budget system. Many folks cringe at the words bookkeeping or budgeting. It’s just not something they enjoy doing. That being said can take a lot of the work out of it by subscribing to a system such as QuickBooks or Programs such as these can help organize where you’re spending and even categorize budget items.
  1. Review your withholding and retirement plan contributions. By adjusting how much is withheld from your paycheck and or allocating more to your 401(k) you can help alleviate what could be a big bill at tax time. In addition, if you find you’re getting a big refund every year, consider adjusting your withholding so that less is taken for taxes. Instead of giving the government an interest-free loan, put that money to work for you!

These are just some basic items to help get you started. As always, don’t hesitate to reach out to us for any particular questions or concerns.

Reverse Mortgages Require a Close Look

reverse mortgageFor many folks in their retirement years, home equity can be a substantial part of your overall net worth. According to recent figures, the equity in your home can amount to roughly 30-40 percent of your net worth, if you’re in the majority. If you and your spouse are both at least 62 years of age and have significant equity in your home, a reverse mortgage can turn that equity into tax-free cash without forcing you to move or make a monthly payment.

If it’s right for you, a reverse mortgage can be a worthwhile financial tool. If not, you could cause some serious problems for your financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

  • A lump sum cash payment;
  • A monthly cash payment, like a pension or annuity;
  • A line of credit which you can draw on in varying amounts as you need the funds (this option tends to be the most popular due to its flexibility);
  • Some combination of the above.

When the owner dies or moves away (perhaps to a long-term care facility), the home can be sold and the loan paid off. Any leftover equity value can go to the living owner or the designated heirs. Heirs don’t have to sell the house: they can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months.

There are three basic types of reverse mortgages:

  • Single-purpose reverse mortgages, which are offered by some state and local government agencies as well as some nonprofit organizations;
  • Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);
  • Proprietary reverse mortgages are private loans that cover home values usually over $600,000.

The size of a reverse mortgage is determined by the borrower’s age, the interest rate and the home’s value. The older a borrower, the higher percentage that can be borrowed. The amount of the mortgage is limited to the lesser of the home’s appraised value, sale price, and the federal HECM limit of $625,500.

Reverse mortgages have traditionally been chosen by older Americans who are having a tough time paying for everyday living expenses. Matters such as long-term care premiums, home health care services, home improvements or paying off their current mortgage or credit cards may be greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and even to purchase a second home. Review reverse mortgage options with the help of a financial adviser to determine if there are any unique, “outside the box” options for you.

Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling.

The counselor is required to explain the loan’s costs and financial implications. The counselor also must explain the possible alternatives to a HECM – like government and non-profit programs, or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. You can visit HUD for a list of counselors, or call the agency at 1-800-569-4287. Counseling agencies usually charge a fee for their services. This fee can be paid from the loan proceeds, and you cannot be turned away if you can’t afford the fee.

Other things to consider

Cost: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can often run between $12,000 and $18,000. The loans are based on anticipated home value appreciation of four percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

There is also the cost of mortgage insurance to consider. You will have an up-front charge for federal mortgage insurance, which will amount to between 0.5% and 2.5%, depending upon the type of disbursement you’ll be receiving. There is also an annual premium for mortgage insurance which will be 1.25% of the outstanding mortgage balance.

Interest rates and costs: As you draw funds from the equity in your home, interest is added to your balance every month. This can result in quite a surprise over time, as the interest costs add up. Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. This interest is not tax deductible while you are drawing funds from the equity.

Your mortgage can be called: The homeowner or estate always retains title to the home, but if you fail to pay your property taxes, adequately maintain your home, pay your insurance premiums, or change your primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

Talk to your kids. If your house is your major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why that in addition to discussing a reverse mortgage with a financial adviser, persons considering a reverse mortgage need to talk with their family.

The Top Income Tax Myth That Can Hold You Back

hold backThere are many myths about income taxes that are just plain wrong. But there is one income tax myth that is likely the most hurtful to you financially – and that is the idea that a big refund should be your goal. The actual goal, counterintuitive as it may sound, should be to owe some tax when you file your return.

You may have heard this explanation before: When you have a big refund every year, you’re effectively loaning money to the government throughout the year, and getting nothing for it. And then when you get that big tax refund, what do you do with it? The responsible thing would be to put it in some sort of savings vehicle – but how many folks actually do this? Statistics show that far too few of us think saving first when we have extra money. Too often we use the money to pay off a credit card (which is still a good thing, but perhaps we shouldn’t have built up the credit card balance in the first place) or worse, we use it to treat ourselves.

Let’s examine the situation for a moment. If you have a refund of $2,000 (for example) when you file your tax return, that means every month throughout the year you handed over $166.67 to the US Treasury that should have been in your pocket. The US Treasury is happy to have it: they report the balance to Congress and Congress spends it.

And then, when you get the refund you wind up spending it on something that provides short-term pleasure rather than long-term benefit.

What if, instead of handing it over to the US Treasury, you change your withholding so that you can now receive an additional $166.67 each month? You could put this money into a savings vehicle, an IRA for example. Now, you could actually reduce your taxes even further by deducting the IRA contributions from your income. So if this reduces your overall taxable income from $80,000 to $78,000 (for example), the resulting tax is reduced by $500 (for a single filer, 2015 rates). So not only have you added $2,000 to your savings, you could add a total of $2,500 to your savings (adding another $125 of tax reduction!).

If you did this for 20 years over your working lifetime and earned an average 5% return, you’d have built up an extra $82,000 in an IRA.

Can’t I just do this at the end of the year?

But you may ask – couldn’t I just make the IRA contribution after I get my tax refund, taking the deduction while I’m filling out the return? Of course you could, but how often have you done that in the past?

What I’m suggesting is that you might set up an automatic contribution to an IRA every month. You’ll want to change your W4 on file with your employer so that less tax is being withheld, so that you’ll have the extra money in your take-home pay.

Then by setting up the automatic contribution you don’t have to make the choice to contribute to the IRA at the end of year – you made the choice when you set up the automatic contribution plan. Since you’re already accustomed to living with that same income (the same amount of take home pay), you’re no worse off than you were before, and you will be building up your savings to boot.

So the real goal should be to wind up with a zero tax refund – or possibly even owing some tax at the end of the year. If you owe less than $1,000 when you file your tax return, it’s as if the US Treasury has lent you that money, interest-free, for the year. It’s a reversal of fortunes, all because you realized this is an income tax myth.

If you put that extra $1,000 to work earning 3% (over time), you’ll pick up an extra $375 over the same 20-year period – it’s not a lot, but still money that could be yours instead of going to the government.

Now, there’s the question of how can the US Treasury get by without your loan every year…? I suspect that somehow things will work out just fine, because very few people will do this and the impact will be minimal in the scheme of things.

Why People Don’t Trust Financial Advisers (and Used Car Salesmen)

5337167883_5f5e064a7d_nBased on some recent experience I’ve had in trying to purchase a vehicle, I thought I’d spend some time on helping advisers new to the industry trying to build their businesses the right way. Additionally, it may help some advisors who are or were being taught the wrong way to deal with clients and prospective clients.

Perhaps this post will be better understood if I share my recent (and unsuccessful) experience trying to purchase a different vehicle. Over the last month I’ve inquired both private sellers and dealerships regarding certain vehicles they had for sale. Of the many features and benefits available, I’ve made clear (at least to the dealers) what features and benefits are important to me.

Like many car buyers, I am looking for good gas mileage, reliability, and affordability. What I am not looking for is pushy salespeople, sales pitches and closing techniques. Nevertheless, it’s what I’ve encountered at every dealership I’ve visited thus far.

Note to new advisors: Regardless of how you’ve been trained, people HATE to be sold. They also do not appreciate you being fake. They’ve heard all your sales lines and pitches and then some. Be yourself.

One dealership I called in particular asked for my name and information. I winced when they asked for my phone number, but reluctantly gave it to them anyway. However, I specifically requested that they remove my name and not call me for offers, deals, etc. Sure enough a few days later the bubbly receptionist who I made the request to called and completely ignored my request. In fact, she went as far as to only give her name (not the dealership she was with) and vague information on “some great deals’ they had going on. Another dealership ignored my specific request to use email only as I would be traveling. On their website they had a “preferred method of contact.” They never emailed but called me daily for 10 straight days.

Note to new advisors: If a prospective client or client makes a reasonable request, honor it. Furthermore, if a client has a preferred contact method, use it. Little things like this matter and will lead to more trust for the bigger things. Listen to what your clients are saying, don’t just hear them.

Naturally, I’ve done quite a bit of research looking at different vehicles and what I like and dislike about each one. Like many purchases in life there are trade-offs. Sacrificing a bit of gas mileage for an automatic transmission, paying cash for an older vehicle instead of financing a new one, etc. are all things that I’ve considered. The point is I came into the dealerships knowing exactly what I wanted. And yes, you guessed it, the dealerships tried to sell me something way off my radar. I’m all for being educated, but when you want steak and you’re being sold tofu – that’s a problem.

Note to new advisors: There is no one size fits all in financial planning. This means that one or two products will not fill every need. This applies to permanent life insurance, annuities, mutual funds, etc. Diversify your toolbox. You should have more than just a hammer. People also know more than you think and will surprise you with their level of knowledge.

Speak of the devil! As I’m writing this guess who just called? Yep. The dealership I specifically requested to not call me. I digress…

Which brings me to my last point; it’s more of a question really. If people don’t like pushy salespeople, product pitches and lack of professionalism, why do individuals and businesses keep doing it to their prospective clients? Perhaps it’s the industry. Many salespeople are paid based off of what they sell. Naturally, if they don’t sell, they make zero income. Compounding this is that many salespeople figure out very quickly which products and add-ons lead to higher payouts (commissions) and they tend to push those few products and services (a hammer anyone?).

These businesses would be better to rethink their approach and develop a consultative, educational approach to their prospective clients. In addition, they may consider adjusting how their salespeople are paid – weaning them off of commission only income and to more of a hourly or salary based approach. After all, it’s easier to worry and care about the prospect when one isn’t worry about their next paycheck.

Note to new advisors: Be extremely cautious of the phrase “unlimited income potential.” Your income is limited. If the income potential was unlimited, why did your manager accept his or her position? Why on Earth would anyone give up unlimited income for a salaried managerial position? Seek out positions where your income is related to how you help improve and bring value to a client’s life, not what you sell them. It’s a road less traveled, but worth the journey.

2016 IRA MAGI Limits – Married Filing Separately

separatedNote: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Separately):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar (or 65% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan but your spouse is, and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Separately):

If your MAGI is less than $10,000, your contribution to a Roth IRA is reduced ratably by every dollar, rounded up to the nearest $10.

If the amount works out to less than $200, you are allowed to contribute at least $200. If your MAGI is $10,000 or more, you cannot contribute to a Roth IRA.

2016 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)

married coupleNote: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Jointly or Qualifying Widow(er)):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, and your MAGI is $98,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $98,000 but less than $118,000, you are entitled to a partial deduction, reduced by 27.5% for every dollar over the lower limit (or 32.5% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $118,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan at your job, but your spouse IS covered by a retirement plan, and your MAGI is less than $184,000, you can deduct the full amount of your IRA contributions.

If you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $184,000 but less than $194,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $194,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Jointly or Qualifying Widow(er)):

If your MAGI is less than $184,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $184,000 and $194,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $194,000 or more, you cannot contribute to a Roth IRA.

2016 MAGI Limits – Single or Head of Household

single flowerNote: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately who did not live with his or her spouse during the tax year, is considered Single and will use the information on this page to determine eligibility.

For a Traditional IRA (Filing Status Single or Head of Household):

Note: These limits are unchanged from 2015.

If you are not covered by a retirement plan at your job, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, if your MAGI is $61,000 or less, there is also no limitation on your deductible contributions to a traditional IRA. If you are covered by a retirement plan at your job and your MAGI is more than $61,000 but less than $71,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $71,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2016. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status Single or Head of Household):

If your MAGI is less than $117,000, you are eligible to contribute the entire amount to a Roth IRA. If your MAGI is between $117,000 and $132,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $132,000 or more, you cannot contribute to a Roth IRA.

Without Action, Resolutions Don’t Matter

9639918937_31ce49728b_m1Given the start of the New Year it seems almost cliché to write a blog post about resolutions to make for 2016. While making resolutions is not a bad thing, I thought I’d spend some time talking about an arguably more important aspect to resolutions; and that is taking action.

To help make some sense with the article I thought I’d share a personal experience. When I was in college I was considerably overweight. Between my junior and senior year I lost quite a bit of weight – about 75 pounds. I was never overweight growing up; I had just let poor eating habits and a sedentary lifestyle get the best of me.

After the weight came off, several friends and family members asked me what I did and what my secret was. Really, there was no secret. It was simply eating less and exercising more. However, I became infatuated with my diet and exercise and began to research and study more about how to live a healthier lifestyle. As I put what I was learning into my own practice, friends and family members began to ask me if I would put what I learned together in an easy-to-follow format (a written plan if you will) so that they could follow the program and hopefully obtain similar results.

Unfortunately, some of the people that wanted help lost their enthusiasm, stopped following their plan and gave up. Then, at certain times of the year (say, when making a New Year’s resolution) they would come back and ask me to write a new plan for them so they could get back on track and live a healthier lifestyle. My answer, to their surprise, was no.

The reason why wasn’t to be rude or unaccommodating. It was the fact that nothing had changed. In other words, the plan I had given them previously was just as effective and would help them live a healthier lifestyle. The problem was whether or not they would take action and utilize the information in the plan.

The same is true for many other goals and resolutions including personal finance. The best financial plan in the world is completely useless unless action is taken to implement the steps in the plan. A resolution to save for retirement is meaningless unless action is taken to physically have the money from your paycheck invested in your 401(k), IRA or other retirement plan. Resolving to pay off debt without taking action to pay down the debt is useless. You get the point.

So while I’d love to write a post on resolutions for 2016, I think it’s more important to write about taking your same resolutions from 2015 and years past and finally acting on them. So this year, instead of making a list of financial resolutions, make a list of action steps you’re going to take to make those resolutions happen.

Retirement Income Requirement

road, long and winding

Photo courtesy of Jon Ottosson via

You know how important it is to plan for your retirement, but how do you get started? One of the first steps should be to come up with an estimate of how much income you’ll need in order to fund your retirement. Easy to say, not so easy to do! Retirement planning is not an exact science. Your specific needs will depend on your goals, lifestyle, age, and many other factors. However, by doing a little homework, you’ll be well on your way to planning for a comfortable retirement.

Start With Your Current Income
A rule of thumb suggests that you’ll need about 70 percent of your current annual income in retirement. This can be a good starting point, but will that figure work for you? It really all depends on how close you are to retiring, as well as what you’re planning to do while retired. If you’re young and retirement is light years away, that figure probably won’t be a reliable estimate of your income needs (and let’s face it, over a long period of time it’s not much more than a wild guess!). That’s because many things will change dramatically between now and the time you retire. As you near retirement, the gap between your present needs and your future needs will likely narrow. But remember, you’re only going to use your current income only as a general guideline, even if retirement is well within sight. In order to accurately estimate your retirement income requirement, you’ll have to do some more cipherin’.

Project Your Retirement Expenses
As with any budgeting exercise, annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating expenses is a big piece of the retirement planning puzzle. It’s bound to be difficult identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still a ways off. To help you get started, here are some common retirement expenses:

  • Food and clothing
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs. These may change dramatically – often the mortgage is paid off, or you may be looking to move and/or downsize. These changes can increase or decrease the figures needed to cover housing.
  • Utilities: Gas, electric, water, telephone, cable TV
  • Transportation: Car payments, auto insurance, gas, maintenance and repairs. Often in retirement auto expenses decrease dramatically since you’re not driving to the job daily. However, you may be travelling more (to see the grandkids, for example!), so plan accordingly.
  • Insurance: Medical, dental, life, disability, long-term care. Again, these expenses may change dramatically, with the addition of Medicare to the mix, plus the inevitable “new” ailments you may acquire in your later years.
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Taxes: Federal and state income tax, capital gains tax. Keep in mind that many states don’t tax retirement income – this could help you make decisions on relocating in retirement as well.
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal
  • Recreation: Travel, dining out, hobbies, leisure activities. These expenses tend to increase a bit when you have more time on your hands in retirement, but then after a few years begin to level off. Planning for higher outflows earlier in your retirement than later is a wise plan.
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living. This expense can be all over the board, depending on your own family, experience, and location. This also works just the opposite of recreation expenses (above) – less early on, more expense later in life.
  • Miscellaneous: Personal grooming, pets, club memberships

Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 3 percent. And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, are bound to increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Finally, have a financial professional review your estimates to make sure they’re as accurate and realistic as possible. Don’t forget to factor in insurance benefits (especially medical) as your out-of-pocket costs are likely to be much different in retirement than when you’re working.

Decide When You’ll Retire
To determine your total retirement needs, you can’t just estimate how much annual income you need. You also need to figure out how long you’ll be retired. Why? The longer your retirement, the more years of replacement income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65 because there will be many more years’ worth of expenses you’ll need to cover. Plus in your earlier years you’ll likely be more active (spending more money) than you will later in life when you may become more sedentary.

Estimate Your Life Expectancy
The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live. With life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect. To be conservative, you might project out to age 100 (or longer, if longevity is in your genes!).

Don’t Forget to Inflate!
But you can’t just come up with an expense figure and simply multiply it by the number of years you’re planning on living… remember that little factor mentioned earlier: inflation? Not considering the impact of inflation can cause your plan to run off the rails – and soon you’d run out of money altogether. As we sometimes morbidly joke in this business, you may want to increase your bacon intake to match up with your portfolio’s longevity!

It’s a fairly simple matter to project out the future value of your retirement income requirement, using the average inflation rate of 3% (or higher to be more conservative), to give you a pretty good picture of the amount of money you’ll need when you retire. There are many calculators available on the internet to help you with this process – just go to your favorite search site (Yahoo!, Google, etc.) and search for “retirement calculator”. As an alternative, a financial advisor will be happy to work with you to come up with a reasonable figure for your own circumstances.

Identify Your Sources of Income
Once you have an idea of your retirement income requirement, your next step is to determine just how prepared you are to meet those needs. In other words, what sources of income will be available to you in retirement? Your employer may offer a traditional pension that will pay you monthly benefits (although this is becoming increasingly rare, especially in the private sector). In addition, you can likely count on Social Security to provide a portion of your retirement income, although many younger folks are making their plans without factoring in Social Security, just in case it’s not there in the long run. You can get an estimate of your Social Security benefits by visiting the Social Security Administration website ( to download a copy of your statement.

Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and additional investments. The amount of income you receive from those sources is dependent upon the amount you invest, the rate of return on your investments, the internal costs of the investments, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make Up Any Shortfall
If you’ve been diligent about saving, or are fortunate enough to have a funded traditional pension plan, your expected income sources may well be more than enough to fund even a lengthy retirement. But what if it looks like you’re going to come up short? Don’t run screaming down a hallway (it doesn’t help) – there are always steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses (in your working years) so you’ll have more money to save for retirement. This will have the added benefit of teaching you to get by on a little less both now and in the future, as well. Think of it as a “practice” retirement.
  • Shift your asset allocation to increase the potential returns on your portfolio (always keeping in mind that a portfolio that offers higher potential returns most likely involves greater risk of loss).
  • Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, instead maybe you’ll plan to buy a Buick Riviera to drive to the rental beach house once a year!)
  • Work part-time during retirement for extra income. Many folks are doing this nowadays, as the “kick back and relax” style of retirement is not their cup of tea. Staying active tends to maintain your health as you age, both physically and mentally.
  • Consider delaying your retirement for a few years. Instead of a big fat “I QUIT” at your planned age, consider shifting gears and pursuing a different career, something that you’re passionate about that you always dreamed of doing.

I hope the above discussion helps you to be better prepared as you plan toward your retirement. Too often, I talk to folks about their goals for retirement, and they’ve never considered the income side – the primary aim they have in mind is a particular age. By focusing on the retirement income requirement, you can be much better prepared for a long, happy, restful vacation from “work”.

Three Year-End Financial Moves

checklistAs 2015 comes to a close here are a few things to consider so you can make the most of your money for 2015.

  1. Take full advantage of your IRA contributions. For those age 50 and over, you’re allowed $6,500 and if you’re under age 50, $5,500. It may also be of benefit to see if you qualify for a deductible IRA contribution or if contributing to a Roth IRA makes sense.
  1. Make the maximum contribution to your employer sponsored retirement plan. Granted, there may not be much time left in the year to do this, but there is plenty of time to do so for 2016. Many companies have access to their plans online and employees can change contribution amounts when necessary. If you’re not already doing so, consider saving at least 10 percent of your gross income. Aim for 15 to 20 percent if you can. Pay yourself first and live off of the rest.
  1. Consider starting or contributing to a 529 college savings plan. Many children received gifts of money this Holiday season. Parents can help compound that gift by saving for college. Contributing to a 529 plan allows money to grow tax-deferred and qualified education expenses taken from the plan are tax-free. Some states allow tax deductible contributions.

Come soon we’ll have a great list of financial things to consider for a prosperous and financially sound 2016.

2016 IRS Mileage Rates

autoThe IRS recently announce the standard rates for business mileage deductions, along with the rates for moving, medical travel and charitable travel.

There were reductions in the primary categories, as you will see in the list below. This is reflective of the reduction in fuel costs over the past year, and is part of a study done annually to determine the fixed and variable costs of operating an automobile.

As of January 1, 2016, the following standard rates apply for operating a car, pickup, van, or panel truck, for the various categories:

  • 54¢ per mile for business (was 57.5¢ per mile in 2015)
  • 19¢ per mile for moving purposes (was 23¢ in 2015)
  • 19¢ per mile for medical purposes (also was 23¢ in 2015)
  • 14¢ per mile for charitable purposes (unchanged)

The standard mileage rates are used by anyone who keeps a log of miles for the various categories to be used as deductions against income. The taxpayer always has the option of using actual costs instead of the standard rates.

However, if you use the actual costs method and claim depreciation using an accelerated method of depreciation (including MACRS or Section 179 expensing), you cannot switch back to the standard mileage rate on that particular vehicle later. Plus, you cannot use the business standard mileage rate for more than 4 vehicles simultaneously.

Charitable Contributions from Your IRA

contributed catOnce the PATH Act (Protecting Americans Against Tax Hikes) is signed into law, at long last the ability to make a direct contribution from an IRA to a qualified charity will be permanent.

For background – a Qualified Charitable Distribution (QCD) is when an individual (age 70 1/2 or older and subject to Required Minimum Distributions from his or her IRA) makes a distribution from his IRA directly to a qualified charity. This distribution can be used to satisfy the Required Minimum Distribution for the year. The distribution is limited to $100,000 for each year per individual.

The real advantage of this option is that the owner of the IRA doesn’t have to claim the distribution as taxable income on his or her tax return. Any other distribution of pre-tax dollars typically must be claimed as ordinary income, increasing taxes because of the additional income.

In addition, having the increased income can cause other tax credits and deductions to be reduced (since the Adjusted Gross Income is greater). Medical expense deductions, limited to the amount above 10% of your AGI, is one such deduction that is impacted this way. For example, if you had deductible medical expenses in the amount of $10,000 for the year and your AGI is $75,000, you are allowed to itemize $2,500 in medical expenses ($10,000 minus $7,500, 10% of your AGI). If you took a distribution from your IRA to satisfy RMD in the amount of $10,000, your AGI would increase to $85,000 and therefore reduce your deductible medical expenses to $1,500 ($10,000 minus $8,500, 10% of your AGI). Because of this differential, since the QCD is not counted as income at all, this is much preferred to taking a distribution, counting it as income and then making the deductible contribution.

This QCD has been available for several years, but has always been limited to a year or two and renewable by Congress (it has always been renewed, sometimes retroactively). Most recently the provision expired at the end of 2014 and has not been available in 2015 (until the law is signed). Because of this late extension of the provision, often taxpayers don’t know whether the provision will be allowed until very late in the year, and have often already taken their RMD earlier. The PATH Act takes the action of making this option permanent. Now you can plan and make the QCD at any time in the year and know that it’s going to be available.

If you already took your RMD for the 2015 tax year there is no way to undo this fact, but you could still make another distribution directly to a qualified charity if you like. Or you could donate your RMD in cash to the qualified charity, increasing your income by the distribution and then taking the charitable contribution deduction on your tax return.